Tag Archives: Proformative

CFOs in the Spotlight

I’ve been getting a lot of e-mails from Proformative.com reminding me of the CFO Dimensions conference, held this year in New York City in Mid October and targeted at senior finance professionals from many industries. The focus of this year’s event, as listed on the Proformative.com website was: “The evolving role of technology and leadership in finance”, with the theme of this conference being “The CFO as Chief Future Officer”.

I didn’t plan on attending this event but can imagine that a good portion of the discussions was centered on why and how CFOs should pay careful attention to available data, using analytics, in order to arrive at reasonably accurate and reliable predictions of the future financial health of their organizations.

CFO Dimensions is just one recent example. There are many more activities, seminars, webinars, white papers and other information, mostly contributed through the Internet, informing readers of the important role CFOs have in leading their financial organizations and in partnering with their organizations’ CEOs and other executive management members, helping their companies navigate their charted course, at times through rough waters, but with confidence and decisiveness, only possible with access to and proper interpretation of reliable data.

I’ve been in finance and accounting for a long time now and don’t remember the use of the CFO title when I first started. In fact, none of the C-Suite titles, as they are known today, existed.  I was recently amused to learn about a technology company that had, in addition to its CEO, CFO, CTO, CIO and COO, also a Chief Talent Officer. I assume this is the head of Human Resources but not sure if it is also abbreviated CTO, or maybe CTO2?. The company also had a Chief Digital Officer (the Analog days must be over for good).

I suppose these C-Suite titles are only limited to one’s imagination, but there is an important message here: The creation of specific and defined organizational leadership roles in certain areas where the organization’s excellence as a whole is the combination of the levels of excellence of each of these areas with the “Chief” in charge defining and maintaining that excellence. The CFO’s office is such an area, arguably one of the most important in any organization.

I’ve been writing about the changing CFO role on this blog for a while now. The entries titled “CFO’s Revised Job Description“, “The Ideal CFO Skills”, “The CFO’s Big Picture” and “Why CFOs Need to Adopt Financial Analytics” are good examples and are reflections of the gradual change of the role from purely accounting to everything finance, accounting, reporting, legal and compliance. To that add HR and IT which also are starting to become the responsibility of the CFO and you’ll begin to realize how much a company is dependent on its CFO, his or her skills, experience and attitude toward the job.

As seen by our readers in prior blog entries, there is one area that CFOs must pay close attention to and do it continually and consistently: Analytics.

The information technology has advanced to a point that any data generated by the organization, in any areas of operation, plus all the data generated through the execution of a strategic plan, an operational plan and a budget, plus re-forecasting of that budget data, is available to be presented to the CFO in exactly the format and presentation style he or she desires. Now the CFO can have insight into past, present and the anticipated future performance of the company, and with that, also into the future financial health of the organization.

Modern day software solutions can provide such insight. Budget Maestro‘s Analytics solution, Analytics Maestro is such an application. By using and relying on such a solution, CFOs will certainly be in the spotlight.

Financial Planning & Analysis – Art or Science?

How technology reduces the “art” element in successful FP&A activities

This morning I received an e-mail from Proformative.com inviting me to a webinar titled “The Art (and some Science) of Great FP&A”.  I am glad to see a resurgence of such an important facet in any company’s finance department and the increasingly stronger endorsement of this function by executive management.

FP&A stands for Financial Planning and Analysis. This function is performed in the finance organization and consists of preparing financial plans and budgets based on strategic plans and historical data, gathering actual and current data and comparing with budgeted data and doing re-forecasting during the budget year. The analysis performed is used to provide upper management with information they need to make strategic and operational decisions.

Historically, and to a certain degree even today in many organizations, FP&A is only performed annually, during the so-called “Budget Season”, with little attention to analysis (the “A” in FP&A). There are several reasons for this:

a. The planning and budgeting processes are complex and very tedious. In the past, each iteration of the budget required an enormous amount of work to update data and correct newly discovered errors and omissions. By the time the budget was completed and approved, it was in many cases already obsolete.

b. The budget data had little or no correlation to the actual data. In fact, many budgets had a structure that did not tie directly to the actual accounting data structure; there was no 1 to 1 relationship between specific budget items and actual accounting general ledger accounts.

c. Due to existing technology, planning and budget data resided primarily in spreadsheets.  Eventually, this data found its way to more “purpose designed” applications, which initially borrowed from the spreadsheet model, albeit in a more robust database environment. The results were inaccurate, incomplete and often suffered from serious logical and computational errors stemming from the budget model as implemented using spreadsheets and other software.

The end result is often a budget that is not used for its intended purpose. Management does not get the benefit of having the insight into the company’s future financial health, due to the disconnect between the budget data and the actual results as produced by the accounting department. Often, bad business decisions are made, not supported by solid data, as intuition and prior experience, if available, play a major role in making these decisions, a risky behavior at best.

When true analysis is performed, all of the data used resides in the analysis module representing actual and budgeted data, with separate budget data for each version of the budget where applicable. The analysis system will then display the required data, either visually via graphs and charts or in tabular format, all of which can be printed or forwarded to a pre-defined distribution list.

The content and format of this data can be pre set according to management’s needs and for clarity, only the required data should be conveyed. In a properly set up environment, FP&A’s software solution is linked to the ERP software and data is automatically available as soon as an accounting period is closed. This allows the decision process to start sooner and since the data can include specific indicators about future period performance (e.g., forecasted financial ratios), management can make tactical and operational decision with greater confidence.

Today there is a lot more science and less art in FP&A activities. To me the “Art” in all this is having vision and recognizing what technology solutions are available and pairing the technology with company processes and existing systems. Once properly set up, the technology will do the rest, allowing FP&A to successfully do its job.

Should Finance Become an Analytics Powerhouse?

See why Finance finally has the right tools to excel in this function

Recently there was a discussion on the Proformative.com site whether finance should take over analytics and own the process, the advantages to the company and the steps required to do so. The following is the link to the discussion:  http://www.proformative.com/blogs/anders-liu-lindberg/2015/06/20/how-finance-can-become-analytics-powerhouse and I encourage all readers of this blog to become Proformative.com members as the site includes free membership and great resources and insight in all areas of accounting, finance, HR, corporate governance and more.

This is a great topic for discussion with many opinions and points of view, depending on which functional area of the company you visit. The general opinion in this particular Proformative discussion was that finance should own analytics and be tasked with providing management with the essential data that is necessary to run the company and steer it on its charted course.

Unfortunately, in many organizations today there is no central area where analytics is performed, along with reports, alerts and other research into variances anomalies. Many functional units (e.g., sales) do their own analysis of only the data produced by their business units or which are directly related to their area. With analytics being fragmented, and often incomplete and inaccurate, management cannot benefit from the real meaning of the data generated in their companies, validating the notion that there are many versions of the truth.  Centralized analytics is designed to change that.

What is analytics?

Analytics is the process of:

1)    Retrieving stored data from various company departments, divisions or business units, with historical as well as recent actual results of operations and financial data, plus the organization’s plan and budget data.

2)    Understanding the meaning of all relevant actual data collected and comparing to plan and budget data.

3)    Preparing reports using text and other visual aids to convey these data and their interpretations to individuals within management and other functional areas, supporting the decision making process.

When there is a plan and budget in place while monitoring the actual results and comparing with the anticipated results (as expressed by the budget and derived from the plan), meaningful information can be obtained when performing analytics.

The data used to perform analytics originates in several or many functional areas of the company. For example: Sales data, marketing data, accounting data of actual closed periods, etc.  It makes perfect sense to centralize the analytics process and have one owner over the process: The finance organization, reporting to the company CFO.

Information technology enables all data used in analytics to be retrieved by the analytics process owner and processed by the analytics software. The output, in turn, is a pre-defined set of reports and other visual aids (e.g., graphs, dashboards) designed to allow the user of these reports to quickly understand what these reports and visual displays are trying to communicate.

The CEO of a leading Planning, budgeting and Analytics software publisher defines this system as:

“A single source of accurate financial information- backward and forward looking- with the ability to integrate with Operations data- and that can be served up to end users for them to analyze themselves, and thus, allows them to contribute to the strategic and operational decisions and direction of the company in a timely (and informed) manner.”

The purpose of analytics is to give management the tools to be able to make timely and informed decisions with confidence. Having the right data reduces the risk of bad decisions, or decisions made long after the symptoms of trouble have actually appeared, when there is little that can be done to turn things around.

In a blog entry I recently made, titled “Why CFOs Should Adopt Financial Analytics”, I emphasize the need to have accurate, complete and timely information  that upper management can reasonably act on it, making decisions backed up by solid facts and not just intuition. It is the CFO’s responsibility (as the CEO’s second in command) to ensure that such data exists, is accurate and reliable, is available on a consistent basis and is presented in a manner that is simple to understand.

Since finance reports (or should report) to the CFO, it is finance that must develop the analytics process, acquire the right tools, implement them and use them on a regular basis, while communicating with the various business entities that generate the data.  Duplicating this effort in other departments, or having a fragmented system with incomplete or erroneous data is completely counterproductive, thus rightfully giving finance its status as an analytics powerhouse.

The Ideal CFO Skills

What qualities are essential and what CFOs should really focus on

There was a recent discussion topic on Proformative.com titled “The Ideal CFO Skills” .  It evolved from a question by a Proformative member trying to get a better understanding of what CFOs should devote their time to and what basic skills they must possess in order to do so. The question was based on an article in CFO.com by David W. Owens about skill sets provided by a recent CFO survey. The main categories given were:  Strategist, Catalyst for Change, Steward and Administrator.

Proformative readers were asked to form their own opinion on how much time CFOs should devote to each category and why. There were many responses to this question and the general opinion was that the “Strategist” was a critical category where CFOs must be able to continually analyze the performance of their organization using planning as a tool of reference, while also being a catalyst of change, usually in conjunction with the first category’s activities.

In my many years in accounting, finance, and upper management I have seen the CFO role evolve from the top accounting and finance person in the company to the CEO’s partner.  It used to be that if you wanted to become a CFO of an organization, your career path had to often start as a staff accountant, moving through the ranks while gaining experience and taking on greater responsibilities with each career advancement.  You often had to be a CPA (in the US) in order to be considered for the CFO position.

This has all changed in the last 10 – 15 years. Many CFOs in a variety of industries are not accountants by trade.  Some have sales and marketing background, others advanced to the position from operations management or the legal department.

CFOs are often the second in command at the organization, directly report to the CEO and in close contact with the company’s Board of Directors, investors and shareholders, and industry financial analysts.  It is common nowadays to see the accounting, finance, IT, Legal and HR departments report to the CFO.

The four skill categories given in the Proformative board discussion are all very important, but some of the activities in each category must be delegated more than others in order for the CFO to meet his or her objectives.

Strategist is by far the most important skill category. The CFO must work very closely with the company’s CEO while interacting with other members of senior management in order to clearly understand the organization’s performance, analyze it against pre-determined goals and milestones and be able and willing to affect change. This is where the second skill category mentioned comes in: Catalyst for Change.

The CFO must continually search for ways for the organization to adapt to changes in the company’s market place, its customers, product or service lines offered vs. actual or forecasted demand, existing and competitors’ technologies or product offerings, legal and moral issues and changes in the general economy. These continuous changes must be performed timely but always thoughtfully and with solid data backing up each change.

In being a Catalyst for Change the CFO must earn the company’s respect and trust, as in doing so, changes will be embraced by all levels of management and can actually take place within the planned timeframe and budget.

Stewardship, the third skill category pertains to all levels of management, CFO included.  This is what separates a great organization from all other companies. The CFO, backed up by the CEO and with the help of senior managers can set that example. In turn, this will trickle down through the ranks and will make every employee feel they are cared for and appreciated. The results are often profound.

And finally, Administrator is an important skills category. It requires the CFO to not only be organized and well disciplined, but also able to instill these skills and traits in other managers of the company, and most importantly teach them to pass on these traits to their direct reports and to all company employees.

To make these skill categories really effective, the CFO must above all partner with the company’s CEO, who must also posses these skills and fully endorse them. Close communication between the CFO and CEO as well as between the CFO and his/her direct reports will always ensure that the organization is moving in the right direction, be able to quickly change course and most importantly rapidly recover from inevitable mistakes and unexpected negative events.

Should Excel be Expelled?

What applications Excel should and should not be used for and why 

I just saw a great question followed by a discussion on the proformative.com site about whether Excel should be completely eliminated  as a financial analysis tool. I was pleased to hear that many people recognize both the value and the risks and limitations of Excel (or any other spreadsheet). I contributed to the discussion and wanted this blog’s readers to benefit from the insight given and my own opinions.

It is a well known fact that Excel is one of the most common software tools in the workplace, not just in finance and accounting, but also in many other areas that require maintaining calculations or data analysis.

Excel (and all popular spreadsheets in the past 30 plus years) is an incredible tool with certain capabilities and functionality unmatched by any other software application.  Unfortunately, we have become dependent on it for far more applications than we should.

Applications such as planning, budgeting & forecasting, consolidation of financial statements and other critical financial processes should not be dependent on and performed in Excel (or any other spreadsheet). The risks of errors, omissions, broken links and the significant effort required to update complex models are far too great, especially given the fact that the practice of change management and internal audit of user computing controls is nearly non-existent when it comes to use of spreadsheets in corporate finance.

However, financial analysis can be performed in Excel as long as the data driving the analysis is primarily produced elsewhere (e.g., a dedicated planning and budgeting software solution, your ERP software, etc.). In this case, Excel should be used for its impressive formatting and display capabilities and ability to link it to data sources.

An example of this is Analytics Maestro from Centage Corporation. This application works within Microsoft Excel and uses all of Excel’s  incredible formatting and display capabilities without the risk of having bad formulas or broken links and without any user programming, as the data is seamlessly retrieved from the company’s ERP software and from Budget Maestro (Centage Corporation’s  planning and budgeting solution). A while ago I wrote on this blog about this new approach to analysis, A new Way to Look at Accounting Data.

Ideally in complex analysis, no actual formulas, links and other computational programming should be maintained in the Excel workbooks. In reality, many analysis worksheets will contain formulas, functions, macros and other custom programming.  These, however, should never be used in the production of financial statements and other critical external reporting activities. These worksheets should be set up under change management with proper design documentation and a change log.  Review and approval of all changes should be evident. Locking down worksheets, requiring access passwords and other security measures will reduce the risk of data manipulation by unauthorized persons.

When risk to accuracy and completeness of data in Excel workbooks or worksheets is greatly reduced, finance organizations will enjoy repetitive and consistent display of data in a familiar format and appearance, making the data simpler to understand and driving decisions quicker and with more confidence.

Microsoft Excel may very well be the most popular software application in the workplace; employees are familiar with its functionality, at lease on the most fundamental level, and get a good portion of their work done using it daily. Once we understand which critical applications Excel should not be used for we can safely continue to use and benefit from this software in many of our other daily tasks.

Why CFOs Need to Adopt Financial Analytics

And why they can’t continue to do their daily work without it

RK Paleru, Executive Director of the Systems, Analytics and & Insights Group at George Washington University recently authored the article “How can CFOs adopt Financial Analytics?”.  He touched on the reality facing the finance departments of so many organizations that are not adopting new technologies and therefore still relying on spreadsheets to deliver the results that support decision making.  While these departments know that these tools are flawed, they still continue to rely upon them.

In response to Paleru’s article, a great discussion ensued on Proformative’s website.  One member commented that accounting and finance departments are so wrapped up in the close process, financial statement consolidations, financial reporting generation and compliance activities, that there is hardly enough time to devote to analytics, especially with the inadequate tools many of these organizations possess.  I tried to reinforce the notion that upper management (the CEO, CFO and certain other management team members) must have timely, accurate and complete data in order to be able to make reasonably informed business decisions.  In addition, major changes have to be made in order for management teams to be able to see and understand their company data immediately, as actual data becomes available and in conjunction with existing and updated planning, budgeting and forecasting data.

My general observation is that many existing planning and analytics software solutions do not provide CFOs the data they need.  This is due to the fact that the majority of the software solutions today cannot produce accurate and complete future period financial statements, and especially the Balance Sheet and Statement of Cash Flows.

This is why I am excited by a new generation of Planning, Budgeting and Analytics software which I call:  “SmartBudget Driven Future Period Financial Statements and Analytics”.  I’m sure this definition will be refined as this software category matures but for right now the essence of it is:

Generating future period financial statements and other reports, driven by a smart budget, prepared using built-in drivers and system pre-defined business rules, automatically consolidated across the enterprise that provides the CFO (and the CEO) with the insight into the future financial health of their organization.

Using this type of software, all the traditional potential errors and omissions are completely eliminated or greatly reduced due to the fact that no spreadsheets are employed in this process and users are never asked to provide formulas, functions, links, macros or any other programming.

The software should also perform analytics in particular areas of interest such as sales and expenditures and respond to any other custom requirements the organization might have.

Another desirable feature is the ability to “drill back” into the source GL containing the actual accounting period results.  By pulling in any required detail data from the GL (as detailed as actual transactions, if the ERP software GL is set up to post into in detail), the analyst can examine specific variances and anomalies, not visible on the summary level.  The root cause of these variances or anomalies can be investigated and any found issues can be quickly remediated.  The CFO, equipped with this information will have the opportunity to make process changes, or make timely and informed decisions.

Analytics Maestro, used in conjunction with Budget Maestro can provide:

  • Sales analytics, using both actual and budgeted data
  • Expenditure analytics
  • Future period Balance Sheet for each budget period
  • Future period Income Statement for each budget period
  • Future period Statement of Cash Flows for each budget period
  • Many other specific reports, tailored to the company’s needs

The future period financial statements can be consolidated or filtered by any entity or level in the enterprise entity hierarchy.

With this data, CFOs can have a pretty good idea of what the financial health of the company is going to look like.  They can see the predicted cash balance, receivables, inventory, payables and other liabilities.  They can easily obtain forecasted future financial ratios determine whether the company will comply with loan covenants whether or not it will be able to utilize its credit lines, whether or not it will be able to retire debt and other obligations in future periods and more.

By using a software like Budget Maestro, CFOs can have a pretty good idea of what the financial health of the company is going to look like.  A CFO can perform his or her job with peak performance when relying on intelligent data in real time.  Not relying on analytics can be a costly mistake. Luckily, there is a new technology available that can change all that.