Everybody knows they need a finance department, but rarely do organizations pay much mind to what the finance department needs. Ask yourself, what does your finance department do? Many would answer “Controlling expenses, like bills and payroll” or “Managing our revenue paper trail”. You wouldn’t be wrong, but if all your finance department is doing is reporting and playing catch up, something is wrong.
How to empower your finance department
Finance needs to be a true strategic partner of the business. Their duties need to be rooted not only in recording and reporting, but additionally in profit maximization and future planning. To overcome the challenges this responsibility requires, they need support from other departments. This support comes from tools for an efficient process, timely responses from data inquiries, and execution of suggested improvements from their forecasting. In short, you need to empower and trust their decision making to get the most profitable outcome.
The tools for an efficient process need to be geared around reducing manual entry time, human error mitigation, and faster reporting. At the end of the day, any time your financial analysts are spending that isn’t on financial analysis is a deterrent to maximum profitability. This may seem like common sense, but in our dealings with companies, we are overwhelmingly finding situation after situation where a small percentage of financial analysts time is actually spent on analyzing!
Why aren’t analysts analyzing?
Studies confirm that as much as 80% of Finance analysts’ time is spent on data entry, spreadsheet maintenance and creating reports. Little time is left for analysis. The shocking part is reports are often inaccurate and untimely, controllership may be lacking with material, decision errors are rampant, and lack of process control means compliance and audit standards are not met. Whenever multiple humans are involved, mistakes are inevitable.
Financial analysts are getting less and less time to actually analyze. This was the case for a large aerospace manufacturer that relied on a very complex spreadsheets for multiple tasks. Spreadsheets were used to determine the optimum price for long term service contracts, manage margins over the contract life, and ensure accurate accruals of billions of dollars in revenues and reserves in the financial statements.
What tools make processes more efficient?
The spreadsheets used by the aerospace manufacturer were so unreliable and inaccurate it kept the CFO awake at night. There were over 60 analysts, and even with those numbers, it took nearly 90 days to create a quarterly report. This left little no time to analyze the data. CTG Global replaced it with a financial workbench solution that achieved high levels of controllership (including elimination of errors), decision support, risk mitigation and compliance. Upon implementation of the workbench, reporting was able to be done in real time, allowing the analytis to get back to decision making based off the data, rather than struggling to document it in the first place.
Another important need for Finance is to easily model information that does not exist in the financial system. For example, financial systems don’t report the profit of customers, segments, channels, products etc. This dramatically reduces the chance to improve profitability due to lack of insight. Financial systems also don’t report process level detail for costs, which is vital for sustainable and strategic cost reductions.
This chart shows that 60% of customers are breakeven or unprofitable, the remainder are unprofitable. This pattern holds at all companies that have done a similar profitability analysis. What this means, is a majority of companies are spending their marketing dollars attracting customers that will not turn a profit.
It would be shortsighted to remedy this by thinking “Well, let’s just cut the bottom 50% of our customers and focus on the ones that make the money!” The reason financial analysts get paid the big bucks is because, with this added insight into segmentation, they can model future growth.
What they don’t know CAN hurt you.
So let’s say that the above graph represents how much someone has in their bank account. Assuming that it would be wise to just close all of the accounts of poorer college students, would essentially cut off all future growth as that person graduates, buys a house, needs a loan, etc. Using profit analytics to determine the lifetime value of the client and being able to drill-down into customer segments provides more opportunity and insight into what decisions will be the most profitable.
Another example, one of our clients had over 400 customers in a market segment. Of these customers, one accounted for 120% of the profits from the entire 400. 20% of the customers accounted for 500% of the profits of the segment, and another 20% accounted for minus 400% of the profits. Once the sources and causes of profit variation were revealed using profit analytics, changes in pricing, cost to serve and other factors had a dramatic impact on profitability.
Conclusion - needs of the financial department.
If I ask you “What does your financial department do” and your answer is something reactive rather than proactive, there is room for improvement. The finance department needs tools to reduce manual tasks, and increase time analyzing. They will ultimately need support from other departments to gather insight and execute on profitable decisions.
Top 6 finance department challenges
- Ensure sustainable, repeatable, reliable processes
- Identify and capitalize on revenue growth opportunities
- Reduce costs without compromising profitability
- Plan, predict and respond to business and market changes
- Align day to day operations with long term strategic goals
- Mitigate business, financial and regulatory risk
Opportunities for the financial department
Take advantage of data and the enormous potential for unlocking the hidden meaning that can drive profitability and growth
Leverage advances in technology to put information and analytics at the fingertips of analysts
Apply the latest tools for financial planning and decision support, which combine financial modeling, and analytics (e.g. forecasting and decision optimization)
Move the organization up the maturity curve for use of financial and analytic tools (see below for maturity curve)