Many finance directors strive for the same thing - an excellent finance service. This could be dressed up as a 'world class finance department" or a 'class leading finance department', but reading between the words the objectives are common. Recently there has been a real shift of direction within organisations and finance is normally at the top. From my experience Finance Directors are looking at focusing on three key areas:
Closing and reporting
Financial shared services
Cash flow has grabbed the headlines over the last couple of years due to worldwide market conditions. Organisations are not growing at the level they'd previously done and margins are being squeezed as consumers have less disposable income and more choice. Financial Directors are under tremendous pressure to realise more cash flow within their organisation to provide the growth and value shareholders expect. It feels that success is measured, not just on the performance of an organisation, but on how it fairs against competitors.
By enhancing the supply chain process, organisations can free up cash flow. This can be managed by controlling stock levels to ensure the correct levels are being held. The challenge for the Finance Controller is to be able to work out what the correct levels are. Whilst having low levels of stock means that the volume of cash tied up in stock is relatively low, it also means that, if there was an increase in demand, the organisation may not be in the best place to cope with this. So the key information the Financial Director needs to have around cash relates to planning business outcomes and what-if scenarios...
"What if sales increased by 10%...how would we cope?"
"How would the 10% increase affect cash flow?"
Traditional measures around short-term cash flow forecasting focus on being able to predict when customers will pay, and when suppliers will be paid. Streamlining this process to ensure that (1) organisations can predict when customers will pay and (2) improving when customers pay will have a positive impact on short-term cash flow. Further to this, improving the ability to pay suppliers and removing the requirement to make one-off supplier payments, will lead to better payment terms and more accurate reporting.
Closing and reporting
Some see this area as a service and a fairly simple focus point. Large organisations being able to close the books in a controlled, efficient manner, provides business control. Month-end management packs need to be produced and the quicker this can be achieved the quicker managers can react to the output. Large organisations may require detailed consolidation to occur from numerous systems and countries. A delay from any country or system will delay the final consolidated reports from being published.
A Financial Director needs access to accurate data as quickly as possible. Normally an organisation will have a month-end timetable for local and group reporting. Further to the production of internal reporting, organisations will also need to provide reports to met statutory requirements such as local GAAP, and IFRS. Lastly organisations will focus measuring its true performance by utilising KPI's. Due to complex data landscapes, large organisations have it as critical that consistent measurement of KPI's can be achieved. There is no point measuring data that is different and so reports need to measure apples against apples, and not apples against pears. Any error or issue with reporting and closing can have a dramatic impact on an organisation. Large public listed organisations have to report their figures and any amendments or delays in the reports can create panic and remove confidence leading to a reduction in the share price.
Financial Shared Services
Large organisations require large teams of people to manage the end-to-end financial processing. To obtain economies of scale, Financial Shared Service centres can be seen as a way of reducing head count and providing a consistent approach. If, for example, you had local entities across Europe, it could make sense to have a single team to manage their day to day activities. If you compare the costs of having local teams to manage the finance function against having a single shared service centre, in most examples the shared service centre wins. Where common processes can be adopted to process vendor invoices, managed customer debt and produce local reporting, a shared service centre can provide a Financial Director a more efficient way to service the organisation.
All of the three focus points complement each other. Where a Financial Shared Service Centre can reduce the cost to manage the finance function, this in turn will have an impact on cash flow and reduce overheads such as local finance centres (offices) and head count. Further to this, the Financial Shared Service Centre can provide consistent processes to ensure reporting is consistent and removing the risk around data being recorded inconsistently.
Where organisations focus on ALL of the three key points, they will start to achieve the goal of having a world class finance department and give them a competitive edge. To stay ahead of the competition and be well equipped to invest in strategic growth, organisations need to invest in their finance function. The worldwide recession feels as though it's coming to an end and growth is being realised in both Europe and America...so business should ensure they are best positioned to hit growth targets and improve market share.