PMCC Interactive

Tag: Financial Performance

  • Effective Financial Management- Setting a Developmental Agenda

    In most instances, enhancing financial management capabilities will require that leaders not just focus on that which can be made more effective and efficient- that is obvious and easy and does not create a lot of value.  Instead, Finance leaders will have to both focus on efficiency and at the same time focus on what has been missing and create those capabilities from the “ground up”.

    I recently attended a local CFO Breakfast.  The breakfast theme was financial leadership-and it lead to a lot of different interpretations in the discussion- but some common themes emerged and not all of them are new.

    • Role of finance
    • How can finance “get more respect” be more vital etc?
    • What should finance be working on….

    The answers are of course:  It depends on the individual circumstance.  I go to the school that all improvements are good improvements- and that the value of investing in upgrading capabilities will eventually accrue to the organization.  However, absent a specific change agenda, I suggest that Finance Leaders consider the following scenario and plan their mid to long term development agenda around the needs suggested in the scenario below:

    • Investors will always demand incremental returns….
    • There  is significant cash on the sidelines of public companies and investment funds
    • So …Companies will have to invest or return cash to shareholders or limited partners- which for a whole host of reasons, there is a general reluctance to do so…
    • Hence …there is pent up demand to invest- and in the Spring of 2011 this is playing out in the volume of announced large strategic deals
    • Meanwhile,,,, Banks are offering less leverage than once considered “normal”
    • And…. Lack of leverage staunches the ability to increase returns using financial engineering techniques
    • At the same time it appears that…. developed economy countries economies will not grow very rapidly in the near term and therefore not provide volume growth opportunities to the market
    • Hence….“Class of 2011 and likely 2012” deals will have to get their returns the old fashioned way- they will have to earn them through
      • Market Innovation- new products and new markets
      • Operating excellence- achieve best cost operations
      • Working capital creation and increased velocity
      • Causing…. the overall competitive environment to intensify as mergers and acquisitions that are sure to follow an economic downturn take place but in new formats and capital structures
      • And….place pressure on all competitors for enhanced performance
      • Which… if not properly managed could start the economic challenges giving rise to this scenario to start all over again…. Just when we thought we were emerging….

    To deal effectively in this environment, companies and their finance leaders will both have to ensure that the skills and capabilities in the finance group are sharp as well as ensure that the organization as a whole understands and is focused on driving returns for the business.

    If these assumptions are plausible for your organization, it stands to reason that companies will need to have above average capabilities in most all of the five following domains.  In fact the capabilities will have to be so good that they will both enable profitable innovation and growth- as well as pave the way for solid operating performance- and today, not many companies are necessarily good at both.

    Domain Relative Financial Management ability required in the business
    Financial Planning, Control and accountability Businesses will have to plan with more rigor to ensure that scarce resources are allocated in ways that will drive value and produce measurable results in the expected timeframes; Accountability processes will have to be real time and responsive to changing market conditions and company performance.
    Information for Decision Making Business leaders will need to have relevant, reliable and readily available information where and when they need it- in the formats that promote insight and compel action.
    Cost Structure Understanding Companies will not have just have to have low cost- they will require a best cost approach to the business- that is integrated- investing, cost cutting and operating rigor can’t operate independently. For success, they will have to operate together.  Capabilities will have to be in place so that people designing operations are doing so with the cost structure in mind so that they can make appropriate optimizing trade-offs and decisions.
    Business Literacy People planning and commanding resources will have to have a firm sense of the business of the business of how profits are earned and value is created so that they can make real time tradeoffs and decisions.
    Working Capital Capital deployment will be key.  Idle assets will have to be turned into cash and invested or used to meet the capital requirements of the business.    Similarly, returns on new capital invested will have to be closely monitored to ensure sustainable value creation.

    Time is tight and the stakes are high. Financial leaders will have to take stock to ensure that not only do individuals in the business possess capability and capacity in these domains, but that the fundamental business practices and processes are in place to effectively use and deploy these capabilities.  Some organizations will have to do some quick make or buy analyses to determine their organization’s own capabilities and the most expeditious path to developing and deploying them.

    • How do you rate your organization’s abilities in these domains in light of your business requirements?
    • What can you do to ensure your finance organization is up to the task?
    • What’s in the way of you accomplishing what you need to accomplish?

  • Effective Financial Management

    The subject of Effective Financial Management (EFM) seems to be a perennial favorite.  Welcome to our inaugural blog on the subject.

    EFM has been a favored research topic for educators and consultants alike.  The subject while likely around since shortly after the creation of double entry bookkeeping which seems to be around 1211 in Florence Italy, really came into focus in the mid 1980’s as companies were stretching their resources (and those of many of the manager-owners) to accomplish leveraged buy-out transactions.  Up until then, keeping score was the role of a few people in the organization whose offices did not have great views.  However, once people started putting their own money into the game, the desire to know where you stand began to build.  Further, the basic need for “safety” helped to move the concept of internal control out of the “nuisance column” and into the – “this is a good idea- even if it creates a bit more work column”…. ERP advances and the desire to cut cost lead to EFM’s focus initially being placed on transactional efficiency.  Shared services, and outsourcing created the opportunity to create both economy of scale- and economy of intellect (just how lucky were you to have the best accounts payable supervisor in each of your 29 locations that paid bills….?) by co-locating people doing the same tasks.

    The ENRON era related failures created additional control requirements mostly on the reporting side of the business with the apparent goal of creating an environment that financial leaders would be much better prepared to describe exactly how the horse left the barn when it was decided to keep the barn doors open to avoid the costs of running the fans….

    Yet these might not have been all that potent since we are still at a loss in coming to grips with just exactly happened on Wall Street in our latest series of financial challenges- and why “whatever it was” wasn’t reported sooner and more clearly.  Most of us are waiting with baited breath to understand the full scope of new government regulation that will help with these challenges in the future.

    And the debate rages, blame is laid and elixirs abound.  Yet, there are still many different definitions- and degrees of rigor applied to the answer of the question of: ”just what is Effective Financial Management”.  The debate is still a bit uncomfortable because some of the outcomes might not be “doable” for many organizations because many are still debating just “what is the role of finance” and if you can’t get your status in the organization settled- it might be tough to acquire or develop the resources to create EFM.

    Having been on the EFM quest for 30+ years, we know there are a lot of good people with good ideas- some basic- and others game changing about how to create a business environment that enables more Effective Financial Management.  With that as background, we launch this Effective Financial Management Discussion Forum.

    We want to run this as a true discussion forum with rich and thought provoking conversation emerging.  Since we are all at the same time, operators and investors, it is in our best interest for companies to improve the effectiveness of their financial management.

    To put the ball in play- we ask a few simple questions: To create a more Effective Financial Management environment or capability for your organization what would you have to:

    • Start doing
    • Stop doing
    • Continue doing with more intensity?

    What has been in your way of accomplishing this?

  • Improving the Business of the Business- A Maiden Blog…

    Thank you for joining in on our Maiden Blog. The inspiration for the blog about “Improving the Business of the Business” has come from several friends- all in different roles- but all in the search of wanting their businesses to be better.

    Over the past few months, we engaged several people with the question: “Do people in your business [who manage resources and whose decisions have an impact on strategic, operational or financial performance] really understand the business of your business- how you create value and make profits?”

    Generally, after a recognition smile emerges, the conversation opens and covers a range of current concerns, and aspiration that once leaders developed and objective and shared view of the real “Business of the Business, a lot of potential will emerge.

    The conversation engendered a lot of rich dialogue and we thought it might be really informative to engage a wider group on the subject. We think it might be timely, because as the economy begins to turn, it would be refreshing to turn thoughts from merely surviving- to thriving. We also believe it is a fundamental question because this understanding (or at least this set of beliefs) should be the starting point for assessing your own business, its performance, devising strategy etc. Without this settled, the foundations of strategy, day-to-day operations and ultimately performance could be at risk.

    We thought this might make for a rich conversation topic. I know that most all of the people on the initial announcement have an interest and a passion in always improving the Business of their Business- and can only assume that many of their contacts share the same passions. We encourage you to share this topic with folks you think might have some sharp insights- and drive up the quality of the conversation and benefit from it as well.

    We hope to host and operate this as a legitimate Discussion Forum- with a rich conversation as opposed to a monologue with a few comments thrown in for good measure and feaux legitimacy. We will see where this journey takes us and once we get a few of these “logs on the fire” we can really jump off into some meaningful conversation.
    So- we leave you with a series of related questions:
    • What are your thoughts on the importance of a shared agreement among business leaders with regard to the essence of the Business of their Business- what does it take to create and sustain value?
    • What are the critical elements to consider as you embark on “improving the business of the business”?
    • If you could do just one thing to improve the business of your business- what would it be? – and what’s holding you up from getting it done?