The Importance of the Finance Function

John Baule

Successful companies have an impactful finance function that truly influences and plays a critical role in the business. The main function of Finance is to provide strategic insight that can have a profound impact on the decision-making process and overall health of the business. 

If your company thinks of Finance as a back office function full of accounting trolls who linger in the basement and live to create bureaucracy in the business, then management has a misperception of finance that you must reverse. You’re also missing an opportunity to have a function that can have a tremendous positive impact on your performance. Finance is effectively the rhythm section of a company. It creates the company cadence that every company needs. 

Finance Functions are more important than ever

When you think about deliverables of the finance function like the monthly financial close, the weekly sales report, the annual budgeting process and possibly the annual strategic planning process, there is a framework within which the company has conversations, and makes decisions and choices. That conversation is worth thinking a little deeper about. 

For most companies, it's about using information to make better decisions and moving that information around in increasingly creative ways. The key to that is to have high-quality conversations. The companies that have high quality conversations almost by definition are going to perform. 

Therefore, you need to know that when you have a discussion about your scenarios and choices, that someone is taking those strategic choices and incorporating dollars and cents implications and that's the essence of finance, both short and long-term.

Too many CEOs think Finance’s sole job is to control spending. Yes, it's to control spending, but not necessarily to minimize spending. It's meant to spend each dollar wisely and help a company think about how to spend each dollar wisely.

Finance provides essential strategic insight

Let’s look at an example of how a Finance Function impacts the entire conversation of a company by considering an NBA game. You get to a point in the game where there's a critical play and what you always notice first is they call timeout and three or four of the coaches, the head coach and the assistants, they all walk out on the floor with a clipboard and they all discuss what they're going to do before they tell the players what play they're going to run.

They discuss what's the optimal strategy and they are trying to make a choice. Watching this, you might ask yourself what's involved in that decision, what's going on there? 

Well, you see the coaches and they're looking at a clipboard, but what you're not necessarily noticing, but is absolutely a key part of that discussion is the entire analytical framework that supports it.

What does that mean exactly? First, there's a scoreboard. So obviously these coaches are not having that discussion in a vacuum. They know critical details like what the current score is, how many timeouts they have left and they have a very clear understanding of the metrics that are up on that scoreboard.

They understand if a player has four fouls, that he only has six allowed for the whole game before fouling out, or they understand the different insights that those scores are telling them, those metrics are very clear to them. They also have a huge amount of information about the other team that’s factored into their decision process. 

For example, they know that the other team tends to run this type of defense in a certain situation and they understand their tendencies. All of these things are a part of this conversation, but they're all behind the scenes. 

Finally, there's the whole structure of the game, the rules of the game. Well, if I shoot behind this line it’s worth three points. If I shoot in front of this line it’s worth two points. If I get fouled, I'll go to the foul line or I won't go to the foul. 

To make an analogy to accounting, finance creates the rules, they provide this whole sense of background and metrics and trends. They've defined the metrics and the score and because all of these things are present, it looks like those four coaches are just going out and having a quick conversation. But in fact, it's embedded with tons of background information and that's the way a finance functions in a company. 

When your management team gets together to have a discussion, they're not just having a discussion at that point in time. They're having a discussion that is layered on top of this entire framework that's created by the finance function. Therefore, finance is essentially responsible for providing that strategic framework in a company.

To successfully manage a finance function, you first need to build one. It's important to consider each of the steps necessary for CFOs and finance to play an impactful role in the business.

FP&A is the most value added function

As a CEO or a CFO or a management team, 90% of the value you're getting in the Finance Function is from financial planning and analysis (FP&A) — though, this comes with a very important caveat. FP&A is more value added, as long as the accounting works. 

For example, if electricity is flowing through your house, you don't even notice it, but the minute electricity goes off, it's all you notice. You might notice all of the devices you plug in, but if the electricity is not flowing through the walls, then it doesn't matter what you plug in, it won’t work. You won’t gain that value. Therefore, accounting is absolutely critical to run that for that process of getting you to point zero. It doesn’t mean you won't get beyond point zero, but that's how accounting and finance function together.

In a recent survey from Deloitte, 63% of CFOs said FP&A is the core Finance Function they would like to improve the most. This comes as no surprise because that is where you're getting the value in your Finance Function. 

However, FP&A is very different today than it was in the past. It's no longer just responsible for rudimentary variance analysis. Determining what was the budget, here is the actual, and here was the difference, that's not very meaningful. 

The role of finance, and specifically, FP&A is to provide real insight into the accounting information, to incorporate other information from other systems like customer relationship management (CRM) and human resource (HR) data, and share it across the company.

You must also incorporate those metrics into real analysis of the business. You can also consider FP&A like Maslow's Hierarchy of Needs. At the basic level, a company has bookkeeping and as a company grows, even a little bit, they start to need more and more.

They need more advanced bookkeeping and bookkeeping in accordance with  generally accepted accounting principles (GAAP). As they mature, they need a lot more information, specific reports for investors, for banks and other stakeholders. Then, they realized they need a whole dashboard of metrics for their business. The more you grow the more you climb that need for additional information to provide insight and drive strategy.

How to best approach finance metrics

One of the most important roles of FP&A is to take all the analytics and information, and puts it together for the sole purpose of helping the Company make and frame choices. 

Essentially, FP&A is responsible for framing choices, so that management knows that when they make this explicit choice, that there are a number of implicit choices that they're making at the same time. Making those implicit choices explicit is a key part of the FP&A mission.

When considering metrics to frame those choices, be sure the metrics for the business are clearly defined. They need to be defined in a way that is absolute, without ambiguity. If, if they're not a guarantee, you, someone will, as the minute, the metric matters to somebody, they will figure out a way to rewrite it and redefine it.

Metrics should also be calculated regularly, and ideally, they're generated automatically from source data. If it's an act of God every month to put together a certain metric, they'll eventually drift away and not be utilized. Also, business metrics should be interpreted in context, not necessarily taken as absolutes.

This is a key point regarding metrics, don't confuse accounting with analysis. If I told you that my annualized employee attrition was 30%, you might think that seems high. But if I told you the business was the restaurant business, that's actually pretty good for a restaurant business.

Therefore, you have to look at metrics within a context and not think there's some magic to the number itself. Metrics are generally better interpreted in the context of trends, not for a single period. 

It's not really useful to know that the temperature is 99 degrees outside as much as it's useful for me to know how that compares to every other day in the month and every other day in the year. It’s difficult to make an assessment of a metric just by looking at any one thing. 

A great example of this is from the book, Factfullness, where they compare the tons of carbon that were in the air in different countries in India, China and the United States.  Once the metrics were presented, the Indian UN representative stated, he never wanted to hear that number, quoted without it being compared with the population of his country, because he has 1.4 billion people and you're comparing an absolute number to a country that only has 339 million people. It doesn't make sense. 

You shouldn't look at numbers without the context of other numbers. You need to start with a realization that there is no individual metric that tells the whole story. That's why we call it an analytical framework. It's a framework of metrics that together define your business.

Growing need for dedicated Finance Software

Managing a finance function without the proper tools is a losing battle. Trying to manage your disparate data from various systems in Excel or legacy solutions isn't ideal for your growing business. For an effective finance function transformation, you need more automated processes and robust software solutions that provide greater insight and use of your data to efficiently deliver actionable insight.

The FutureView Platform is built with battle-tested methodologies from decades of finance experience and turnkey solutions to fit your needs. It leverages direct integrations with your ERP and other systems and automatically structures your data into a centralized platform, allowing you to forecast and develop various scenarios while always maintaining version control.

Our team of finance experts can have you up and running in a couple of weeks, not months and with minimal internal effort. If you’re looking to automate manual processes and maximize the impact of your finance function, contact us or schedule a free demo to see our FP&A Platform in action.

Managing Your Finance Function simplified with our FP&A Platform. To be an impactful finance function, it's important to rely on robust software that can transform your finance function