So what? The impact on performance of your finance function

In this blog I explain the impact on an organisation of a finance function being in a particular performance state. In my last blog I explained the 3 states of performance in which I classify finance functions and the indicators I use to determine which state they are in.

The table below recaps the states and shows their impact on the organisation (click on the image to enlarge):

  1. In this first state, owing to a lack of basic controls, the finance function is confused or blind. The information that it is producing cannot be relied on and the finance function is destroying value in the organisation. Examples of how this can occur can be in making inaccurate payments, not collecting cash from customers or failing to file compliance information like tax returns on time or accurately.

In these situations there is often a lack of respect amongst the powers that be for finance and, at worst, a lack of honesty. This can go as far as fraud but need not be that malicious, it can simply be a lack of preparedness to face up to the truth about where a business stands. Managers manage purely on gut-feel and never think that actual measurements could tell them something that they don’t know.

I never rule out the importance of gut-feel in making decisions involved in running an organisation. However, the complexity of a business of any size is such that some sort of basic measurement will be required to monitor the financial position and inform decision-making.

2. In this second state, the finance function is doing its job adequately: there are good basic financial controls in place which mean that the information produced by finance can be relied on. Some of the key indicators of the function being in this state are:

  • the balance sheet is being controlled with all key accounts being reconciled each month.
  • regular monthly management information including Income & Expenditure, Balance Sheet and Cashflow analysis is being produced.
  • there is an underlying management culture and desire for accurate, realistic reporting.

So the function is doing fine but is not adding value leading to high performance.

3. In the third and final state, the finance function is adding value to the organisation. This means that it is providing insight and a level of financial management that contributes to how the organisation is run. It is well integrated and uses lean management practices to perform efficiently and continuously improve. The information that is produced is accessible and easy to understand. Month-end information is produced quickly: within 1 week of month-end; and this information is robust.

Another attribute of high performing finance functions is that they invest as much effort into managing people well (e.g. through staff recruitment and training) as the technical aspects of finance (e.g. knowledge of tax or accounting).

Determining the status of your finance function is the first step in working out what to do to improve its performance. Having done this, the goal is then to create a programme of work to move it up to the next level or, if already in level 3, to maintain its position there through ongoing investment and improvement.

Bellevue Partners can provide tools to help you self-assess where your finance function stands, or, if you want an independent view we can do this for you. We can then work with you to create programmes that will improve the performance of your finance function. Get in touch with no commitment if you would like to discuss steps of how to help your organisation. I am always happy to give an opinion.