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Partner in Driving Performance and Value

Financial management, financial planning and analysis (FP&A), and other financial business partners (FBPs) play important roles in the overall success of any enterprise. In this chapter, we will introduce the critical value-add activities that contribute to becoming a “Partner in Driving Performance and Value,” and we will preview the contents of the remainder of this book.

WHAT IS A FINANCIAL BUSINESS PARTNER?

I define an FBP as those individuals or teams that support the business in achieving goals for performance, and ultimately, value creation. In this text, I have chosen the label FBP rather than FP&A. FP&A is somewhat limiting and the role of FP&A varies from organization to organization. Much of what we define as a FBP occurs outside FP&A, for example, merger and acquisition (M&A) support, Capital Investment evaluation, financing, and so on.

Finance wears many hats in most organizations. These include varied responsibilities such as transaction processing, statutory compliance, financial control, and financial reporting. While these areas represent important functions and activities, they are not considered value-add activities by most nonfinancial senior executives (until they break!). This book will focus on the value-add finance roles we describe as the FBP. However, finance cannot function at this level unless the core elements of reporting and financial control are effective. If vendors and employees are not paid, or if financial reports are not timely and reliable, then finance must address these to shore up the foundation, enabling contributions at the higher FBP level. This can be conceptualized as a pyramid as illustrated in Figure 1.1, similar to Maslow's hierarchy of human needs.

FIGURE 1.1 Business partner pyramid.

Under the leadership of the CFO, business partner roles may exist across the finance organization as shown in Figure 1.2. Shaded areas represent those areas considered value-add within finance, with the potential to drive performance improvements and create shareholder value.

Chief Financial Officer

FP&A

Control

Treasury

Investor Relations

Tax

Other

Monthly Reporting

Monthly Reporting

Capital Structure

Investor Communication

Tax Planning

M&A support

Performance Analysis

Financial Reporting

Cost of Capital

Investor Presentations

Tax Compliance

Real Estate

Financial Plans and Projections

Compliance

Cash Planning & Optimization

Information Technology

Decision Support

Internal Control

Investment Evaluation

Strategic Planning

Scenario Management

Financial Data

Cash Management

Value Creation

Other

FIGURE 1.2 Chief Financial Officer responsibilities.

FINANCIAL ANALYSIS AND ENTERPRISE PERFORMANCE MANAGEMENT (EPM)

A major area that adds value across the organization is financial analysis and enterprise performance management. Figure 1.3 presents the instrument panel in the cockpit of the space shuttle, which represents a great illustration of key objectives of EPM. At a glance, the pilot can get a highly visual report on the shuttle's altitude, on its attitude, and on every major system in the aircraft. The radar in an airplane allows the pilot to spot and identify potential external threats long before visual contact. At first, the panel appears very complex, but you can bet the pilot knows where every needle and dial should be and the importance of any changes! Pilots compare this information with the feel of the plane, visual observation, experience, and intuition to make adjustments in real time, as indicated, to operate the craft to safely execute the flight plan or mission.

FIGURE 1.3 Space shuttle cockpit instrument panel.

Photo used with permission of NASA.

In a nutshell, one of the fundamental roles of finance is the development and delivery of information to run a business and achieve an organization's goals, just as the instrument panel assists the pilots of an aircraft to execute their mission.

Key Features from Cockpit Instrument Panel

1. Real-Time and Predictive Insights.
2. High Visual Impact.
3. Focus on the Important Measures.
4. Provides Insight into External Factors and Environment.
5. Combine with Observation, Experience, and Intuition.

Our definition and application of the FBP is very broad and inclusive. It includes all activities that assess, plan, improve, and monitor critical business activities and initiatives. EPM is a critical aspect of the management processes of the enterprise. Performance management is closely aligned with, and overlaps FP&A in many respects. Key characteristics of effective EPM include:

• Achieving an organization's goals and objectives, including strategic and operational initiatives, forecasts, and planned results.
• Projecting and modeling future financial performance.
• Monitoring performance on key value and business drivers.
• Increasing visibility into critical areas of business performance, allowing managers to assign and enforce accountability for performance.
• Providing an effective framework, allowing managers and employees to understand how their activities relate to operating and financial performance, and ultimately, the value of the company.
• Providing early detection of unfavorable events and trends, such as manufacturing problems, supply chain disruptions, competitive threats, and product performance issues.
• Delivering critical information to managers and executives in effective displays or presentation formats that aid in identifying trends, problems, opportunities, and so on.
• Integrating into other management practices in the overall system of management processes that we will call the performance management framework (PMF).
• Identifying, monitoring, and mitigating risks.
• Providing information to managers to run the business.
• Supporting growth.
• Identifying and managing risks and uncertainty.
• Scenario analysis and planning.
• Monitoring progress on critical projects and programs.

FP&A and EPM must be integrated into other management processes as shown in Figure 1.4. Analysts and others involved in EPM must play an active role in the management of the organization. They are not reporters or historians; they should help shape the outcome of the enterprises’ efforts.

Understanding How Decisions Are Made

Since a substantial part of finance's value-add contribution involves developing and providing information and analysis to managers, partners should develop an understanding of how the human mind receives and processes information as part of evaluating options and making decisions. The analyst bears a responsibility to develop and present findings in an objective manner that reduces bias and the tendency to reach less than optimum decisions.

FIGURE 1.4 EPM integration with other management processes.

A primary theme throughout this book is the need to present and communicate business information effectively. This subject is the focus of Chapter 5, “Presenting and Communicating Financial Information.”

Preview of the Book

The book has been written to address key areas of financial management from a practical point of view. While theory and technical aspects are included throughout the book, I have tried to incorporate real business applications from my 45-year career in business accounting and finance. Some readers will explore the entire text, while others may dive into a specific topic of particular interest at the time. Where appropriate, I have included cross-references to other parts of the book that cover related material to assist the reader.

Most of the illustrations are Excel-based since nearly all analysts have access to Excel, and it facilitates illustrating key concepts.

The book contains seven parts:

• Part I: Fundamentals and Key Partner Capabilities
• Part II: Financial Leadership in the 21st Century
• Part III: Enterprise Performance Management (EPM)
• Part IV: Business Projections and Plans
• Part V: Planning and Analysis for Critical Business and Value Drivers
• Part VI: Valuation and Capital Investment Decisions
• Part VII: Summary

Part I: Fundamentals and Key Partner Capabilities Part...