October 2, 2020
Corporate Finance Has Only Two Key Jobs – ‘Know Thyself’ Is One of Them
Posted by John Kogan
“What?!” you say. “Corporate finance does tons of stuff.” That’s certainly true, but when it comes to what really matters, what finance was truly created for in the first place, the “tons of stuff” are but a means to a far more valuable end.
Finance is here to help companies:
- Better know themselves
- Chart a path to their best future
Yup, that’s it. Let’s break it down, starting with “know thyself.” (We’ll tackle forecasting in a separate blog post.)
Reporting and Analysis
Financial reporting and financial analysis are two categories that encompass lots of that “tons of stuff” and which really boil down to “know thyself.” Once you know a thing, you can make it better. Without the knowing, you just bumble along.
Financial analysis helps every part of the company better understand any facet they care to analyze. Whether it’s marginal product cost, channel profitability, cost of customer acquisition, churn, optimal pricing, investment decisions or the like, financial analysis provides an economic basis for understanding virtually every part of virtually every operation.
Even seemingly non-economic analyses are about their inherent economics. For example, production efficiency may be about squeezing more product from the same supply chain, but it’s an economic analysis at its heart.
This brings up a key element of financial analysis: It should not be restricted to pure dollars and cents. All roads at a company lead to the money, therefore, finance can and should examine all operations, not just financial areas. Done right, finance should be working hand in hand with marketing, sales, production, development, HR and other functions, all with an eye toward better understanding and a path to better performance. In fact, when finance gets invited to the table as a friend and not a foe, that’s a sign that things are going really well in your finance organization.
Financial reporting is another key part of knowing thyself — the part that communicates knowledge and leads to action. While financial analyses are frequently done as one-offs and communicated once, at other times they will be part of ongoing financial reporting. Financial and operating information certainly need and deserve to be reported regularly. Without that, how will business leaders see the impact of their actions?
It’s Not Just About GAAP
Financial reporting is too often assumed to be “GAAP-based” reporting of month/period-end numbers. Nothing could be further from the truth. In fact, that’s a dangerous mindset because it all too often leads to complacency with grossly incomplete information.
GAAP-based reporting is generally somewhat useful for investors and lenders but not for operating executives or boards. Such reporting is usually based on high-level numbers that are reported by function, region, and/or a company’s chart of accounts. Whether done separately or in combination, those are wholly inadequate for decision-making. They tell you a bit of the “what” with none of the “how” and “why.” Yet this is what the vast majority of corporate “financial reporting” provides.
Reporting should combine that “pure GAAP” information with metrics that demonstrate why and how in order to provide consumers of the information the ability to understand and then do better. These metrics are almost infinite. Examples include churn, customer acquisition cost, days sales outstanding, productivity, cost/employee, revenue/employee, sales/square foot, and on and on.
If it provides improved insight into your economics that can be the basis of improved performance, it should be used. Figuring this out is rewarding and fun for finance professionals, and it’s a never-ending process. Each new analysis has the potential to be part of tomorrow’s reporting.
Tools to Use
Unsurprisingly, technology helps. Sure, lots of analysis and reporting can be done with Excel, a genuinely amazing tool, but in these “big data” days, there are a host of tools that can help you do many things better, faster and more reliably.
If you have very large data sets to analyze, you will want to consider a business intelligence (BI) tool such as Microsoft PowerBI or the like. The advantage purpose-built BI tools bring is the ability to work with massive data sets and set up and save advanced analytics and reporting. Their use is relatively straightforward, but you definitely want a good partner helping you set the tool up and integrating it with appropriate data sources, because the real magic happens there.
If your setup is right, then the data you really need to analyze becomes seamlessly accessible. However, if setup is not handled well, you will find yourself with a very poor ROI and high abandonment rates among those who really need to use the platform.
Beyond BI technology, there is also reporting automation, which, when properly aligned with your business and setup, allows you to automate even complex reporting, turning what could be hours or days of work every month into a very quick and more insightful process. The trick to reporting solutions is finding one that will work with your technology stack without a lot of customization, because customization dramatically limits upgradability.
Of course, you also want cloud-based, secure access and user-friendly authoring tools to make life easy on the employees who will be driving this. Remember, too, that reporting is more than just the numbers, and a reporting tool that makes it easy to add commentary and ad-hoc analysis to regular “canned” reporting will be most suitable for typical corporate situations.
“Know thyself” is key to your company and your finance organization. Once understood it becomes easy to align people, process and technology to most effective analysis, reporting, and “knowing”. That’s finance done right.
To learn more about strengthening your corporate finance function, visit our FP&A page to see how our experts can help your organizations.
John leads the Finance Performance Improvement practice, where he helps clients with strategic finance outsourcing, executive search & finance technology solutions. He is passionate about helping CFOs become strategic leaders and make the finance organization a genuine weapon for their organizations.