Finance: Measuring their performance
September 30th, 2010
Copyright © 2010 Integrated Profitability TM
(This article is published concurrently at the “Integrated Profitability” blog. Please visit for the full series of articles.)
Given what Finance people do, their accountability, and the information they use while doing their jobs, what are some of the ways to measure how well they are performing?
Given that Finance accountabilities cover significant internal and external ground, measuring their performance needs to include both. Here are a few common approaches, by the three major functions:
● Accounting
- Accuracy of booking entries
- Findings from internal and external auditors; regulators
- Promptness of the monthly close
- Timeliness of submitting regulatory and investor reporting
● Finance
- Accuracy of the financial plans
- Accuracy and business-relevance of variance/performance explanations
- Accuracy of the forecasts
- Timeliness of financial reports after accounting close
- Use of reports and analyses by business partners
● Market-related
- Net-profit from proprietary trading
- Amount of idle funds
- Adequacy of liquidity
- Net value of hedging activities
Bill
William A. Stong
Email: william.a.stong@gmail.com
SBF&P # 82
Telephone: 925-202-6244
Copyright © 2010 Integrated Profitability TM
Capital vs. Equity
January 21st, 2010
Copyright © 2009 Integrated Profitability TM
When I started the “Capital” series back in October 2009, I should have taken that critical first step: set definitions.
In the eagerness to get started on something new, and especially on those projects that are really necessary or important, beginnings sometimes get rushed and that can cause rockiness down the way. For example, the series really isn’t about capital, it’s apart a specific portion of capital: the equity, shareholder/owner portion of capital. The series will be re-named “Equity-Capital.”
So, starting at the beginning as we near the end:
Capital Structure:
The percentage of each type of capital used by the firm—debt, preferred stock, and net worth (net worth consists of capital, paid-in capital, and retained earnings).*1
Equity:
The net worth of a business, consisting of capital stock, capital (or paid-in) surplus, earned surplus (or retained earnings), and, occasionally, certain net worth reserves. Common equity is that part of the total net worth belonging to the common stockholders. Total equity would include preferred stockholders. The terms common stock, net worth, and common equity are frequently used interchangeably.*2
Everything perfectly clear now? While doing research for this blog, I came across a passage in a text book under a sub-title of “Definitions of Capital” which I was quite happy to see:
“When accountants refer to capital they mean stockholders’ equity or owners’ equity.”*3
I couldn’t have said it better myself!
Anyway, remember the earlier series on “Numbers People”?
This definitional issue is a perfect example as to why accountants are so critical to the success of a business. They define the transactions, set the standards, and oversee the infrastructure in which the financial booking takes place.
And they keep those finance people in place. Sooner or later.
Bill
William A. Stong
Email: william.a.stong@gmail.com
SBF&P # 50
Telephone: 925-202-6244
Copyright © 2009 Integrated Profitability TM
*1: Eugene F. Brigham, Fundamentals of Financial Management (Illinois: Dryden Press, 1978) p. 568.
*2: Brigham p. 571.
*3: Donald E. Kieso and Jerry J. Weygandt, Intermediate Accounting Second Edition (Santa Barbara: Wiley/Hamilton Publication 1977) p. 602.
Got Numbers People?
August 27th, 2009
Copyright © 2009 Integrated Profitability TM
If your business is squarely on the road to riches and you “don’t need no stinkin’ Numbers People,” then STOP READING! Go straight to your favorite entertainment place and reward yourself with whatever you enjoy the most.
On the other hand, if your numbers are not everything you would like them to be, then feel free to read on. If your numbers don’t exist, are unknowably mysterious or are plummeting out of control, then definitely continue reading.
You’re in good shape when you have:
● a business model that is clear, easy to understand and comprehensive
● accounting books that are accurate and timely
● financial reporting that is timely, insightful and which acts as an actionable bridge between the accounting numbers and your business processes
● planning that links the financial numbers to the future of the business and incorporates the experience and knowledge of key stakeholders
You’re not in good shape if none of the above exists.
You’re in poor shape if:
● your business model isn’t written down. Or your written business model doesn’t show, precisely, how you make money and where you might lose money.
● your “accounting” is a shoebox full of paper that you (or somebody else) go through once a year…to keep the Tax People happy and off your back
● financial numbers are only pulled together when taxes are due, a government filing is needed, or a potential lender/investor needs background information
● planning is done over coffee and a donut each morning…if ever
You’re in really bad shape if all the conditions of “in poor shape” exist AND you’re losing money hand-over-fist.
Numbers People in Action: Planning Process
August 24th, 2009
Copyright © 2009 Integrated Profitability TM
Another continuation of the suggestion that came in to
“…include a simple but meaningful scenario which you’d have the three Numbers People work through to posting, reporting and interpretation and planning…”
The first article set up the simple scenario, the second dealt with Accountants & Bookkeepers. And then Finance: basic, financial analysis and financial planning. This article covers a process to do that planning.
The Planning Process
Most “Plans” start with the financial numbers that have been created for and used by the regular (monthly) reporting. Of particular importance is the most current trend within those numbers (e.g., what’s going up? what’s going down?), as well as a good understanding of the underlying business drivers of those trends. Using the trends and the drivers, Finance can model what most likely will happen, assuming those trends continue. This initial set of future numbers then needs to be adjusted based on input from other stakeholders. Each of the main financial sections (e.g., revenues, expenses, assets, liabilities) may be adjusted up or down based on the other stakeholders’ views of the future from their particular areas of expertise:
● Economists: provide information about the high-level business and seasonal cycles (e.g., is the business in the up or down part of a cycle?) and various rates (e.g., interest and foreign exchange rates)
● Marketing: provides input similar to that from the economists, but more detailed in terms of targeted regions, industries, customer segments and product performance metrics (e.g., are different industries or customer segments moving in different directions? Are there any shifts in products being purchased in the market?)
● Sales: provides even more detailed insight, with the focus on what the company’s customers (both current and prospective) might do with the company’s products and services, including what future transactional volumes and realized prices might be (e.g., what is in the sales pipeline? Is the company losing customers or gaining new ones? What kind of pricing will be needed to retain current business; to close new sales?)
● Operations: working with vendor prices (the company’s cost), transactional volume forecasts from the sales function and their own operational productivity goals, the operational function (e.g., factories, processing centers) provides detailed forecasts on total expected operational expenses (e.g., are postage rates increasing? Is minimum wage going up? Based on the sales transaction volume forecasts, are any step functions going to be invoked, either in terms of personnel, equipment or IT capacity?)
Finance takes the initial set of numbers created from the historical financial books and works with (negotiates with?) other stakeholders to fine-tune the company’s future financial plan to make it as realistic as possible. The company’s financial plan is truly a joint effort.
Again, notice how “The Numbers” become so dependent upon non-financial information? And how the menagerie of Numbers People has increased?
Bill
William A. Stong
Email: william.a.stong@gmail.com
SBF&P # 41
Copyright © 2009 Integrated Profitability TM
Numbers People in Action: Finance Planning
August 20th, 2009
Copyright © 2009 Integrated Profitability TM
Another continuation of the suggestion that came in to
“…include a simple but meaningful scenario which you’d have the three Numbers People work through to posting, reporting and interpretation and planning…”
The first article set up the simple scenario, the second dealt with Accountants & Bookkeepers. And then Finance: basic and finance analysis. This article covers Finance Planning: The Basics.
In addition to reporting on the financial numbers after they are posted, Finance also develops and monitors a financial plan to cover what might happen in the future. Assuming a company has an annual plan process, the future numbers that result from such a process is the “financial plan” for the next year. If financial reports are generated monthly, the annual plan is usually a monthly one as well. Most plans also use a summarized level of general ledger accounting lines (e.g., if the general ledger has 10,000 unique accounting lines, the annual plan may only use 2,000 from a higher level in the general ledger accounting hierarchy).
After the approval of the annual plan and the beginning of a new year, actual numbers will begin to be reported. The actual results, of course, may be different than what the plan anticipated. Which may necessitate changes to the future plan to make it more accurate given what has already happen. The results of these “in-year” adjustments to the plan are frequently called “forecasts.”
Finance uses the historical (actual) information already reported to indicate what most likely will be happening in the future. However,
“No man is an island, entire of itself
every man is a piece of the continent, a part of the main…”
John Donne (1572-1631) a Jacobean poet and preacher*
To paraphrase,
“No business function is an island, entire of itself
every function is a piece of the company, a part of the main…”
Planning for a company’s future financial numbers may start with, and be coordinated by, Finance, but the financial function cannot create a fully realistic plan without help from other critical stakeholders in the company and its business.
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