Financial Performance Management

Information Management Special Reports, December 4, 2007

K. Narashimha Rao, Shobha Sharma, Abhishek Deb

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In this article, we discuss the advantages of using financial performance management (FPM), which provides the quantitative side of enterprise performance management (EPM).

EPM helps an organization to efficiently their business units as well as their financial, human and material resources to and optimize business performance. EPM brings together all types of data/information, including both financial and operational information. It helps in assessing progress toward achieving organizational goals.

Business needs to define performance metrics that are both quantitative as well as qualitative in nature to have a complete understanding of performance. Qualitative metrics capture the facets that cannot be quantified, such as, quality of management, efficiency of employees and confidence of shareholders, and they are critical for the business continuity. Quantitative models provide an objective performance measurement in a world where businesses are rapidly expanding across national boundaries. Financial performance management (FPM) is perhaps the most objective and comprehensive of all quantitative performance management models.
FPM covers processes such as planning, forecasting and consolidation. It is aided by through data integration from various sources. FPM covers querying and analysis of the data, and it puts results into better perspective. FPM:

• Provides financial consolidation capabilities to understand the overall figures, with details to analyze the various unit levels as well. This helps in taking a corrective action quickly.
• Provides forecasting abilities with a high degree of predictability and helps the company to take the necessary course of action to meet earnings projections and stakeholder expectations.
• Effortlessly allows users to monitor the efficiency of projects and employees against set targets using key performance indicators (KPIs).
• Helps in stress testing to understand potential problems.
• Helps in identifying and eliminating problems before they grow bigger.
  Creates betterfeedback loops with the help of data integration.

This article deals with this major part of EPM, and goes on to explain EPM expectations, the main functions involved, benefits, progressive pillars, the whole surrounding environment, implementation methodology, tools, common activities and the problems associated with it.

FPM aims to optimize business processes while aligning them with organizational strategy. It is an approach that uses best practices, methodologies and information technology to manage the performance of an organization and guides the business to effectively use all its assets – people, processes and technology – to achieve the organization’s strategic goals.

There are other pressures on the company, such as better regulatory compliance and providing accurate data to its stakeholders. Transparency to the stakeholders involved has taken on a whole new meaning.

FPM integrates data from multiple financial systems, developed over time in the organization, to provide accurate and on-demand reports. It will generate reports not only for the finance department but for all managers responsible for budgeting or revenue generation, and it enables creation of accurate forecasts, ensures financial transparency and insightful managerial reports more quickly. With the help of FPM, financial reports are being consolidated on a real-time basis, thus making the latest information always available for decision-makers and regulatory agencies.

Functions of Finance

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To gain maximum benefits from the FPM implementation in the organization, all functions must contribute, but the major onus is on the finance department. Today’s finance department has taken up many strategic roles in addition to the conventional duties assigned to it. They are increasingly becoming the strategy drivers in an organization, besides executing the basic finance and accounting functions expected of them. Performance management, control metrics, gap analysis, reporting and constant improvement all falls within the preview of the modern finance function.

A well-aligned finance function will ensure continual success for the organization; they are continuously improving their effectiveness by:

• Better alignment with other functions within the organization.
• Eliminating manual intervention in its processes, thereby reducing errors.
• Improving financial and management reporting.
• Better aligning goals with the results. Well-defined KPIs and measurement metrics.
• Using predictive indicators to enable decision-makers to anticipate issues and current market trends.
• Effective planning and profitability management.

Benefits from FPM

When an organization is implementing FPM, it improves its processes to gain an edge over the competition. It may be to improve revenues, to reduce cost, for better on-demand reports, for improved transparency or simply for better alignment of different departments and resources. FPM as a tool offers all these advantages and many more.

Figure 3: FPM Benefits

In many global organizations, the financial data is stored in different systems, using different accounting and reporting standards, making the consolidation of data and comparison of results for different units very difficult. FPM improves the accuracy, relevance and timeliness of financial plans, budgets and reports. Some of the major benefits of FPM are:

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