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 organizations 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
To gain maximum benefits from the FPM implementation in the organization, all functions must contribute, but the major onus is on the finance department. Todays 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.
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:
- Cross-departmental alignment: Different departments in the companies are operating in their individual information silos, working only to improve their profitability and visibility. This is sometimes detrimental to the overall growth of the company. FPM tools increase the participation of all key departments, hence breaking these silos and ensuring free flow of information.
- Single view of the enterprise: The company many times may have different systems that were implemented at different times in the past. The most important challenge for an enterprise is to align all these systems and present one single view of the entire organization. FPM enables the company to present a single view for transparent reporting for all its stakeholders.
- Quick response to changes in the market: Markets are very dynamic, so any tool which the company implements needs to be very adaptive and quick to respond to the changing scenarios. FPM offers a platform for dynamic data update.
- Reduce costs without compromising profitability: As the competition increases, and the price-demand relation becomes very elastic, companies start looking for cost reduction in all spheres to maintain its bottom line. FPM, by its tight control process, helps in identifying the avenues to reduce costs and ensure optimal resource allocation.
- Meeting regulatory compliance requirements: FPM ensures that the financial reports generated are compliant, adhering to regulatory norms and accounting standards. The FPM platform itself offers ease of reporting.
- Accurate, relevant and on-demand reports: Manual entries and spreadsheet modes of reporting sometimes result in a matrix of interconnected worksheets, thus making the data more prone to inaccuracy. So the companies need to replace manual processes and adopt more and more automated systems to ensure that the data is accurate when it is entered and retrieved. FPM with its platform of automated processes increases data accuracy and generates on-demand reports not only for the finance managers but for all decision-makers.
- Better alignment of budgeting and planning process with strategies and KPIs: More often the goals of the company and the strategies designed to achieve them are not well interlinked with individuals KPIs, resulting in failure to achieve these results at enterprise levels and dissatisfaction at the employee levels. FPM helps in setting well-defined KPIs and aligns day-to-day operations with long-term goals of the enterprise.
FPM Works Along Four Progressive Pillars
Analysis of current process and profitability management: The basic functions of reporting, managing and improving will allow an organization to understand the as-is-scenario and to improve it. Reporting performance would help in gaining transparency in business and increasing stakeholders confidence. But the answers to questions such as, what is the competitive market environment like? What are the new developments happening? What are the new benefits the customers are demanding? How to understand what will be future trends? FPM helps the company analyze data along new dimensions and predict future trends, thus helping strategy makers in designing effective strategies.
- Budgeting/Planning: Analysis, in turn, will provide a solid base on which budgets and plans for more accurate forecasting of future results can be made. An exhaustive planning exercise should includes the better resource alignment, well-defined KPIs, linking of organizations goals with individuals goals, financial and operational strategy alignment across the company, strategy mapping, and cause and effect impact of decisions taken. This elaborate planning will help in achieving maximum benefits from its FPM Platform.
- Enterprise performance management: The plans and the budgets prepared have to be validated with the actual to determine accuracy and effectiveness. FPM helps in this measurement so that any gaps and loopholes can be tied up to ensure an overall increase in performance.
- Overall development of financial systems: This series of activities, i.e., analysis, planning and performance measurement, will reduce discrepancies in budgeted and actual performance, thus paving ways for an overall development of financial systems. This will increase the tools available to decision-makers, as they will be in a better position to understand what factors drive the business, how the company can increase its competitive advantage and what pit-falls the company should avoid. These fours pillars of FPM form a closed loop system providing maximum benefits of implementation.
Successful implementation of FPM in an organization requires seamless integration of all four entities. The entities are Processes, people, infrastructure and skills. This initiative needs to be driven by the top management, but without the participation of all employees, it will not be possible to get the desired results. For all benefits of FPM to be accessible, the people must be made an integral part of it. Some key people need to be identified who will drive this initiative. Also, the ownership needs to be clearly defined to prevent responsibility avoidance by different departments. All the current processes and the infrastructure must be well integrated for desired results.
For a successful implementation of an FPM program, company needs to look at the following aspects.
- Strategize: A strategy map has to be crafted on how this program will bring in results and improve performance from a short-, medium- and long-term perspectives and align itself with the organizations mission and vision.
- Understand the information needs: Needs to analyze the current information analysis standards and the framework supporting the same. Needs to define the gaps and statistical parameters of the data in meeting the to-be-analyzed needs.
- Estimate: Need to define a roadmap to achieve the final objective along with the associated effort and costs. It is always necessary to understand the business benefits and associated cost savings to propel the program forward. Benchmarking can help in accurately understanding the post implementation benefits by comparing the pre- and post- scenarios.
- Risk provision: Large programs are fraught with risks. So, it is very important to have a risk mitigation strategy also in place by having a good understanding on all types of risks that can crop up.
- Implementation monitoring mechanism: an FPM program should be properly monitored to ensure that objectives are being met. Necessary resources and authority should be provided to the implementation body to make this happen. The implementation body should be well positioned in the organizational structure to make this happen.
These tools help in understanding the present position and are able to provide the necessary information to correct aberrations as well. To manage performance, the company needs to understand where it is, where it is going and what needs to be done to get it there. There are many performance measurement tools that help to clarify the value proposition and measure the outcomes, some of them being balance scorecards, strategy maps, dashboards, financial consolidation and planning, marketing performance management, activity-based management and value chain analytics. Most of these methods are already in use in companies, but the ones which are offering major benefits and helping in more accurate forecasts and transparency are ABM and VCA.
FPM provides a foundation to build, control and improve performance of all functions. If correctly implemented, it enables all participants to align their actions to overall corporate vision and deliver an optimal performance. But for overall development, participation of only the finance department is not enough. All functions within an organization must shoulder the responsibility. FPM must pave way for enterprise performance management.
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