How to tell if your Finance function is any good

By Andy Burrows

There are many different ways of looking at the performance of a Finance function.

But in this article, I want to start from first principles and definitions.

As with any question of performance, before you can tell how well you’re doing, you have to know “what good looks like”.

How can we tell if we’re doing a good job if we don’t know what the definition of “good” is?

But don’t, at this point, go straight into thinking about how you’d define a good job in Finance! If you do, you’re jumping the gun!

We need one more definition... the general definition of “doing a good job”.

The general definition of “doing a good job” is that you are meeting your objectives, which in turn is defined as making your anticipated progress towards your ultimate goals.

So, you have to know at the outset what your goals and objectives are.

Most people think that these are so obvious that they skip the thinking here. But it makes such a huge difference. And that lazy thinking is one of biggest areas of CFO leadership weakness today.

Mission and vision

At an organization level (and the Finance function is an organization within a business), these foundational questions are ones of mission and vision.

A mission is what you do, and includes the purpose (the “why”) of the organization.

A vision is what your aspirations are in doing what you do. Or, more correctly, it’s the owner’s aspirations. What does the owner of the organization want out of it?

The way I see things, the purpose and mission of the Finance function is to drive business performance through top class business performance management.

And our vision is to do that efficiently, but also primarily effectively, such that the performance of the business actually does improve.

Efficiency and effectiveness

So, the performance of the Finance function should be assessed in terms of both effectiveness and efficiency.

Effectiveness is how well we do something.

Efficiency is how much energy or resource we consume in doing something.

It’s effectiveness that I want to talk about mainly today.

That’s not to say that I don’t care about efficiency.

However, my belief is that Finance (generally speaking) already obsesses too much over its own efficiency, and yet doesn’t often think about effectiveness.

The other thing is that the standard way of measuring efficiency is by benchmarking – comparing how our efficiency measures up to other organizations on a consistent basis. And that means (if you have the scale to warrant it) spending some money with a big consultancy.

They’ve defined standard efficiency measures and collect data to enable these comparisons. It is worth doing if you are ready to have a fully rounded Finance strategy. Once you have the efficiency performance measures, you will be able to report them regularly. And then periodically you can update the benchmark data if you want to.

What is an effective Finance function?

Effectiveness, on the other hand, can be looked at fairly subjectively, and that’s where it can be useful to know what kind of questions to ask.

And we measure effectiveness in terms of how good our Finance functions are at doing what we’re here to do - driving business performance.

We can suggest what good looks like, but we may not have a numerical metric and a scale to work on. In cases like this the actual scores are not so important. It’s the identified areas of improvement that matter most.

A word of caution, though. Accountants love numbers and data. And managers gravitate to the performance measures they can influence most easily. So, if you have ten numerical efficiency KPIs for Finance, and a couple of subjective effectiveness measures, Finance managers will naturally focus on better efficiency.

And yet, I would argue that effectiveness is the most important.

There’s no point being really efficient at being ineffective!!

As I said earlier, an effective Finance function is one that carries out its mission well, it drives business performance. But there are several angles in looking at how well a Finance function drives the performance of the business. Here are a few:

• Functional leadership
• Communication
• Culture
• Skills, training and development
• Innovation and transformation
• Continuous process improvement
• Teamwork
• Business partnering

These are all angles that are worth considering carefully. And I mention them so that it’s clear that what I’ll outline below is not the full picture.

The angle I find most valuable is to start by asking basically how well performance is managed in the business. And then, using the findings, we ask what Finance should/could be doing to improve areas that need improvement.

Some areas we will have responsibility for (things like reporting and analysis). Some areas we can try to influence using our insights into strategy and value drivers.

The major advantage of this approach is that it keeps Finance focused on the business, rather than on itself. Any areas of improvement identified by this approach will tend to be driven by concern for business performance, and it generates a Finance action plan that is centred around business performance.

Isn’t that the kind of mindset we want to encourage?

How is business performance managed?

So, just briefly, if Finance is all about helping the business to manage performance better in order to improve performance, what’s involved in that?

If you’ve seen anything else from Supercharged Finance (including my article on “Purpose-Driven Finance”), you may have seen that I see business performance management as made up of eight key activities:

1. Strategy and planning
2. Execution and delivery
3. Measurement and reporting
4. Analysis and feedback
5. Risk management and control
6. Stakeholder management
7. Resource management
8. Transaction management

Points 1-4 make up the performance cycle, points 5 and 6 relate to the performance environment, and points 7 and 8 are the performance hub.

Driving business performance is a combination of how well each of these things is done, and how cohesively they work together. I’ve got a downloadable short guide that explains this framework and approach more fully – it’s called How Finance Can Drive Business Performance (just click the link to get free access).

Hence, when assessing the effectiveness of a Finance function, I tend to follow those headings. I would outline “what good looks like” for each one, and point out the most important integration points with the other activities.

Finance strategy

As a final point, it’s worth mentioning that really what we’re doing here, by going from first principles, is robust strategy development for Finance (and that is unusual!).

What this self-assessment does is to provide part of the strategic analysis (what I’d call the “factbase”) for your Finance function. It is only a part, as I said before. However, that strategic analysis should indicate your strategic priorities, and your strategies will emerge from that using the insights gained.

So, if this is part of your strategic fact finding, make sure you also consider efficiency, and brainstorm to identify the strengths and weaknesses, opportunities and threats relating to your Finance function.

The main thing you will have to reflect on (and I can’t give a “silver bullet” answer on this) is how you bring about necessary change when Finance is not directly responsible for an area where improvement is needed. If another department is falling down in an area of business performance management, how does Finance drive an improvement, and thereby drive better business performance?

My advice would be to think of options for either direct or indirect action. For example:

• You could influence the management in the area responsible, through showing them the impact of the weakness, and showing them the benefit to business performance if they make the improvements you suggest.
• You could introduce a Finance control to give Finance an avenue to send things back for rework, which eventually should get the message across. At some stage you will be asked for an explanation of the amount of rework requested, and that will be an opportunity to then work together to improve things.
• You could escalate to the CFO or CEO, explaining the impact on business performance, and ask for their support in requesting improvements.

But remember two things:

1. Any transformation, any strategy, is likely to involve a long journey. You will not solve everything at once, and sometimes the best way is to start with small steps. And it’s best to bring the business with you, rather than continually telling them where they need to improve. The most important thing is the direction - having the aspiration, the mission and the vision.
2. Even if you are only able to influence a small improvement in what the other department is doing, it is more than if you’d never done the analysis and never spoken about a need to improve.

Conclusion

Assessing your Finance function is crucial if you want to know what the right things are to improve. There are several angles from which to come at the performance of Finance. However, I believe that since the purpose of Finance is to drive business performance, the primary angle should be to look at how effectively the Finance function does that.

Related posts

The Purpose-driven CFO Part 8: Purpose-driven Finance

Thinking strategically about Finance Transformation

Free download

How Finance Can Drive Business Performance (short guide)