FINANCE

Surprise and the CFO: An Uneasy Mix

Apr. 19, 2006

If you find a $20 bill on the street, would you be happy or concerned? Happy at the prospect an unexpectedly free lunch? Or concerned that the original owner is nearby and looking for it?

Now suppose that $20 is actually $20 million. And you're the CFO of a publicly traded company at the end of your fiscal year. True, additional discretionary income presents new opportunities – to invest, for example. Or to increase EPS. On the other hand, that money raises some unsettling questions: Where did it come from? Did it slip through weaknesses in your company's internal controls? Does it conflict with the numbers you've provided to the SEC? Why weren't you aware of it earlier?

When it comes to financial surprises, most CFOs can do without.

Why surprises happen

There are two general sources of financial suprise: first, the CFO's lack of visibility into operational data; second, the inability to readjust plans or reallocate resources in response to changing conditions.

The first indicator of meaningful change – a drop in market demand, an inventory shortfall, or even an HR issue – typically occurs in the company's operational systems.

Events like these could serve as a useful early warning. Knowing of and understanding these changes as they happen means more time for the CFO to assess alternatives and course correct. But CFOs rarely have visibility into these systems. Even if they did, transactional reports don't illustrate the impact of a cancelled order on the company's financial performance. Rather, the data must be combined with other data and then aggregated or transformed before appearing in the CFO's financial system. This can take hours, days, or even weeks. This is the first source of surprise.

Being able to change plans and reallocate resources – either to sieze an opportunity or to avoid a pitfall – is among a CFO's top responsibilities. But many are hamstrung by an annual budgeting cycle that limits their options and makes it difficult to reallocate funds in time to effect change. The window of opportunity closes before the budget is changed. This is the second source.

The problem with annual budgets

The annual budget model is increasingly anachronistic in a customer-driven world flattened by technology. "Today, customers can change their mind with the click of a mouse," says Jeremy Hope, Research Director of the Beyond Budgeting Round Table (BBRT). "Organizations have to be faster on their feet. So it's insane for them to lock into a model that dictates in minute detail everything that is supposed to get done over the next 12 months.

"Look 12 or 18 months ahead, he says, "but back that up with a rolling quarterly forecast. Planning with a light touch, spending only a day or two every quarter to fine-tune the plan – that's where we're headed."¹

"Flaky and insecure spreadsheets"

Key to avoiding surprises is efficient and accurate data management. Currently, says Hope, most organizations depend on "flaky and insecure" spreadsheets as a homegrown way to merge data from disparate IT systems.² What's needed is an integrated planning, financial consolidation and reporting system that can act as an umbrella over these disparate sources and pull information together – to provide the CFO with visibility and control.

Avoid surprises with visibility and control

With visibility and control, a CFO gains the key attributes needed to manage the dual demands of compliance and performance. Visibility into results enables agility and improves decision-making. Control increases responsiveness and competitiveness by connecting people and goals across operations and management functions with right-time, actionable information.

Visibility means better decisions, sooner

With improved visibility into results, the CFO (and her Finance department) can focus on adding real value while at the same time keeping the regulators and litigators at bay. They can view the predictable indicators of performance down to their operational causes and gain early insights into where the business is heading relative to goals and forecasts – a direction they may otherwise not foresee.

CFOs also gain agility: "Instead of spending time on racking and stacking data," says Richard Roth, Chief Research Officer at The Hackett Group, the CFO can focus on analyzing data and planning the next move for the organization. What's more, he says, the CFO is "helping to drive business strategies instead of just trying to determine what happened in the past."³

Control for rapid change

By connecting financial and operational data, the CFO can effect rapid change. She can adjust targets, plans, and resource allocation across the organization to defend against problems, seize opportunities and succeed in keeping their organization on course to meet or exceed targets. This increases agility and improves the decision-making process because people and goals across operations and management functions are interconnected with right-time, actionable information.

A blessing or a curse

An extra $20 million at the end of the year can be a blessing or a curse. For the CFO who knows where it came from and where it's going it's an opportunity to effect positive change. For the CFO who doesn't, it's a surprise he'd rather do without.