GROWTH AND PROFITABILITYOptimizing the Finance Function for Small and Emerging Businesses phần 6 docx

ANTICIPATING DATA CUSTOMER NEEDS Need to Anticipate Customer Requirements The finance strategist must go beyond identifying data customers to ing their needs well enough to anticipate th

What mechanisms are in place to handle this crucial communications task? Ifthe finance function’s obligations have been historically suited for internal datacustomers, how will it adjust to the more formal and sophisticated needs of exter-nal data customers? Is one person in the organization deemed the owner of the fi-nance data? The small and emerging business owner may be the only individualthat has access to financial data on a corporate-wide basis Is that person sophisti-cated enough (from a finance perspective) to communicate this data to erudite un-derwriters or financiers?

The small and emerging business owner may not have the luxury of a cated group of financial professionals that keep track of and interpret financialdata Such a group will be a necessity at some time during the company’s life cy-cle Until that time comes, the organization still may avail itself of professionalswho interface with sophisticated data customers, such as governmental authorities

dedi-or institutional investdedi-ors What mechanism is in place fdedi-or disseminating accurateinformation to data customers? Companies with no public reporting or disclosurerequirements may not need a formal mechanism to release financial data; however,publicly traded companies must be careful that only officially reported and auditeddata gets released to the public Laws that govern the release of financial data

Exhibit 5.2 Internal and External Data Customer Needs

Internal Data External Data

country

demand a controlled, uniform distribution of data These laws, along with the need

to communicate with sophisticated data customers, may demand that an investorrelations group be established to handle all communications with the public Hav-ing specialized professionals dispense data to the public will keep the organization

in conformity with fair disclosure laws and ensure that external data customers’needs are being served

ANTICIPATING DATA CUSTOMER NEEDS

Need to Anticipate Customer Requirements

The finance strategist must go beyond identifying data customers to ing their needs well enough to anticipate them before they are critical Doing so iscrucial when it comes to conceptualizing infrastructure and long-range analysisparadigms The ability to build into the finance strategy scalable infrastructure andrelevant soft components depends on knowing what is needed and when Antici-pating data needs may not be difficult when it comes to internal data customers;however, doing so for external data customers may be a challenge The financestrategist must investigate and understand the strategies of external and internaldata customers and must be clear on the current and prospective capability of thefinance function to accommodate various needs in various circumstances

understand-Know the Strategies of Data Customers

Most data customers, like the business itself, are operating in a dynamic ment Internal data customers are a prime example, as their growth and data needsembody the evolution of the business organization itself Physical proximity andunity of purpose make keeping in step with growth strategies less taxing for the fi-nance strategist How about the strategies of external data customers? Companieswith external reporting requirements to the Securities and Exchange Commission,for instance, should be in tune with future reporting requirements Are there par-ticular reporting initiatives on the horizon? How about the Financial AccountingStandards Board (FASB) when it comes to GAAP reporting and disclosure or thefederal government when it comes to tax law? Although it may seem difficult tocomply with current laws, future rules may represent a greater burden Under-standing these law or rule changes and how they impact the organization in ad-vance will allow for the capability to develop infrastructure, particularly systemsand processes that will minimize the impact of change on the organization.How will the strategist be clear on data customers’ future strategies? Simpleresearch may suffice when it comes to external data customers like the FASB,SEC, or federal government Solid lines of communication, however, must be inplace with internal data customers Teams or task forces that meet periodically to

discuss future strategies are great ways to understand the needs and strategies ofinternal data customers This avenue allows for the finance strategist to communi-cate expectations and plans for development while enabling data customers to dothe same Communicating strategies and growth plans will be effective in creatingplatforms to handle current needs and expand to manage future ones.

What types of data will be demanded of the organization? Reporting financialdata will take many forms; however, all reporting, whether it is for internal or ex-ternal purposes, will focus on a standard slate of financial statements Generally,the term “financial statements” refers to the balance sheet (a snapshot of the com-pany at a point in time) and the profit and loss statement The goal of generatingfinancial statements and reporting financial data is twofold: (1) creating an accu-rate representation of the company at a specific point in time and (2) summarizingthe company’s performance over a period of time Achieving these two objectivesmeans financial statements that provide internal customers of financial data withinformation on the company’s ability to pay bills and meet obligations (liquidity)and generate additional equity (net income) for owners Likewise, financial state-ments can provide information to certain external customers of data whether theyare banks, equity partners, or governmental authorities

Need for Statistical Data

Not all data needs are financial Data customers may demand data that is not erated by a general ledger Information like headcount, accounts receivable aging,bookings, and backlog are examples of vital information that the finance function

gen-produces This data is typically referred to as statistical data Some nonfinancial

data may fall into this definition; however, most of this information is based on,

or a derivation from, financial data Components of fixed asset or reserve forwards are prime examples The beginning and ending balances themselves arestandard balance sheet items; components such as disposals, additions, translationadjustment, and the like may not be How is this data gathered, stored, and inter-preted? Statistical data must be considered part of the finance strategy just likeother standard general ledger (P&L and balance sheet) data Internal data cus-tomers may be the greatest consumers of statistical information, although certainexternal filings may demand statistical information as well

roll-Recognize the Mode of Data Delivery

Part of anticipating data customer needs involves understanding the mode of datadelivery most likely to be demanded The company will have, at some time or an-other, rigid, well-defined external reporting requirements as well as open-ended,less-defined internal reporting needs Finance infrastructure addresses these varyingneeds in different ways Handling predictable, recurring external reporting require-ments may require a reliable consolidation and reporting tool that can generate

predesigned P&L and balance sheet reports quickly and easily The emphasis may

be on speed in these circumstances The demands of the finance organization may be

to review results for outliers and articulate variances If the organization is growingquickly, there may be an ongoing need for standard and nonstandard data analysis.Companies that employ economic value-added (EVA) models or dynamic valuations

of the business may seek data to manipulate and fashion into nonstandard forms

Data requirements for these models epitomize the need for data availability as

op-posed to financial reporting More complex infrastructure may be required to servethis purpose Data warehouse and online analytical processing (OLAP) technologyare examples of advanced tools that can meet more advanced, open-ended dataneeds Because resource requirements will be so disparate between the need for rigidreporting requirements and open-ended data availability, the finance strategist mustfully understand and anticipate these different data needs and incorporate the appro-priate actions into the finance strategy

LINKING DATA CUSTOMER NEEDS TO FINANCE STRATEGY

Recognizing the Impact of Tier 2

Knowing who needs what and when coupled with understanding the organization’s

ability to address these needs will enable the strategist to integrate data customerneeds into the finance strategy Although developing the finance function with cus-tomer needs in mind may seem a natural progression for many organizations, in-corporating these needs into the core of the strategy will require constant focus andflexibility Businesses evolve, as well as data customers and their needs Everybusiness is different, but the necessity of maintaining focus on core, static needswhile sustaining a posture of flexibility for shifting or additional needs is some-what universal To this end, many key areas of integration must be addressed.Achieving success will mean focusing on the considerations in each of the tiers ofthe multilevel approach and incorporating Tier 2 into them

Linking Milestones (Tier 1) to Data Customers

Businesses will encounter certain watershed events in their life cycles as theygrow Examples of these may be a target acquisition, multinational expansion, or

a public offering of stock Some milestones may be anticipated while others maynot be It is the challenge of the finance strategist to put the company in the bestposition to navigate successfully through these milestone events These milestonesmay involve providing financial statements for a due diligence exercise or provid-ing an enhanced look at company performance to management and key executives

In either case the onus is on the finance function to produce financial reports andperform analyses that serve the appropriate data customer

The needs of certain data customers have been discussed already in detail It

is important to note that part of approaching these needs strategically is

ing when they will be encountered during a company’s life cycle Some data tomers will be encountered repeatedly in different milestone events while otherswill be encountered in particular circumstances only Exhibit 5.3 depicts potentialmilestones and accompanying data customers.

cus-The level of sophistication and detail required in generating financial mation will be dependent on the company’s life cycle events The challenge of thefinance strategist is to assess the current state of the finance function, particularly

infor-as it relates to accommodating these events and the data customers encountered.Are systems, processes, soft components, and the finance organization appropriatefor the current stage of the business life cycle? Are future stages anticipated? Com-mitting the organization to future life-cycle events may be ill advised if the financefunction is not prepared to take on the data customers that will be encountered.Company-wide strategies ultimately dictate which data customers are encoun-tered and when Not being prepared to meet the needs of data customers could provecostly, whether the organization is a closely held private company or a large publiccompany Lacking synchronization with expectations in this regard may mean:

■ Missing earnings release dates

■ Not making earnings estimates

■ Not achieving critical liquidity or equity ratios

■ Misrepresenting the company on paper in an acquisition

■ Misinterpreting results and making faulty decisions

Any of the above circumstances may hurt the company at the negotiating table

or in the court of public opinion The only sure way to avoid circumstances like these

is to anticipate life-cycle milestones where possible and devote careful attention tothe data customers to be encountered and their informational needs This evaluationwill be particularly fruitful as it relates to strategizing infrastructure development

LINKING DATA CUSTOMER NEEDS TO FINANCE STRATEGY 125

Exhibit 5.3 Company Life-cycle Milestones and Anticipated Data Customers

Event Financial Statements Needed Data Customer

underwriters

Linking Infrastructure (Tier 3) to Data Customers

The development of relevant infrastructure at the Tier 3 level of the multilevel proach must be shaped by data customer needs The three major aspects of infrastructure—finance organization, information systems, and data flow processes—must be customer-centric if the finance function is to be truly effective Becauseinformation systems and processes are the foundation of finance infrastructure,the finance strategist must take pains to ensure that they are truly customer-centric.The following points are worth noting:

ap-■ Finance organization Finance employees should be suited for the analysis,

interpretation, and communication of finance information to internal and ternal data customers Day-to-day operations may rely on perfunctory re-porting schemes Typically, the role of the finance organization is to addressoutliers or exceptions in company performance revealed by the data Thebusiness organization may, however, be moving through a challenging time

ex-in its busex-iness life cycle Hard economic times, a shiftex-ing market focus, theneed for financing, and business combinations will demand extraordinaryanalysis and input from the finance organization Sophisticated data cus-tomers in these cases may demand input on and explanation of the com-pany’s financial data Because the packaging of financial information will

be just as important as content, recognizing these circumstances and ing needs enables the finance strategist to plan the finance organizationappropriately

result-■ Systems Information systems must suit the organization’s ability to manage

data Information systems must be sophisticated enough to manage data in

a manner that will serve external data customers Having the ability toquickly and accurately produce data for auditors, bankers, or external au-thorities is imperative if the company is to navigate challenging life-cyclemilestones More important, however, is the development of systems to suitinternal data customers Complex systems with powerful functionality will

be of little or no value if users cannot access data The key is matching theskill set of internal users (data customers) with the system Overly complexsystems probably will not be used properly; in all likelihood their potentialwill never be realized, resulting in wasted dollars The finance strategist andbusiness owner must refrain from overbuying systems

■ Processes Aligning the data flow process with the needs of internal and

ex-ternal data customers will be worth the effort as the business organizationevolves If the business has formal reporting requirements with the SEC orother regulatory authorities, timing and accuracy of the data will be crucial

Issues such as time to close will be a priority if these data customers are to

be addressed properly Absent these types of reporting requirements, the nance function will handle internal analysis needs The company may opt

for a less complex process with little detail or a detailed process that garners

a wealth of data Internal data customers may be more flexible on these ters than external data customers The impact of process changes or up-grades on data customers is important to recognize Will the overhaul ofprocesses create downtime or degradation of the current process? The cost

mat-of such a blackout period may exceed the benefits mat-of the overhaul that

cre-ated it Understanding customer needs must play a role in this component ofthe finance strategy

Linking Soft Components (Upper-Tier Considerations) to Data Customers

Upper-tier considerations in the multilevel approach will yield certain unique datacustomers Tier 4 and Tier 5 prompt the strategist to develop P&L and balancesheet–oriented models and policies Although many of the same internal and ex-ternal data customers may be encountered, their needs will vary based on the poli-cies or data models the finance strategy seeks to develop If management dictates

a complex cash flow model, what will data customers expect in the way of data?Will the finance function be able to deliver the appropriate data in a timely man-ner? Will certain metrics set forth by the organization be reasonably addressed?Upper-tier policies and models must be easily understood by and accessible to datacustomers if they are to be worthwhile If the internal data customers are less so-phisticated, perhaps simpler versions of the models and policies should be strate-gized For example, a complex Financial Accounting Standard (FAS) 95 cash flowmodel may be replaced by a simpler working-capital fluctuation model, which pro-vides the same general cash flow results without requiring sophisticated analysis.Regarding accessibility, defining metrics but denying data customers access to thedata that feeds them will not only result in frustration but also degrade the credi-bility of the metrics and the management issuing them The finance function thatunderstands data customers will make finance strategies more effective at incep-tion and as they evolve with the company

FINAL THOUGHTS

Strategizing the finance function is more than employing best practices and nology It focuses on putting a structure in place that gives data customers whatthey want, when they want it Constructing a finance function that does not serveusers of the data wastes time and money Staying in touch with current andprospective data customers and their needs is less about algorithms, formulas, andcheck lists and more about the culture of management Working a customer-centricmindset into finance strategy will mean success or failure when it comes to financefunction development

DATA FLOW PROCESS

ROLE OF PROCESSES

Processes Defined

The term processes means many things to many people The term refers loosely to

any chain of ordered actions or events that lead to a desired end Processes havevalue in manufacturing, administration, or any of a myriad of nonbusiness con-texts The most predominant process in the finance function is the series of actionsthat contribute to the conversion of events and transactions in the company’s busi-ness environment to knowledge Tier 3 of the multilevel approach (see Chapter 4,

“Multilevel Approach”) outlines the considerations involved in developing this pect of infrastructure Data flow processes underlie and/or influence all aspects ofTier 3 and many facets of Tier 4 and 5 (upper tiers) of the multilevel model

as-Data flow process represents the succession of actions that converts data from

transactions and events external to the company into relevant knowledge to be

KEY TAKEAWAYS

■ Understanding the definition of data flow and the data flow process

■ Understanding the need to convert data to knowledge

■ Understanding the role and impact of the data flow process

■ Understanding the key components and significance of data gathering, dataprocessing, and data analysis

■ Recognizing processes that are inadequate

■ Understanding techniques for evaluating the data flow process

■ Recognizing the manner in which discipline and documentation enable the tegration of the data flow process into the business culture

in-■ Understanding the benefits of common data standards

■ Understanding how the data flow process will develop with the rest of the nance function

fi-used in decision making and financial statements This cycle of data gathering,data processing, and data analysis must be broken down to a level of granularitythat will enable the business owner/manager to create initiatives that incorporatethe finance function into company-wide growth objectives Processes in the smalland emerging business may seem simple enough; however, as the companygrows, the need to refine/review the data flow dynamic will become imperative.Being armed with the knowledge to understand in greater detail issues and con-cerns relating to data flow processes will serve the business owner/manager wellthroughout the strategizing process.

Data Flow Process and Creating Knowledge

Extracting accurate and timely financial data from the business environment andrefining it for decision-making purposes is the foundation of the finance function.This process, however, often is taken for granted by the business community Theassumption is that generating accurate data for management is a natural offshoot

of any finance endeavor This misconception is perhaps most evident in academia,where most business leaders begin their formative training Examinations and text-books offer up challenges in the form of long elaborate problems to solve Apply-ing the concepts in question (be they accounting, finance, or otherwise) is not asdaunting a task as sifting through the mosaic of information that is provided Over-looking a minor, subtle piece of information can yield incorrect results Strategi-cally approaching these problems is key as students try to master the material inquestion Where did all the information for the problem come from? How were ac-count balances derived, and who declared the accounting treatments? Were theevents yielding the transaction interpreted correctly?

The academic world assumes that the decision crossroads faced in nations, textbooks, case studies, and business models are supported by reliable in-formation In the real world, applying the correct accounting concept to a

exami-circumstance is the easy part; the difficult part is getting the information The

form-ative years of businesses are marked by the challenge of gathering accurate cial data in a timely manner In response to this challenge, organizations often fallinto the trap of generating copious amounts of financial data that is neither accu-rate nor timely

finan-It is imperative that the small and emerging business be able to identify the ference between data and knowledge Where data represents certain events and trans-actions in their most basic form, knowledge is the appropriate data refined andtranslated to suit certain circumstances at the right time Creating knowledge is morethan just gathering data; it is the state of awareness that bridges business needs withthe capacity to generate information The successful business owner/manager man-ages knowledge by staying close to the front lines of the business (operations) andlinking everyday business needs with the organization’s capacity to generate infor-mational solutions

Need for a Data Flow Process

Generating knowledge in the enterprise is more than a technological feat It is aprocess that demands the capacity to access, store, filter, and discern the appropri-ateness of data The blueprint for a particular company’s data flow process is neverfinal but always evolving The components of this blueprint often touch on everyaspect of concrete components of the finance function The data flow process rep-resents the protocols and procedures that envelop information systems It draws onthe skills of employees and their judgment in matching business needs to infor-mation availability It also leverages the impact of information systems and bridgesthe gap between raw systems capability and company-specific needs Processesmust be customized and suited for a particular organization’s needs

The business owner or executive will spend a great deal of time making sions Hiring, firing, product purchases, product or service expansions, real estatedivestitures—all these decisions require accurate and timely data Where does itcome from? How is it generated? Many executives blindly rely on their financeperson or on out-of-box software to generate it for them Surprisingly, they rarelychallenge the integrity of the source of data, especially when time is constrained.Unfortunately, some executives are easily led to believe that data generated is al-ways right The reality is the data may or may not be appropriate for the circum-stances intended The key to determining the adequacy of data for the organization’spurposes is understanding the effectiveness of the data flow process

deci-Making the transition from a struggling, emerging organization to a healthy,stable company will mean establishing a sound finance function—the core of which

is the data flow dynamic Developing a sound data flow process may not be as ple as implementing steps and actions for employees to follow Issues of culture,knowledge of objectives, and view of the big picture must be addressed Overcom-ing these challenges will be paramount in developing a sound data flow process.The case of Passalla Industries illustrates some of these issues

sim-Passalla Industries is a manufacturer and distributor of doors for a host of dustrial and residential uses The company has one central manufacturingsite where it produces all standard and customized doors, which are distrib-uted throughout the Southeast The company is a traditional family-ownedbusiness with the patriarch and founder Victor Passalla immersed in both thestrategic and day-to-day decision making

in-Passalla Industries has experienced a steady surge in business orders

of late Revenues in the past two years have gone from approximately

$10–12 million to $50–60 million This has pushed the manufacturingprocesses to unprecedented limits Many of Victor’s manufacturing processdecisions are driven by gut feel from his three decades in the business Thelast two years, however, have put him in a position where he must reassesshis approach to supplies, raw materials, and production capacity Having

spurned the input of accountants (whom he refers to as numbers guys) in thepast, Victor is coming to the realization that to thrive, he will have to em-brace financial data as it relates to his manufacturing process—something hefeels he is not suited for at this time.

Historically Passalla’s financial reporting has been limited to modating information requests from the CPA who prepares the tax return (alongtime family friend) The company is a Subchapter S corporation incor-porated several years ago for liability and insurance purposes Payroll, ac-counts payable, accounts receivable, and cash disbursements are donemanually on a hodgepodge of applications—from 12-column paper (man-ual) to Quicken to Excel Victor has been reluctant to invest in any informa-tion systems or computers for cash flow reasons and due to his fear oftechnology Compounding this matter is his reluctance to open up his finan-cial affairs to anyone other than family and his CPA

accom-Passalla Industries is in the process of acquiring a $2 million loan to pand its facilities to accommodate a greater volume of standard and non-standard customer orders Victor is growing frustrated with the informationthe bank requires regarding the financial picture of the business He isequally irritated with the public accountants who are poring over the data hesupplies and challenging its validity Although many people are contributing

ex-to the effort of pulling the necessary financial data ex-together, no one person is

in charge of the numbers This responsibility has fallen on Victor’s ders, and he feels a little overwhelmed by the whole process and discouraged

shoul-by the amount of his time it demands—time he would rather spend on ations He is having a difficult time articulating the information requests tolower-level people, resulting in problems providing answers to the bank andthe auditors Victor’s lack of finance/accounting background is becoming adisruption to current business processes as he struggles with clerks and or-der entry people to garner data for the bank

oper-Victor’s son Jesse invested his knowledge of the Internet into PassallaIndustries and created a comprehensive online ordering system that not onlytakes orders but expands the company’s marketing exposure to a globallevel The combination of this wide marketing net and Passalla’s burgeoningnational reputation has resulted in a surge of orders

Jesse, educated as an engineer, is expected to succeed Victor as the pany patriarch; however, Victor still retains all decision-making authority,especially as it relates to new technology in administrative functions Victorreluctantly OK’d the website (after his son completed it) and has finally rec-ognized its importance after positive feedback from his longtime customers.Use of the website has resulted in a great reduction in errors, as customerscould input their orders directly and avoid the potential miscommunicationthat often happened though the phone ordering system on which the com-pany relied

The various door divisions are growing quickly, thanks to a generousbonus program that Victor implemented a few years ago Quarterly bonusescan double the salaries of the division directors The divisions are careful totrack their financial data and submit it promptly for review at the end of eachquarter Victor often is suspicious of the results submitted to him for review;however, the success and rapid growth of the company have distracted himfrom acting on his unease Each division keeps track of its own results as best

it can This situation has resulted in a number of various applications withvarying definitions of revenue and expenses Victor has made frequent un-successful efforts to unify the results and reconcile them company-wide.Preparing the financial statements for the bank loan is his most recent at-tempt at this exercise His queries and concerns about the divisional resultshave been met with resistance and equal concern from the divisions them-selves, which vehemently defend their results

Passalla Industries is at a crossroads in its business life cycle The key to suring that management is making sound business decisions in this time of rapidexpansion will hinge on the development of a sound finance strategy, the core ofwhich is a reliable data flow process The following observations should play a role

en-in developen-ing the data flow process at Passalla:

■ Leverage the Internet for order processing The company has the ideal

plat-form for eliminating a slow data entry process that is prone to error Takingorders over the Internet will allow industrial and residential customers tocommunicate their needs around the clock without waiting for a customerservice person to wait on them This means minimized slowdowns or errors

in recording and submitting orders for processing Enabling an Internet der entry system for customers also will afford Passalla Industries the op-portunity to gather market data from customers that it would not otherwise

or-be able to accumulate How will the company construct the infrastructure tointerface with this valuable, cost-saving device? What are the implications

of establishing a web-enabled order entry system for the rest of the zation? Could the resulting web platform serve as a mechanism for placingdirect orders from vendors?

organi-■ Keep Victor and others from gleaning incorrect information Serving as

CEO/patriarch of the company, Victor Passalla has free rein over the pany However, he must exercise some restraint when it comes to handlingfinancial data Having a high level understanding of the finance function andhow finance data is derived would benefit both Victor and the company Ifthis is not practicable, the next best thing is to select for all finance matters a

com-“point person” who understands where data comes from and what the bers mean Installing a protocol for accessing data is difficult with high-level