4 Secrets of KPIs and Corporate Performance Management

4 Secrets of KPIs and Corporate Performance Management

The April 2015 CFO Leadership Council event in New York City featured a panel discussion on “KPIs and Corporate Performance Management.”  

Key Performance Indicators, or KPIs, are an important component of CPM and can help executives and management understand how the business is performing against its goals to help drive decision-making.   

The panel included senior executives from Comcast Ventures, Eyeview Digital, Silicon Valley Bank, and NetSuite.  The main focus of the panel discussion was on the role KPIs play in various stages of a company’s growth. 

Here’s a brief summary of the key points made by the panelists:

  1. Keep KPIs Simple: When it comes to metrics, there is such a thing as too much information. The panel recommended that high-growth, early stage companies track 3-5 KPIs at a time. Anything more will dilute the value of the information you’re presenting to your board and executive team.
  2. Let KPIs Evolve: As your company evolves, so too should your KPIs. In the early stages, your board and executive team should focus on your growth drivers (i.e. Recurring Revenue will usually trump everything in a subscription-based business). Over time, you’ll open the lens to understand new KPIs (such as CAC, churn, etc.)
  3. Stay wary of ‘hot’ KPIs:  for example, LTV (Lifetime Value) for an early-stage company needs to be taken with a grain of salt as the model may not have proven itself out yet. Your board may drill down into CAC (Customer Acquisition Cost), as this number is usually presented as an average, and they’ll want to understand particular campaigns and tactics.
  4. Get Out of Your Spreadsheets: The panel agreed that you cannot scale your business in Excel. While it certainly works for very early-stage companies, the amount of data that you will need to process in order to arrive at your KPIs will quickly outpace the capabilities of a spreadsheet. Luckily, according to the panel, there are SaaS vendors out there that are enabling CFOs to do their jobs better.

If you would like to learn more about this topic, here’s a link to an article on the CFO Leadership Council web site with more details from the panel discussion:

http://www.cfoleadershipcouncil.com/news/kpis-and-corporate-performance-management-a-nyc-cfo-discussion

To learn more about how Planful can help your organization reduce reliance on spreadsheets and gain better control over your KPIs, visit our web site at www.hostanalytics.com.

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The Shift to Predictive Accounting

The Shift to Predictive Accounting

There is a widening gap between what the CFO and accountants report and what internal managers and employee teams want and need. This does not mean that information produced by the accountants is of little value.

In the last few decades, management accountants have made significant strides in improving the utility and accuracy of the costs they calculate and report. The gap is being caused by a shift in managers’ needs – from just needing to know what things cost (such as a product cost) and what happened – to a need for detailed information about what their future costs and profits will be and why. Examples include driver-based rolling financial forecasts and true marginal cost analysis for what-if scenarios

Despite the accountants advancing a step to catch up with the increasing needs of managers to make good decisions, the managers have advanced two steps such as with lean quality management practices. In order to understand this widening gap, and more importantly how accountants can narrow and ideally close the gap, let’s examine the broad landscape of accounting.

What is the purpose of management accounting?

Contrary to beliefs that the only purpose of managerial accounting is to collect, transform and report data, its primary purpose is first and foremost to influence behavior at all levels – from the desk of the CEO down to each employee – and it should do so by supporting decisions. A secondary purpose is to stimulate investigation and discovery by signaling relevant information (and consequently bringing focus) and by generating questions to stimulate conversations. 

The widening gap between what accountants report and what decision makers need involves the shift from analyzing descriptive historical information to analyzing predictive information, such as budgets and what-if scenarios. This shift to anticipatory, proactive management where organizational changes and adjustments, such as staffing levels, can be made before things happen and before minor problems become big ones. This involves predictive analytics.

An accounting framework and taxonomy

The domain of accounting has three components: tax accounting, financial accounting, and managerial accounting. There are two types of data sources for all three components: (1) financial transactions and bookkeeping, such as purchases and payroll, and (2) non-financial measures such as payroll hours worked, retail items sold, or gallons of liquid produced.

The financial accounting component is intended for external reporting, such as for regulatory agencies, banks, stockholders and the investment community. Financial accounting follows compliance rules aimed at economic valuation, and as such is typically not adequate or sufficient for internal decision making. And the tax accounting component is in its own world of legislated rules. Commercial accounting software now makes these tasks immeasurably easier.

Our area of concern – the management accounting component – can be divided into three categories: cost accounting, cost reporting and analysis, and decision support with cost planning. To oversimplify a distinction between financial and managerial accounting, financial accounting is about valuation and managerial accounting is about value creation through good decision making.

The managerial accounting component, our focus here, is comprised of three elements. Each is a recipient of cost measurements using the source data inputs that transforms incurred expenses (or their obligations) into calculated costs:

  • Cost Accounting represents the assignment of expenses into outputs, such as the cost of goods sold and the value of inventories. This primarily provides external reporting to comply with regulatory agencies.
  • Cost Reporting and Analysis represents the insights, inferences, and analysis of what has already taken place in the business in order to track performance.
  • Decision Support with Cost Planning involves decision making and taking. It also represents using the historical cost reporting information in combination with other economic information, including forecasts and planned changes (e.g., processes, products, services, channels) in order to make the types of decisions that lead to a financially successful future.

Cost reporting and analysis is about explanation.  Decision support with cost planning is about possibilities.

What? So what? Then what?

The value, utility, and usefulness of this information increases at an exponential rate from the shift in emphasis from cost accounting to cost analysis to decision-based costing. 

The cost reporting for analysis information converts cost measurement data into a context. It is useful for managers and employee teams to clearly observe outcomes with transparency that may have never been seen before, or is dramatically different from their existing beliefs derived from their firm’s less mature cost allocation methods. Cost reporting displays the reality of what has happened, and provides answers to “What?” That is, what did things cost last period?

However, an obvious follow-up question should be “So what?” That is, based on any questionable or bothersome observations from historical costs, is there merit to making changes and interventions? How relevant to improving performance is the outcome we are seeing?

This leads to the more critical, and relatively higher value-added need to propose actions – to make and take decisions – surfaced from cost planning. This is the Then what?” question. This is what managers want to know. For example, what change can be made or action taken (such as a distributor altering its distribution routes), and what is the ultimate impact? Of course, changes will lead to multiple effects on service levels, quality and delivery times, but the economic effect of profits and costs should also be considered. And this gets to the heart of the widening gap between accountants and decision makers who use accounting data. To close the gap, accountants must change their mindset from managerial accounting to managerial economics.

The need for managerial economics

There is a catch. When the Cost Reporting and Analysis element shifts to become the Decision Support with Cost Planning, then analysis shifts to the realm of decision support via economic analysis. For example, one needs to understand the impact that changes have on future expenses. Therefore, the focus now shifts to resources and their capacities. This involves classifying the behavior of resource expenses as fixed, step-fixed, or variable related to changes in service offerings, volumes, mix, processes and the like. This gets tricky. A key concept is this: The “adjustability of capacity” of any individual resource expense depends on both the planning horizon and the ease or difficulty of adjusting the individual resource’s capacity. This wanders into the messy area of marginal cost analysis that textbooks oversimplify, but is complicated to accurately calculate in the real world.

In the predictive view of costs, changes in demand – such as the volume and mix of products and services ordered from customers – will drive the consumption of processes (and the work activities that belong to them). In turn, this will determine what level of both fixed and variable resource expenses are needed to supply capacity for future use.

Since decisions only affect the future, the predictive view of accounting is the basis for planning, analysis and evaluation. This view is what managers are increasingly seeking, and accountants are lagging at providing. The predictive view involves forecasts and cost consumption rates to determine more valid budgets and rolling financial forecast revisions of the budget.

Closing the accounting gap

Cost accounting system data is not the same thing as cost information that should be used for decision making. The majority of value from cost information for decision making does not reside in historical reports – the descriptive view. Its primary value comes from planning the future including driver-based budgeting and rolling financial forecasts. This requires the predictive view of accounting. There is a gap between what managers need and what accountants provide. Closing the gap should be a high priority for every CFO.

With that in mind, download our 5 recommendations, or steps you can take to create a more agile and productive Finance organization. 

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Financial Forecasting vs. Projections

Financial Forecasting vs. Projections

When you refer to a forward-looking financial expectation, do you call it a financial forecast or a projection?

There is not a generally accepted distinction between forecast and projection within the finance community. In normal dialogue, they are synonyms. Although there is one subtle distinction associated with the time horizon of each.

“Forecast” means a projection of financial results or key metrics in the near term (1 to 4 quarters out) with visibility to leading indicators. For revenue or booking forecasts, there is good pipeline or backlog data to make a solid forecast; for expense, there is visibility into hiring pipeline or opex spend based on committed or almost committed contracts.

The term “projection” is used within finance to mean predicting financial results further out into the future (1 or more years) and using high-level drivers like sales capacity, market growth rate, and historical growth trends to project future results.

So both forecasts and projections are used within organizations to estimate a future financial position of the organization. These financial forecasts and projections are developed by the Financial Planning & Analysis (FP&A) team within an organization’s finance department as tools to support business strategy, tactical changes, and strategic decision-making. By estimating expected future financial results, executives can make better decisions on where to invest, where to pull back, and what to prepare for.

Financial forecasts and projections are typically developed using a combination of quantitative and qualitative methods to ensure rigorous analysis of available data is combined with insights derived from executives, analysts, market trends, and other experts and sources. Forecasts and projections exist at many levels in the organization, from granular forecasting of product demand at the SKU level, to sales projections for a specific sales region, to overall financial results by department or the entire company.

So it’s solved: financial forecasts and projections are generally accepted synonyms, and you can confidently use them interchangeably in your finance career. Technically you can place a distinction on the time horizon of each, though this is a minor difference that rarely gets applied in the real world.

Regardless of your terminology, Planful Planning supports traditional financial budgeting, quarterly forecasting, and long-range strategic projections. It allows you to start with whatever planning process you desire and evolve as you see fit. Planful Planning also enables you to easily forecast, project, and evaluate estimates of different financial outcomes before they happen so you can make better decisions and, ultimately, achieve your desired goals and objectives.

If you’re forecasting a need to accelerate and streamline your planning, budgeting, and forecasting processes, visit planful.com/now. Our forecast says you’ll be happy you did.

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EPM – CPM – BPM: What’s in a Name?

EPM – CPM – BPM: What’s in a Name?

Since its launch more than 10 years ago, the concept of managing performance in organizations has had a variety of labels applied to it.These are the most popular variations:

  • Business Performance Management (BPM)
  • Corporate Performance Management (CPM)
  • Financial Performance Management (FPM)
  • Enterprise Performance Management (EPM)

Many practitioners and experts in the industry have positioned all of these labels as basically meaning the same thing. They see each as a process and software system designed to link strategies to plans and execution. Each includes the monitoring and managing of key performance indicators (KPIs). This then lets managers in various departments and divisions of an organization understand key market and business trends. Ultimately, it allows them to respond quickly to ensure they meet business objectives.

However, subtle differences actually exist between these terms and what they are intended to convey.

Business Performance Management (BPM) was the name originally used by a number of vendors and consulting firms when the concept was first launched in 2003. It included the processes of Goal Setting – Modeling – Planning – Reporting – Analysis. It’s a good label from the standpoint of applying these processes in Finance or line-of-business operations.

Yet there’s a downside of using the BPM label. It often gets confused with the other BPM – Business Process Management. And that’s an entirely different market. This includes a set of software tools providing workflow and process management capabilities in a wide variety of functions.

Corporate Performance Management (CPM) has also been widely used since the category was created. It’s the term used by Gartner, as well as a number of software vendors and consulting firms in the market. This term is typically used to highlight the “corporate” application of performance management processes, mainly driven out of the Finance organization.

To extend the concept out of Finance, some experts will use the term “Operational Performance Management” (OPM) as a companion to CPM. Under this use, they apply the same core concepts and processes to line-of-business operations.

Financial Performance Management (FPM) is a term that has been used primarily by Forrester Research. This flavor of the terminology clearly puts the focus on the Finance organization and the key processes they support. These include Financial Budgeting and Planning, Financial Consolidation, Reporting, Disclosure Management, and Profitability Management. But this term doesn’t address the application of performance management processes outside of Finance.

Enterprise Performance Management (EPM) is a more modern label that broadly applies the concepts of performance management across the enterprise. This includes Finance, which is typically the key driver of EPM. But it also includes Sales, Marketing, Services, Manufacturing, Supply Chain, and other line-of-business operations. This is the term used by Planful, as well as some other vendors and consulting firms. In our view, EPM includes the following business processes:

  • Setting goals and objectives
  • Creating strategic, financial, and operational plans
  • Closing the books on a periodic basis (monthly, quarterly, annually)
  • Reporting results to internal and external stakeholders
  • Analyzing financial and operating results and adjusting plans and resources as needed

Supporting the broader concept of EPM, as opposed to the more narrow concepts of CPM or FPM, requires a broad set of software capabilities. For instance, in Budgeting & Planning, it requires the ability to support the financial budgeting process. It also requires support for planning in other areas, such as Sales & Marketing.

In the area of Reporting, it requires the ability to generate formatted financial statements and disclosures for external stakeholders. It also requires the ability to deliver interactive dashboards and reports to executives and other internal stakeholders. This allows them to track key performance indicators (KPIs) and other metrics on a regular basis.

While most EPM, CPM, BPM, and FPM applications have been deployed on-premises, Cloud-based EPM allows organizations to get up and running much faster. Cloud-based EPM is more easily able to expand beyond Finance. It allows you to address new requirements much faster than with on-premises solutions. It also provides a lower up-front cost and lower ongoing cost of ownership vs. on-premises solutions.

Vendors, consultants, and IT analyst firms have all sought to stake out a unique position in the market by adopting a specific flavor of “PM terminology.” If you’re with an organization considering a PM solution, the important thing is to gain a clear understanding of your needs and requirements in the short-term as well as your long-term strategy and vision for applying PM processes and software.

Will it be confined to Finance? Or will it apply more broadly across the enterprise? How many users will you need to support in the long-term? Will they require mobile access? How quickly do you need to implement a new solution? Are cloud-based solutions part of your IT strategy?

Identify the answers to those questions, and then identify a software vendor and solution approach that will address your immediate needs. Most importantly, identify the vendor or solution that can support the growth of your business and your future requirements as well.

To learn more about Planful’ Cloud EPM Suite and the value we are providing to customers, visit the links below:

Planful Product Overview Page

Planful Customer Case Studies

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Integrating Finance and Operations

Integrating Finance and Operations

Meeting the Needs of Operations Analysts
Business modeling is considered an essential element of the planning process within EPM. Modeling sheds light on the causes, not just the effects, of changes in variables that impact business performance.

It facilitates “what if” discussions and enables decision makers to identify and capitalize on opportunities for profitable growth while minimizing risk.

Integrating Finance and OperationsWhen it comes to modeling outside of Finance, CFOs have lost control. Operational business models typically aren’t aligned with the financial plans and forecasts. Modeling is happening in departments mostly on a standalone basis with Excel, and those departments are often modeling scenarios that could be material to the overall corporate plan. However, it’s rare that the departmental modeling is systematically connected to the overall corporate plan and forecasts.

One example of operational modeling is in Sales. Sales Operations is likely modeling sales territories and commission plans and forecasting bookings for this quarter and next. Iterations of these models happen on a weekly and sometimes daily basis, yet Finance is still operating according to the corporate plan established at the beginning of the year — which is now outdated. Having the Sales models connected directly to Finance models would provide Finance with an up-to-date view of the latest revenue forecast and the impact of the Sales staffing model on costs.

Another example is in Marketing. Marketing might be modeling new subscribers, customer retention, the impact of launching new products or services, and other initiatives that can impact corporate revenue and expenses. If these models are disconnected and Finance doesn’t have insight into these plans and initiatives, then the overall corporate plan may not reflect the impact of these initiatives.

Linking Operations to Finance

Finance needs to provide planning and modeling solutions that bridge the divide and link operational models to financial plans and forecasts. And we need to reduce reliance on Excel for operational modeling. Disconnected Excel models being built by operations analysts might be useful to those departments, but if they don’t align and integrate to the corporate financial plan, then there’s a gap. One that could impact the ability of the organization to meet its financial goals and targets.

A better approach would be giving operations analysts the ability to leverage corporate financial plans and models, but with the capability to extend those plans and models with additional operational metrics and drivers. And then analysts could share those detailed models with Finance. This type of modeling and planning should be supported by a centralized database and system that provides security and scalability, as well as common metadata and business rules. The user interface should be Excel-based or provide an Excel-like experience so that it’s easy for Finance and operations analysts to learn, use, and share their models across the enterprise.

This centralized database can be deployed on-premises, but cloud-based EPM applications provide significant time-to-value advantages over on-premises solutions and much lower cost of ownership. As more Finance and Operations professionals get comfortable with cloud-based applications, adoption rates are rapidly increasing and IT analyst firms such as Gartner expect the cloud to be the dominant deployment model for EPM applications going forward.

Empowering users within and beyond finance with easy to use, integrated tools allows them to gain deeper insight into their business. This also allows them to anticipate business outcomes and inform financial plans, which leads to a more aligned organization.

Integrating Finance and Operations with Modeling Cloud

A good example of a software solution that can align Finance and Operations is  Planful Modeling Cloud. This new module of the Planful Cloud EPM Suite allows users in Finance or Operations to perform advanced modeling on large volumes of data by creating what-if scenarios and adding members and calculations on the fly in their own environments.

Offering Excel, web, and mobile user interfaces, Modeling Cloud allows users to quickly perform real-time interactive data exploration with self-service query and analysis capabilities. After analysis and collaboration, their models can then be incorporated into the overall corporate model.

Test Drive Modeling Cloud

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