In any business segment, organizations increasingly seek to achieve competitive advantage. In this sense, it is not enough just to correctly interpret the changes determined by the market pressures. It is necessary having the tools to quickly adapt supply to demand, develop new products, offer new services, modify its business model and adapt its assets with maximum use of the investments made.
These challenges are equally shared between companies of very different sizes. Midsize companies need the same controls and the same effectiveness in managing the financial performance as needed by large, better structured companies.
Financial management impacts everyone in the company as it contains some of the most challenging and complex business processes, subject to a large number of influences: regulations, exchange, new markets, turn-over, budgeting, acquisitions and mergers, among others. In addition, the company’s business model must be aligned and fed with external information and interact with a huge amount of internal data sources.
For financial managers of any enterprise, it is almost indispensable to have a consistent and up-to-date view of the company’s financial position to take not only strategic and future decisions but also daily tactical decisions.
Large corporations, such as those listed by “Fortune 500”, face complex regulations as the Sarbanes-Oxley Act, the CVM, volatile markets, strong shareholder charges, global competitors, and an endless list of internal requests to allocate their assets. Smaller companies also face increasing regulations, intense competition, and the daily need to balance their working capital with investment needs.
Additionally, regardless of its size, a company must always position itself in relation to mergers and acquisitions. At any time, it may be necessary to raise money in the market or attract potential investors. For this, it is essential for the company to have technologies capable of supporting a consistent model that offers analytical visions and alternative scenarios for the business.
Smaller, emerging companies also need to have the same technology than larger companies and this is evident when in competition with the latter, as they have competitors with more investment capacity and with this, more room to make a mistake.
The smaller the company’s size, in addition to representing a much narrower error margin, it will also imply a much faster decision-making process, increasing its risk. Even though the agility of smaller sized companies may represent an advantage against larger companies, there are still other issues, since a large company may arrive later in a market, with lower prices, better advertising, better distribution, and simply suppress the smaller competitor.
It is therefore clear that smaller companies should have even better financial controls than their larger and more well-equipped competitors.
Unfortunately, this does not always happen. The largest companies have large IT departments and many employees in the financial planning area.
In order to overcome these difficulties, emerging companies need to use tools that offer them the financial visions of larger companies without the huge staff, without a complex IT infrastructure that can be implemented as quickly and as painlessly as possible.
Basically, they have four alternatives:
- Financial Applications/ERP Modules.
- Electronic Spreadsheets.
- Specific Budgetary Solutions.
- CPM – Corporate Performance Management Solutions.
Financial Applications/ERP Modules
These are applications designed and built for other purposes, not to execute the company’s financial planning. They offer isolated views of the business, e.g., accounts receivable – or just past views, e.g., the ERP’s accounting module.
Generally, companies acquire their ERPs expecting that this will solve all business problems and some managers simply do not understand why it also cannot solve the planning issues. Only financial experts can demonstrate that using these solutions solves only a small part of the company’s planning process.
In particular, what these solutions do not offer is the simulation capability, the generation of “what-if” scenarios, which provides the correlation between different views and different assumptions. For example, what could happen to the Balance Sheet if the company opens a branch in a particular city.
A good financial planning solution should enable the implications of strategic or even tactical business decision-making to be clear from a financial point of view. In addition, it must integrate with the company’s ERP or legacy system, to transparently receive the numbers of the paid in.
Unfortunately, Financial Applications/ERP Modules do not allow the modeling of these decisions’ implications, do not work with scenarios and, if anything, they are very skilled at only tracking expenses.
Electronic spreadsheets are probably the most commonly used tools for companies, regardless of their size, for financial planning.
Spreadsheets are powerful tools for conducting “what-if” scenarios. They also integrate pretty good with other tools. However, trying to implement a good methodology based exclusively on the use of spreadsheets can be ineffective and frustrating.
Spreadsheet-based planning is, firstly, fragile and inflexible; it is non-collaborative; it requires a high degree of maintenance; it presents problems with data integrity; it overwhelms people with excessive time for process management and consolidations as this requires complex formulas that need to be properly defined, requiring technical expertise with spreadsheets and technical expertise in finance; and, finally, it is not integrated to the transactional systems where the company’s paid in numbers reside, forcing the entering of data that can easily contain errors.
Other issues may still occur because the links between the spreadsheets can break or because new rows and columns added later do not cover the ranges of formulas that are expected. And once errors are introduced, they tend to proliferate and multiply as the spreadsheets pass from user to user through the company.
Specific Budgetary Solutions
They are usually applications run on workstations of key users, whose main purpose is the preparation of the budget piece, centrally, not the effective financial planning. In some cases, they are “anabolic spreadsheet,” once they allow formulas to be written to a spreadsheet, shared and manipulated by a few users.
Specific Budgetary Solutions have a relatively low acquisition value, are one step away from the right direction, but still have several problems: a) experts need to manually program relationships. b) daily accounting conventions such as revenues, expenses, P&Ls, and balance sheets are usually not included, and it is necessary to export the data at all times to a balance sheet and cash flow spreadsheet. Both of these financial views are difficult to make, cause delays and introduce large risks of errors. c) consolidations, and other reports are not immediately available, urgent decisions may have to wait while the tool merges and consolidates a report. d) rather than using the company’s existing accounting plan to make the budget, users may have to build a modified version that can be accommodated by the tool.
The number of accounting levels or the number of characters in account names, for example, may exceed the tool’s capacity. Or you may have to consolidate accounts just to be able to run the budget software. This makes the tool more difficult to use and the financial information much less revealing.
CPM – Corporate Performance Management Solutions
CPM solutions have reached a maturity degree that gives companies the real power to impact their performance regardless of their size. Through the use of multidimensional modeling, collaboration, scenario creation and simulations, in addition to managing the workflow of planning, budgeting, forecasting and financial consolidation processes, today’s solutions enable an organization to understand what is happening in its business and make adjustments quickly.
They came to offer value and increase the productivity of the activities that were being operationalized through the solutions mentioned above. It is by far the best solution for midsize companies to compete on equal terms with the largest ones in the Financial Planning aspect.
Desirable attributes for choosing a good CPM Solution:
- It must adapt to the business rather than forcing the business to adapt to the tool.
- It should allow the use of accounting structures easily. This is: Financial Statements, DRE, cost structure, products, credits etc.
- It should allow the adoption of any budget model, including matrix or OBZ.
- It should facilitate and promote the “what-if” scenario modeling, impact of mergers/acquisitions, launch of new products, campaigns, restructurings and value to shareholders.
- It must be able to extract accurate forecasts of cash flow, financial statements, income statements and other mandatory reports based on desired scenarios and simulations.
- It should easily identify operational metrics impacting financial results.
- It should be able to promote advanced analyzes of margin, productivity, usability, volume, capacity, profitability, performance and quality, at all model levels.
- It should allow users to easily identify “parent-child” relationships between metrics and results through drill in any direction.
- It should simply and accurately resolve the consolidation process.
- It should be easily implemented by financial department employees.
- It should require minimal IT support both in implementation and later.
These attributes must be analyzed according to weights that can vary from company to company, according to their interests. However, it is essential that the solutions meet in some way, to all of them.
We can identify some clear signs indicating that the financial planning methods in use in an organization are obsolete and require intervention. Know some of them:
You spend a lot of time (and money) on the process mechanics
If the time it takes to make the tool work exceeds the time it takes to use the tool for decision-making, you’re in trouble. This includes time spent programming software, creating mathematical formulas, defining relationships between revenue or expense items, or creating managerial reports for executive presentations.
You do not know what you can or cannot do
Your budget should clearly provide you with information about what you can buy and what you cannot, and how a payment flow would fit your reality. You should be able to answer questions such as: if I invest the resources here, will I have the resources to do what is needed next month? If you find that you cannot really believe the response offered by your planning engine then it really is not suited to your needs.
You cannot answer business questions
Before making a decision, you must know which one should be made first. A budget should answer questions such as: Which employees, products or customers contribute most to profits? How is this quarter different from the previous one? If I remove a product line from the budget, how will this affect total profitability? If I add sellers in a particular territory, are profit margins likely to increase or decrease?
You cannot sync business views
“Everyone who works here has a different view of the company.” This is a frequent complaint from company directors. The operations staff complains about the “accountants” and the finance department complains about the lack of vision from operations staff about where the company is going to. The problem: nobody sees the whole picture. A powerful financial planning solution will help close these perceptual gaps.
In general, the market is reasonably educated in the sense that CPM Solutions represent the technology required to execute a correct corporate strategy, seeking to align departments to optimize their business, reduce their expenses, and increase performance. Because it is the result of a strategy, it should not be implemented in a departmental and centralized way, but in a collaborative way.
Nor is it a project with beginning, middle and end, it is a concept that must be continuously adopted by the company, constantly improved and integrated with the organization’s DNA.