Written by Helen Dow
Part II: Establishing a Financial Management Roadmap
Roadmap
The best way to set your destination and to stay on course is with a roadmap. It is the foundational path of good financial management. Your job as a financial leader of your organization is to establish and set the discipline of its use with your team.
Below are six important tenets of financial management. To remember the tenets, use the mnemonic of vowels; AEIOU and sometimes Y.
- Authorize – establish financial measures
- Expect – set expectations and goals
- Instruct – teach your team what and why
- Observe – review results
- Understand – knowledge of variances and drivers
- Y-Axis – know your trends
Authorize
Authorize is the first step of the “Roadmap” and it is about deciding where you need to go and what you want to measure. Establish important financial needs and metrics that measure and drive results for your company. These are your Drivers. Identify their current values and determine which you want to trend. There are a multitude of ratios and formulas that are built to measure financial strength and performance. See the appendix for some common examples and a discussion on their meaning and purpose. Perhaps most important are the measurements that are unique to your industry.
The art of financial management is determining those which have meaning for your organization. For instance, if cash is tight at times, a days-in-cash is important. Alternatively, debt ratios don’t carry meaning for a company without debt. Depending on where you are and where you are going will establish the focus.
Expectations
With your financial measures and drivers identified, set expectations and performance goals for your operations and initiatives. Ideally, this is built off a business or strategic plan through goal setting, budgets and forecasts. Remember to make them SMART goals (specific, measurable, achievable, relevant, time bound). Use your strategic plan to translate into an annual plan and a multi-year forecast.
Instruct your Team
Communicate these goals to your team. Teach not just the what and how, but also the why of the financial goals to your team. And then keep communicating the vision and goals. I once had a CEO say that you say it and say it and say it and when you see smiles, completion of your sentences or even eye rolls, you are there. Get their involvement and buy-in. Consider conducting a risk analysis or a SWOT analysis (strengths, weaknesses, opportunities and threats) to identify threats and opportunities to achieving the goals. Trust your team to understand and strive for shared goals. Goals are a contest. Take the time to recognize the effort and reward your team when goals are met.
Observe Results
This is perhaps obvious, but there is usually room for improvement here. Financial reports should be comprehensive and as transparent as possible. Management should receive both organizational and department level … all of them. Those ratios and drivers that are identified as important to your organization should be included with the monthly financial review.
And for your teams that produce these reports, understand the complexity and time involved. Invest in systems and streamline the reporting processes. Conform to the format of delivered reports as much as possible or use a report writer. Lastly set a monthly financial close schedule and meetings for several months out on your calendar.
Understand Variances
During the monthly close meetings with your Finance team, review the variances of performance. Gain an understanding of the cause of the variances. Ask, ask, ask. Ask your finance team, your management team and your operations team. Not always in that order. There was a CEO that had the reputation for always knowing the answer before asking. Perhaps you have known someone like this also. I think the reality is that he observed and asked in no particular order and then validated. You never knew if you were on the front end or the tail end of that course of questioning. Or if he was testing you to see if you knew something he already knew. Because it was usually with patience, we learned a lot and it kept us on our toes.
Y-Axis – The Trends
Not sometimes … always pay attention to your trends; the past, current, and future. Graphs bring ratios and numbers alive. Like many of us, if numbers aren’t your native language, consider graphs your Rosetta Stone. Graphs have a bad rap, but like most things, transparency improves reliability. Hidden agendas or preconceived bias make bad ones. To identify those bad characters, look at the Y-Axis. Is the scale appropriate for what you are looking at and the value of its importance? Is it comparing to something that doesn’t correlate?
As a communication tool, I’m a big fan of graphs. Done correctly, graphing the timeline of your ratios and financial results can tell you volumes about what is happening. It can show a downward trend that may not be obvious looking at the numbers. It can also show if a goal is unrealistic based on past or current trends.
They can be a simple accumulating number … all the way to utilizing complex economic models and formulas. I find that simple is usually sufficient. Let the complex measure the complex.
Suggested charts you should probably have included cash. Have a cashflow forecast and chart it. Other suggestions are to chart debt requirements, sales, margins, bank covenants, current ratio or anything that will tell you your growth and financial stability.
Conclusion
In conclusion, establishing a financial roadmap is crucial for effective financial management. The six key tenets outlined – Authorize, Expect, Instruct, Observe, Understand, and Y-Axis – offer a comprehensive guide for leaders to establish a foundational path for success. From defining financial measures and setting expectations to instructing teams, observing results, understanding variances, and analyzing trends, each step plays a vital role in achieving financial goals. By incorporating these principles, leaders can navigate the complexities of financial management, ensuring transparency, reliability, and sustainable growth for their organizations.
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Helen Dow is a Director of Warren Whitney with more than 30 years of experience helping companies improve their financial performance and enhance all finance and accounting functions. She works with clients on overseeing financial analysis, improving operational efficiencies, and system implementation. Helen generally serves Warren Whitney’s clients in the role of Fractional CFO/Controller. To learn how Helen or our other consultants can support your business, contact Stephanie Ford at sford@warrenwhitney.com or 804.282.9566.
Making Potential Happen.
Data Directions Inc.