Prescriptive Financial Transformation—What Every CFO Should Know

• Date: 01 January 2018
• Published date: 01 January 2018
• DOI: http://doi.org/10.1002/jcaf.22322

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© 2018 Wiley Periodicals, Inc.

Published online in Wiley Online Library (wileyonlinelibrary.com).

DOI 10.1002/jcaf.22322

Prescriptive Financial

Transformation—What Every

CFO Should Know

Brian Higgins

INTRODUCTION

Today, many

organizations – both

private and public

alike – are under

pressure from owners,

executive manage-

ment, and activist

investors to improve

financial/opera-

tional performance

neces sary to either

maintain their com-

petitive leadership or

to address financial

challenges posed by

today’s economy.

When any of the

following occur, the

organization can ben-

efit from a prescriptive review

of their operations:

• Changes in the business

environment due to eco-

nomic downturns, loss of

market share, product/

service ma turity, merg ers

and acquisitions, deregu-

lation, etc., that impact

performance.

• Growing costs without a

similar growth in revenues.

• Increased demands for per-

formance accompanied by

budgetary constraints.

• Revisions to strategies that

require redeployment of

effort towards more mis-

sion-critical practices.

• Lack of knowledge regard-

ing the true cost and

profitability of

products, ser-

vices, and market

channels.

• Declines in

employee engage-

ment and/or

customer loyalty

affecting competi-

tive perfor mance.

• Overlap, duplica-

tion, and non-

mission-critical

effort expended

on activities

across functional

bounda ries, gen-

erating excessive

and avoidable

costs.

• When you need

to grow the busi-

ness, but cannot

afford to do so.

• Desire to establish or main-

tain a leadership position in

a highly competitive market.

When organizations are

faced with such financial chal-

lenges, the CFO is often looked

upon as the “go-to” person

Activity Value Management® (AVM®), the method

described in this article, provides the linkages

necessary to achieve outstanding and often break-

through improvements in financial and operational

performance by linking data elements that previ-

ously have not been fused for the purpose of

improving performance. Unique features of AVM®

include, but are not limited to, a revolutionary

method of accurately costing and measuring the

financial performance of products and services

that includes both cost and effort, inclusion of

stakeholder experiential data linked to the work

processes for the purpose of defining value, and

an assemblage of specifically designed tools that

can be applied to produce breakthrough improve-

ment in financial and operational performance.

© 2018 Wiley Periodicals, Inc.

Commissioned

The Journal of Corporate Accounting & Finance / January 2018 13

© 2018 Wiley Periodicals, Inc. DOI 10.1002/jcaf

expected to provide leadership

that will navigate the organiza-

tion through troubled waters.

Unfortunately, many execu-

tives having this responsibility

may not have the authority nor

the wherewithal to succeed in

times of crisis and often pay a

personal price if not success-

ful, resulting in a comparatively

short shelf-life. There are

numerous programs and meth-

odologies designed to enhance

performance aimed at cost

reduction, revenue improve-

ment, customer satisfaction,

employee engagement, etc.,

but these techniques often are

void of critical information

that might tie these programs

together to achieve overall

performance objectives. These

programs often compete for

resources while having conflict-

ing goals and objectives.

A critical component to

effective financial and opera-

tional performance improve-

ment is accurate data on which

to base decisions – informed

decisions grounded on height-

ened understanding of the

relationship between customer

loyalty, employee engagement,

costs, and overall financial

performance. That said, most

financially-based performance

methodologies omit, or fail to

connect, critical information that

plays a key role in enhancing

financial and operational excel-

lence. A missing component to

most operational performance-

improvement endeavors is the

inclusion of stakeholder infor-

mation necessary to identify

areas of sub-optimized value.

In addition to linking critical

information required to achieve

breakthrough improvements in

performance, executives need

tools to understand the true

cost and profitability of their

products and services. Tools

that enhance outcomes that

include lower costs, enhanced

revenues, engaged employees,

and enhancements in overall cus-

tomer satisfaction and loyalty.

Expectations associated

with many C-level executives

are typically related to their

functional responsibilities. For

example, the chief information

officer (CIO) has direct author-

ity and responsibility over the

informational needs of the orga-

nization. Similar to the CIO, the

chief technical officer (CTO)

oversees the technical aspects

of the organization, while the

chief marketing officer (CMO)

provides leadership regarding

marketing efforts and the results

that those efforts have in pro-

moting the organization’s out-

puts—all having both authority

and responsibility. However,

the expectations associated

with the chief financial officer

(CFO) may not all be directly

associated with their functional

responsibilities—in some areas,

they may have responsibility but

little, if any, authority.

Let’s first define the role

of the CFO. At a high level,

one can think of the CFO’s

responsibilities in terms of time

frames in which they operate:

• Past. In the past, the CFO’s

role was that of a book-

keeper or accountant. How-

ever, today their historical

role is normally associ-

ated with controllership

responsibilities. The CFO

is ultimately responsible for

reporting historical finan-

cial and operational perfor-

mance. These responsibili-

ties are a major fiduciary

duty to the stakeholders

such management, inves-

tors, analysts, and govern-

mental reporting agencies.

• Present. These responsi-

bilities pertain to admin-

istering the day-to-day

financial operations such

as accounting, treasury,

and adherence to regula-

tory requirements such as

Sarbanes-Oxley, ASC 606,

and so on.

Clearly, the first two time

frames are extremely important

and perhaps represent the major

responsibilities of the CFO. The

last time frame is the subject of

this article and is emerging as

one the most important with

regard to the future of the orga-

nization as well as the career

trajectory for the CFO:

• Future. The CFO is respon-

sible for leadership and

partnership along with

other C-level peers for the

financial and operational

well-being of the organiza-

tion. The CFO has been spe-

cifically chartered with the

responsibility for identifying,

from a financial perspec-

tive, where the organization

is performing well, along

with identifying areas where

enhancements are required

to meet financial and other

organizational objectives.

This role is getting more

attention these days due

to more global competi-

tion and economic upturns

(opportunities) and down-

turns (crisis management).

Often, the CFO’s responsi-

bilities related to financial per-

formance enhancements have

been relegated to a financial

planning and analysis (FP&A)

team or taken on personally.

However, financial executives

may have neither the expertise,

tools, nor the systems necessary

to assess the value of what the

14 The Journal of Corporate Accounting & Finance / January 2018

DOI 10.1002/jcaf © 2018 Wiley Periodicals, Inc.

organization does to create its

products and services. A survey

conducted by the American

Productivity and Quality Cen-

ter (APQC) polled a number

of CFOs regarding their most

vexing issues and barriers

related to improving the value

contribution of FP&A to their

organizations. The results of

the survey are both surprising

and stunning (Exhibit 1) see

Driscoll & Kaigh (2015).

BREAKING THE “LAW OF

AVERAGES”

One of the first steps nec-

essary by the CFO is to assess

the financial well-being of the

organization—which areas are

doing well and which areas

require financial interventions.

The assessment often taken is

the application of one of vari-

ous cost-accounting systems

designed to measure the cost

and profitability of products

and services.

Without accurate cost

and profitability data, CFOs

may come to false conclusions

about financial and operational

performance, and the wrong

conclusions often lead to the

wrong solutions.

Perhaps without exception,

conventional and even more

advanced cost-accounting sys-

tems rely on averages in their

computations when distribut-

ing and/or allocating costs to

products and services. By the

very nature of averages, targets

of such methods are either

over- or undercosted. Using

such cost-averaging systems

can be compared to the social

situation that many have expe-

rienced (Brown, 2016). When

a group of people decide to

“split the check” after dining,

those who made less expensive

choices will be subsidizing, or

covering, the cost of those who

made more expensive selections.

In business, organizations often

apply overhead/indirect costs in

a similar manner that “covers”

some lines of business (LOBs)

that are actually using more

overhead resources than others.

Typically, such systems fall into

the following categories.

Conventional Cost

Accounting

Having its roots in the

1800s, where factories made a

single product and total operat-

ing costs were divided by total

production volume to arrive at

fully burdened unit costs, con-

ventional costing techniques

assign indirect and/or overhead

costs typically through applica-

tion of overhead rates. These

rates are, in turn, “allocated”

to the outputs of the organi-

zation. The manner in which

overhead costs are spread

across the various LOBs is to

attach such costs to an opera-

tional metric associated with

each LOB, such as direct labor

cost, machine hours, number

Barriers to Improved FP&A as Reported by CFOs

Exhibit 1