About this Section
This section of the module focuses on reviewing and evaluating the financial management process. You will learn how to:
- Collect and collate for analysis, data and information on the effectiveness of financial management processes within the work team
- Analyse data and information on the effectiveness of financial management processes within the work team and identify, document and recommend any improvements to existing processes
- Implement and monitor agreed improvements in line with financial objectives of the work team and the organisation
Resources:
The following materials supplement the information provided in this section:
- Reading H: The Performance-Based Management Handbook
- Reading I: Business Process Improvement Toolbox (2nd ed.)
Reading H
The Performance-Based Management Handbook
Once processes have been put in place to review and control finances, the final stage of the financial management process is to review and evaluate financial management processes. In order to do this, line managers must be able to collect and collate data on the effectiveness of financial management processes for analysis by the work team. Data which can be used to determine the effectiveness of financial management processes may include:
- Bank account records
- Cash flow data
- Contracts
- Credit card receipts
- Employee timesheets
- Files of paid purchases and service invoices
- Income and expenditure
- Insurance reports
- Invoices
- Job costings
- Petty cash receipts
- Quotations
- Taxation records
- Wages/salary books
Since most financial record keeping is now done electronically, you should be able to access most of these records through the organisation’s database or financial management system.
With so much data available for analysis it is often difficult to decide which information is the most valuable. When collecting and collating data for analysis it is important to ensure that the data meets certain requirements. Financial management data should be accurate, logical and comparable as explained in the extract below:
Data Accuracy. Analysts have to determine if each item of data is accurate, if the data source is informed. Accuracy is judged differently for different types of information and can involve cross-checking information between reports, verifying numbers with knowledgeable respondents, or assessing the plausibility, the detail, the documentation, the consistency, and the overall ring of truth of discussions. Certain sources, whether those be document files or individuals, are known to be more informative and accurate than other sources
Logical Inconsistencies. You can look for logical inconsistencies by cross checking two or more separate items of information against each other. Cross tabulations, contingency tables, and scatter plots are common techniques for cross checking quantitative data.
Data Comparability. Check to see if data is comparable and translate if necessary. Sometimes the raw data is not in the format or level of aggregation that is required. You may need unit costs instead of total costs, or an error rate rather than number of errors. You may need new variables that make comparisons for top-level audiences. More common variables that can be computed include ratios, proportions, percentages, averages, rank-order scored, and indexes calculated by adding other separate variables. Each of these can be eye-catching depending on the circumstances.
(Artley, Ellison and Kennedy 2001, 46)
In addition to being accurate, logical and comparable, the data you collect and collate for analysis should also be relevant to the strategic focus of the organisation. Every organisation will have a different strategy and the success or failure of that strategy can only be measured by analysing the relevant data (Hannabarger, Buchman and Economy 2007). For example, if an organisation or department had developed a strategy for reducing expenditure by outsourcing certain elements of production, the relevant data to be analysed would be contained in employee timesheets, wages and salary books.
Once the most appropriate data has been collected and collated in must then be analysed in order to identify improvements to existing financial management processes. In the extract below Artley, Ellison and Kennedy (2001), give some important principles of analysis:
- Creative insights are the key to an effective analysis
- Each analysis is unique
- Analysis occurs throughout the cycle, not just at the end
- Analysis is an evolving, dynamic process
- It is essential to develop an initial plan for analyzing the information gathered
- The analyses themselves should be as simple as possible
- Analysis takes time and cannot be rushed
- Analysis is best done collaboratively, not in solitude
(Artley, Ellison and Kennedy 2001, 43)
Other experts support these insights, highlighting the importance of including stakeholders from outside the finance department in any analysis of the financial management process. Doing so ensures that each stakeholder’s unique interests and priorities are addressed and promotes stakeholder support of the financial management process. Any analysis of the financial management process should ideally include representatives from all levels of the organisation including senior management, line managers and employees. Analysis should also include representatives of each different department or function. Some even go so far as to include external stakeholders however this will not always be possible or practical (Australian National Audit Office, 2008).
Stakeholder
A stakeholder is a party that has an interest in a company and can either affect or be affected by the business. The primary stakeholders in a typical corporation are its investors, employees, customers, and suppliers.
The aim when analysing data should be to identify the cause of problems with financial management processes in order to identify and rectify solutions. One method of identifying root causes is the fishbone diagram, also known as a cause and effect diagram. The main purpose of this diagram is to identify the various causes of an effect, problem or situation (Anderson, 2007). Creating a fishbone diagram involves six steps:
- Assemble participants from a variety of areas with a good working knowledge of the business, department or area to be analysed.
- Describe in detail the effect, problem or situation to be analysed. This could be inaccurate budgeting, poor contingency planning, overspending in certain areas such as wages, excessive wasting or shrinkage or too much or too little inventory.
- Draw a long line or arrow pointing to the problem, effect or situation to be analysed. This can be done using a whiteboard, projector or any other large writing surface.
- Identify categories of possible causes of the effect, problem or situation by drawing branches from the main stem or spine of the diagram. Causes can be categorised by function, department or any other factor that makes sense to the organisation. Commonly used categories are people, equipment, materials, methods, measures and environment.
- Identify as many causes as possible and assign them to the most appropriate category in the diagram. Causes can be identified by brainstorming or by working through the categories one at a time. Keep in mind that some causes may belong in more than one category.
- Analyse the diagram to identify possible solutions to the problem. Keep in mind that the aim is to solve the problem not just its symptoms or causes.
(Anderson 2007)
The diagram below depicts the typical structure of a fishbone diagram.
Once you have identified improvements, the next step is to make your recommendations to the relevant parties. When making recommendations it is important to consider:
- The Audience – who will be reading/viewing the recommendations?
- The Message – what are you trying to communicate to the reader/viewer?
- The Format – how will you present your recommendations?
When formulating your recommendation, one of the most important considerations is the needs of the audience or decision maker. Decision makers and analysts have vastly different needs when it comes to data. Decision makers need information which is “concise, timely and to the point” (Artley, Ellison and Kennedy 2001, 42) while analysts generally favour objectivity, thoroughness and abiding by professional standards when presenting information (Artley, Ellison and Kennedy 2001).
The improvements you are trying to communicate to the audience are your recommendations, which will vary depending on the organisation and the results of your analysis. Despite this, Her Majesty’s Treasury Financial Skills Advisory Board (2008) has developed ten steps to success for embedding financial management skills in government which can equally be applied to organisations:
1. Act now to kick-start good financial management skills in your organisation. It is never too soon to start. Whatever the current level of financial management skills and awareness in the organisation there will be potential – almost certainly huge potential – to improve. The drive needs to start at the top: it is critical the Permanent Secretary and Departmental Board and all of its executive and non-executive members, must want good financial management to be at the heart of the business, be committed to it and be consistent in promoting and supporting its application.
2. Ensure finance is at the heart of developing your vision and business strategy. Without this commitment the Board not only runs the risk of flawed planning and poor decision making but failure to embed sound financial principles into the management of the business as a whole.
3. Start rolling out and embedding good financial management across your business today. The principles of sound financial management must be integrated into the professional development and performance management of all managers. This can be tackled through a variety of means including awareness-raising and training and development.
4. Invest in people development and training needs analysis. Different financial skills and levels of acumen and awareness are required in different parts of the organisation. Identify the distinctive financial competencies needed in different areas of the business from Non-Executive Directors to non-financial managers, from the Policy Unit to operational front-line delivery, and tailor training, development and support to address them.
5. Remember the importance of communication and engagement skills. This is about a step change in the quality of engagement between finance and non-finance professionals. It includes skills in relationship building, communication, listening and influencing.
6. Keep it fresh and current. This means regularly reviewing the skills and competencies needed by and available to the business. It means looking over the horizon to anticipate tomorrow’s needs and planning (and succession planning) to meet them. It means scanning for new ideas and for better practice and performance and using these resources to improve the Department.
7. Reward and celebrate good financial management; tackle poor financial management. To attract and retain the best talent, Government will need to rethink its strategy in relation to pay and conditions. It will need to ensure that senior managers’ rewards reflect in an appropriate way their financial management skills and performance. Equally importantly, managers who perform poorly in this area by, for example, failing to consider the financial implications of different policy options, should be made aware of their failings and of the imperative to remedy their shortcomings in the future
8. Start taking active steps to develop stronger leadership skills within your business’s finance function. The CFO must have a wide range of skills including the ability to lead and develop a finance function which meets business needs and to support the building of financial management skills and capacity elsewhere in the organisation.
9. Keep it simple. The key to success is being able to get things done. The role of finance and sound financial principles must be easily understood and the benefits clearly defined. Finance needs to be seen as part of the solution not part of the problem.
10. Temper ambition with realism. Recognise that becoming world-class takes time. Aspiring to world-class performance is commendable. But for most organisations it represents a very challenging target. What is more this type of transformational change is as much about creating a different climate, changing behaviours and culture as it is about changing systems and processes. It requires concerted action and sustained commitment over an extended period.
(HM Treasury Financial Skills Advisory Board 2008, 10)
While these ten steps represent a good starting point, it is important to remember that these recommendations won’t solve every problem with your financial management processes and that the improvements you recommend with depend on your organisation and the results of your analysis.
Another important consideration is how you will present your recommendations to ensure they have the maximum effect. In the extract below, Artley, Ellison and Kennedy highlight the importance of presentation when making recommendations.
“Our most important goal is for our audience to understand our results, see their many implications, realize what actions are needed, grasp the best ways to accomplish those actions, take action, and follow up on the impacts of those actions. Our results are merely one input into a process of change. Offering straightforward conclusions, sensible recommendations that flow directly and obviously from those conclusions, and practical implementation plans are some of the ways to help effect those changes.”
(Artley, Ellison and Kennedy 2001, 52)
Recommendations can come in many forms including reports, presentations, briefings, memos, emails, informal discussions or even on brief index cards which managers can quickly and easily digest. Regardless of the medium you choose to deliver your recommendations you should always include:
- An overview of the current situation or problem
- Your key findings or conclusions
- Your recommendations arising from those conclusions
- The benefits to the organisation of implementing your recommendations
- An implementation plan or plan of attack
Reflect
Have you ever had to present a recommendation to a superior at work? Was the presentation a success?
Now that you have read this section, can you think of any ways you could have improved your presentation?
Case Study: Daisy’s Drink Company
Daisy’s drink company has been running a petty cash system for many years where staff would fill out petty cash request forms in order to make small purchases of mostly stationary supplies. This involved keeping a money box at front reception in what was otherwise a cashless office.
After taking on a recommendation from a highly experienced member of the administration team, the company decided to do away with the cash box and instead implement a cashless petty cash system.
This was achieved by issuing ‘procurement cards’ (which are company controlled credit cards) to the administration team, and also purchasing vouchers from their local office supplies shop. The benefits of taking this approach included:
- There was no longer any need for cash to be kept in the office
- There was no longer a need to fill out forms when making petty cash purchases
- There were now automatic timed and accurate electronic records kept of petty cash purchases
Reading I
Business Process Improvement Toolbox (2nd ed.)
Once the necessary improvements have been identified, recommended, and approved, it’s time to implement your recommendations. Before any changes can be implemented however, managers should lay some groundwork to ensure that the changes will be successful. Anderson (2007) recommends that managers:
- Prioritise improvements
- Plan for implementation
- Create acceptance
It is not uncommon to identify more than one area for improvement when evaluating financial management processes. It is unlikely that all resources required to implement all improvement will be available immediately (or even at all). Therefore it is important to prioritise improvements to ensure you get the maximum amount of improvement from the limited resources available. One of the simplest ways to prioritise improvements is by mapping improvements on a matrix, like the one on the following page, with improvement on one axis and “implementability” or ease of implementation on the other (Anderson 2007).
The next step is to plan the implementation in detail. The implementation plan should include what actions are required to implement the improvement, who will be responsible for each action, and when each action should be completed. This can be done simply by listing the actions, names and dates in list, table or spreadsheet. Oftentimes however it may be advantageous to have a visual representation of the implementation plan. Implementation plans can be presented in a tree diagram such as the one below. In tree diagrams, activities are shown on “leaves” which are then arranged into a hierarchy using “branches”. The activities in the diagram should be arranged in chronological order from left to right (Anderson 2007).
Finally, for any change to be successful it needs to be accepted by all relevant parties. Anderson (2007) identifies a number of relevant personnel who have the potential to derail process improvements if not managed correctly, including:
- Senior management
- All those involved in the process to be changed
- All those providing inputs to and receiving outputs from the process
- Financial management
- Other gatekeepers
There are a number of reasons why key stakeholders may be resistant to change. Anderson (2007) goes on to identify some common arguments of those who resist change:
- The problem does not exist
- The problem is out of our control
- The proposed solution cannot solve the problem
- The proposed solution will cause further problems
- There will be no support for the proposed solution
- There will be barriers to implementation
As a rule of thumb, the more information you provide key stakeholders, the less likely they are to resist process improvement and change in general. Other strategies for engaging stakeholders and creating acceptance of process improvement may include:
- Provide examples of similar changes that have been successfully implemented.
- Provide training and general information about new systems or processes
- Keep key stakeholders informed about the progress of the implementation
- Involve key stakeholders in the implementation process
- Follow a clearly documented and communicated implementation plan
- Emphasise the importance of patience – changes do not happen overnight
(Anderson 2007, 249)
Tip
As a rule of thumb, the more information you provide key stakeholders, the less likely they are to resist process improvement and change in general.
Reflect
Have you ever had to implement a change at home or in the workplace?
Were you met with the kind of resistance described in this section?
How did you deal with that resistance?
Was the implementation successful and how do you feel it could have been improved?
In this section you learned how to collect and collate data and information to analyse the effectiveness of financial management processes within the work team. You also learned how to identify, document, and recommend improvements to existing processes. Finally, you learned how to implement and monitor agreed improvements.
