Financial performance management (FPM) is the process of addressing the often overlapping people, process, information and technology issues that affect how well finance organizations operate and support the activities of the rest of their organization. FPM deals with the full cycle of finance department activities, which include planning and budgeting, analysis, assessment and review, closing and consolidation, internal financial reporting and external financial reporting, as well as the underlying information technology systems that support them.
How well an organization manages its finance function has a significant impact on its overall performance. To control their fiscal well-being and achieve their strategic objectives, multinational corporations, small businesses, government entities and nonprofits all must be able to set financial objectives, plan and budget to achieve those objectives, and review and evaluate their financial performance in a timely and effective fashion.
Managing financial performance involves well-established processes and analytic techniques. After all, bookkeeping and balance sheet ratios are centuries old; Babylonian clay tablets show that budgeting stretches back millennia. All financial processes and their related analytics used to be done by hand, using paper, an abacus or what have you. Adding machines provided some efficiencies, but it wasn't until computers became widely available that it became possible for companies to automate processes and use innovative techniques. Yet, perhaps because basic financial processes and analytics are so well established, Ventana Research's benchmark research finds that a majority of companies are not using information technology to support the application of more sophisticated analytics or to execute core financial management more effectively.
Having the right technology and using it effectively both are essential to achieving better execution of FPM processes. For example, companies that use consolidation software on average close their books about one-third faster than those that perform this task using spreadsheets, and companies that use spreadsheets sparingly in their closing process produce financial statements containing fewer errors their than those that use them extensively.
In the wake of a relentless consolidation in the software business as well as ongoing organic growth, FPM suites today incorporate a wide range of functionalities. Such suites typically include functionality for planning, budgeting, forecasting and reviews; statutory and management financial consolidation; financial analytics; and reporting tools such as dashboards and scorecards. Many of these suites include specific capabilities for headcount-, sales-, capital-, balance sheet and cash flow planning. Increasingly, vendors also are offering the automation of the management of external reporting, which facilitates the creation of structured filings. For the Securities and Exchange Commission and other bodies that require them, this includes automatically applying eXtensible Business Reporting Language (XBRL) tags to the document. Some vendors also have sophisticated cost and profitability analytics capabilities, and some have financial close automation capabilities such as the automation of intercompany reconciliations.
In the past, companies usually purchased individual components such as planning or consolidation tools as needed. Most still do, and for many companies it may still be the right approach. Still, there can be advantages to buying a full suite if your company needs the full array of functionalities it delivers. Or the company might elect to assemble a full suite over time, purchasing incremental components from the same vendor, an approach that can enable easier integration and maintenance and therefore a lower total cost of ownership.
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Robert Kugel is senior vice president at Ventana Research, where he heads up the Finance practice. He is a regular contributor to Business Finance. BLOG: Look for Robert Kugel's Finance Geek blog at www.BigFatFinanceBlog.com
