IFAC - Performance & Financial Management

WHAT DO WE MEAN BY PERFORMANCE & FINANCIAL MANAGEMENT? Performance & financial management covers the management, process, and behavioral aspects of strategy execution, and managing and monitoring performance. This is important to professional accountants, both as employees or advisers, since many of them are focused on helping their organizations deliver on objectives, goals and targets, and strategies using a range of approaches, tools, and techniques. Performance & financial management involves the deployment of various tools, techniques, and systems to help an organization implement its strategies and plans, and support the achievement of organizational objectives. Successfully executing strategy involves various disciplines, areas of capability, including planning and forecasting, funding and resource allocation, revenue and cost management, managing performance against objectives, and improving operational management and utilization of assets. Performance & financial management also covers the management of an organization’s finances, such as cash flow and working capital management, and forecasting and budgeting, as well as ensuring resources are allocated to the most important projects and investments by using analytical approaches to project and investment appraisal. Effective performance & financial management requires: engaging people to determine their information needs; implementing processes and systems to collect the right data; turning the data into information and insights; and presenting it in the best way. Technological advances in data collection and storage present opportunities for enhancing performance & financial management. There improvements have also introduced new terms, such as business intelligence, big data, and predictive analytics, to represent the importance of evidence-based decision making that helps organizations succeed. The emergence of cloud computing is enabling organizations, especially small- and medium-sized entities (SMEs), to gain access to and capitalize from performance & financial management applications. WHY ARE PERFORMANCE & FINANCIAL MANAGEMENT IMPORTANT? Performance & financial management is essential to achieving sustainable success, and is universal to all organizations, regardless of size, type, and location. Strategies and plans need to be informed by quantitative and qualitative insights and a sound understanding of the external competitive environment, including customers, as well as of internal organizational performance. Executing strategy involves translating strategies into action, allocating resources to the right areas, and measuring results and holding people accountable. Performance & financial management covers all of these core aspects of managing and improving organizational performance. It involves understanding the linkages between intangible—or non-financial—factors and financial outcomes, as well as ensuring that operational activities are carried out effectively and efficiently. Managers need to know that the organization is doing the right things as well as doing them in the best way possible. Executing strategy is often seen as more important than the formulation of the strategy itself. As Lou Gerstner reflected in Who Says Elephants Can’t Dance? [http://www.amazon.com/Who-Says-Elephants-Cant-Dance/dp/0060523808], getting it done, getting it done right, and getting it done better than the next person can be far more important than dreaming up new visions of the future. Effective strategic and operational decision making hinges on information being relevant, timely, and reliable since it is used to answer key questions, including: Are we adapting to meet changing market demands and anticipating future events and trends? Are we delivering the results and sustainable value expected by our key stakeholders? Are we optimizing productive capacity, resources, and capabilities for a range of anticipated economic conditions? and Are resource allocation decisions aligned with strategic direction, goals, and objectives? Sound financial planning, management, and control provides the basis for an organization achieving its goals and can be the difference between success and failure. Good financial management enables an organization to monitor its daily activities, maintain short-term working capital needs, and effectively manage its resources as well as provides the information it requires to enable it to plan and operate more efficiently. GLOBAL PERSPECTIVES ON PERFORMANCE & FINANCIAL MANAGEMENT Since Bob Kaplan and Thomas Johnson’s seminal book Relevance Lost: The Rise and Fall of Management Accounting [http://www.amazon.com/Relevance-Lost-Rise-Management-Accounting/dp/08758...%20target=] in 1987, which argued that traditional accounting approaches were overly focused on financial performance and had become outdated for a knowledge-driven economy, various performance & financial management and measurement frameworks and systems have developed and evolved. The balanced scorecard is a widely recognized strategy-management framework that, since its inception by Kaplan and Norton in the early 1990s, has been adopted, modified, and applied by many organizations worldwide. First developed as an enhanced performance measurement system, the balanced scorecard evolved into a holistic system for strategic execution. Cultural and management philosophies play a part in the design and implementation of these approaches, which are also referred to as management control systems Approaches to management control in different countries are affected by various factors, including governance, structural, and ideological differences. The various approaches all bring together systems thinking and the interplay between financial and non-financial information (e.g., physical, quality, process, environmental, and social) to provide a comprehensive view of the drivers of performance. Some countries and companies have developed specific approaches to help ensure managers have the financial and operational performance information upon which to make decisions, such as the Tableau de Bord in France (Tableau de Bord literally translates to “dashboard”).Skandia, a Scandinavian provider of products for long-term savings and investments, pioneered a model in the 1990s—the Skandia Navigator— to analyze and understand the interplay between intangible assets, such as human, intellectual, relational, and customer capital. Ericsson, a telecommunications company, created its own “cockpit communicator” to understand and operationalize these relationships. In economies such as Japan and Germany, performance & financial management approaches have been intertwined with operational management based on lean principles and techniques. Lean thinking and management can be supported by performance & financial management and process-improvement approaches, such as Six Sigma—a management tool designed to cut waste and make better, cheaper, or faster products or services. In India, the Institute of Cost Accountants of India constituted the Cost Accounting Standards Board [http://casbicwai.org/CASB/casb-about.asp], which has developed a series of cost accounting standards. These standards provide a structured approach to cost measurement and help achieve consistency in classification, measurement, and assignment of cost to products and services. In the Islamic World, Sharia law and principles affect how some elements of conventional finance theory are applied. For example, Islamic Finance prohibits interest and interest-based transactions; however, there are ways to estimate the value of a proposed project or investment. Accounting standards for financial reporting by Islamic financial institutions [http://www.iasplus.com/en/resources/topics/islamic-accounting] have been developed to help Islamic financial institutions deal with the accounting conflicts associated with existing accounting standards, such as International Financial Reporting Standards (IFRSs) or local GAAP. THE ROLE OF ACCOUNTANTS AND THE ACCOUNTANCY PROFESSION To manage and deploy resources to deliver organizational objectives is a vital contribution of finance and management professionals, either in their capacity as the employee of, or as an advisor or consultant to, an organization. While performance & financial management is critical regardless of size of organization, the formality, style, and scope of the approach will differ. SMEs may adopt less formal performance & financial management methods but it is essential they and their advisers understand performance & financial management methods and learn the different techniques to ensure success. Professional accountants’ purview encompasses the application of tools and techniques to improve performance & financial management of organizations. They must have organizational and environmental awareness, and be cognizant and knowledgeable of other disciplines, such as technology, people and project management, and managing, measuring, and linking financial and non-financial activities and performance. Technology and automation are also creating more and better information and analysis to support decision making and to help improve performance. Many accountants have moved into broader and more commercial roles where they can use their skillset to combine financial expertise and business understanding to help deliver sustainable organizational success for their employer or client.