Is Financial Tracking Part of Your Company’s Transformation?

Business change is inevitable, but sometimes something larger than change is needed. A change is when a company decides to alter or modify the way it does business. This is typically triggered by a perceived discontent about the way things are.

A business transformation is different than making a simple change or modification. A transformation is a comprehensive or dramatic change and should be a drastic, powerful, organized, and thoroughly executed destiny-shaping effort.

A variety of factors, such as a shifting competitive landscape, economic conditions, and expansion or contraction, can trigger a business transformation. While the triggers can vary from business to business, all transformations share a common thread of needing to improve an organization’s financial health.

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A well-structured business transformation should be funded with a portion of the benefits that the transformation program is expected to generate.

A well-structured business transformation should be funded with a portion of the benefits that the transformation program is expected to generate.

For CFOs especially, knowing those benefits requires effective financial tracking. Disciplined financial tracking constantly reinforces the purpose of a transformation program and significantly increases its probability of success. Financial tracking also answers the question, “What about the money?”

Successful financial tracking during a business transformation requires five key elements:

1. Establish financial measurements from the start. When justifying the importance of a transformation program, return on investment is a key measurement. However, there is a big difference between return on investment and the program’s overall financial tracking. ROI is a measurement that reveals a static picture of the transformation program’s final benefits. But financial tracking is dynamic. It provides information and encourages feedback throughout the transformation. That is why it needs to be established before the transformation work begins.
2. Communicate clearly with financial measurements. Financial tracking lets CFOs and other key executives know when to expect benefits from a transformation program. Tracking communicates the program’s progress and sets clear expectations and benefits. This helps reduce the chance that a company’s senior leadership will become impatient with how long it is taking to see financial benefits.
3. Track measurements for a financial roadmap. Different areas of expertise comprise the leadership team in any organization. Not everyone understands the financial aspects of a transformation program. But proper tracking breaks down the final financial return into visible, concrete benchmarks. It creates accountability for the operational execution of the transformation plan and encourages corrections or escalations when needed.
4. Link activities to benefits. Even during a well-run transformation program, new processes and responsibilities can occupy a large amount of resources, people, and time. Tracking financials validates teams and activities during a transformation and keeps employees focused, often testing the relationship between actions and results. It also provides an unbiased interpretation of the added value of transformation activities.
5. Connect operational activities to financials. There are different levels within a transformation program between operations and production and strategy and financials. Understanding these levels can be challenging. This starts with actions and activities at the first level and progresses to strategy and financials at the top level.

Levels in the middle can become increasingly complicated and unclear. Questions often arise like:

• Did we establish the right key performance indicators (KPIs) and communicate them effectively?
• How do KPIs contribute to revenues and profits?
• How do individual tasks relate and contribute to the overall transformation?

Many companies struggle to answer these questions during a transformation. However, through proper financial measurements and tracking, organizations can successfully make a “visible-to-visible connection.” This occurs when they combine financial and operational literacy and achieve the ideal state of financial maturity.

Maturing Financially

An organization’s finance team may know the nuances of the department better than others in the company. This doesn’t mean that managers throughout the organization can’t learn to read and understand financial statements. When those outside of the finance department reach this level of comprehension, an organization achieves financial literacy.

Conversely, in a different world within an organization, some people work on the shop floor. These employees make and handle the products that can be weighed, measured, or counted. Organizations that are proficient in these production activities have a high level of operational literacy.

It is rare for organizations to marry the worlds of finance and operations to achieve financial and operational literacy. More often, organizational silos, poor communication, and nonexistent cross-training constrain financial knowledge and operational knowledge. As a result, financial knowledge and operational knowledge aren’t widely shared.

When an organization thoroughly understands and shares its financials and operations, it reaches financial maturity. This is a mastery of all levels of operational measurables that steer the organization’s financials and how those metrics help to reach that maturity. This combined understanding makes the connection between financial results and operational impact possible.

Tying it Together

Business goals are important, but so are measurements for understanding if goals are being met and if that progress makes financial sense. KPIs are measurable values that help determine if objectives are being achieved. KPIs directly contribute to business strategy, and while they aren’t always tied to money, money is usually the most important KPI.

The KPI tree (a graphical method of managing KPIs) is a tool that can help leaders see the connection between activity and strategy. This tool converts activities and behaviors into financial outcomes and shows how an organization can adjust to reach its desired goals. KPI trees also help organizations that may be focusing too much on financial literacy at the expense of operational literacy and full financial maturity. They also help employees understand how their roles contribute financially to the organization. The more financially mature an organization is, the more a KPI tree is understood.

While financial maturity is critical to a business transformation, it isn’t a prerequisite. But it will deliver benefits long after a transformation is finished.

Edwin Bosso (www.myrtlegroup.com) is the ForbesBooks author of “6,000 Dreams: The Leader’s Guide To A Successful Business Transformation Journey.” Bosso is also the founder and CEO of Myrtle Consulting Group, now part of Accenture.