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Ventana Research defines Financial Performance Management (FPM) as structuring financial systems and processes to promote efficient, accurate and timely execution of finance/accounting functions in order to provide an organization with reliable information and analysis to enhance its performance. In other words, FPM promotes financial process efficiency to improve overall management effectiveness. Information technology plays a critical role in FPM because it expands the scope of what finance organizations can accomplish. Putting this into practice almost always means taking a fresh look at the most important finance organization functions and considering how they can be improved using IT systems. Often these capabilities already exist or they are relatively easy (and inexpensive) to implement. Profitability management falls into this category and should be at top of the list of priorities for CFOs.

Finance organizations already play a role in managing profitability but mostly through broad budgetary targets. While these can work well, we find companies often miss opportunities to eliminate or prevent unnecessary spending, or they make cuts in ways that undermine achieving important business goals. They use budgeting as a control mechanism and fail to use it to improve performance.

Budget targets were a good approach when there was no practical alternative, but just looking at overall costs or margins may miss opportunities to achieve greater savings. One company was able to shift money from unproductive overhead to expanding marketing plans using an internal benchmarking approach to its administrative operations. Companies that use the budgeting process to understand cost drivers are in a better position to find savings and reallocate money to more productive areas. Companies with efficient budgeting processes are able to make targeted adjustments in spending quickly using a minimum of resources. Those with effective budgeting processes also can avoid ill-advised cuts. For example, a specialty retailer's policy to cut travel expense across the board prevented district managers from making bi-weekly store visits, which were vital to their ability to understand local issues and have meaningful discussions with individual store managers. Spending for this activity was restored, but the process took time and incurred unnecessary expense to fix.

Managing customer or product line profitability is an area in which few finance organizations play a role (or one that is not as significant as it should be). Too often, customer profitability initiatives are simply about up-sell, cross-sell or promotions aimed at increasing purchasing frequency. Whether these efforts will improve overall profitability on a sustainable basis is another question, one that finance departments may be in a better position to judge. Companies may not have to sell more to fatten their margins. They may have to sell more of the right things in the right way. Finance organizations usually are in a better position to determine what those things are. Organizations may elect to serve low-margin or even unprofitable customers for strategic reasons. Determining which these are and their impact on profitability must be explicit and part of deciding whether specific customer initiatives should be pursued.

Assessment

We assert most companies can gain from applying a Performance Management discipline to finance functions. Benefits will include more efficient finance operations as well as better execution across the corporation. Frequently we find an important obstacle to enhancing Financial Performance Management is the finance department's limited awareness of how IT resources can be leveraged to achieve objectives. On the budgeting and planning front, profitability enhancement efforts will benefit from adopting dedicated budgeting software. These systems eliminate much of the effort now spent on rolling up and consolidating spreadsheets, enabling budget analysts to find duplicative and unnecessary spending, implement internal benchmarking to trim outlays, and so on. Companies often extend their existing business intelligence software and analytical packages to implement customer profitability initiatives. An increasing number of firms are revisiting activity-based costing. They are implementing software that allows them to use a more streamlined approach to this discipline to gain a better understanding of what drives costs in their organization. Software, however, is just one part of a Financial Performance Management discipline that must integrate people, process and systems.