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Comment: Is your finance department paying its way?


Businesses expect their finance departments to establish robust controls, manage risks and handle transactions with suppliers and customers as efficiently as possible and as such much of the management reporting is data rich, but predominantly backward looking, generating limited insight and analysis.

However, as retailers are under increased pressure to expand and grow revenues, while simultaneously managing costs to protect profits, the finance department – as every other – has to deliver value and contribute towards overall business objectives.

The failure of HMV, Blockbuster and Republic, among others, have demonstrated that not even established retailers are immune to suffering significant financial difficulties, so working more closely with the financial team to exploit their capabilities and skills could save other retailers from treading the same path. For their part, in our ever-evolving economic and technological environment, finance departments are trying to establish their identity and purpose. Aware that they are often regarded as the business scorekeeper, the more proactive finance directors have been taking action on two fronts.

Firstly, finance departments have worked hard to improve their own efficiency and cost-effectiveness. IT developments have facilitated the establishment of centralised “shared service operations” for core transactional activities, including paying suppliers and staff, procuring consumables, performing month end accounting and providing management information.

Secondly, and of greater relevance to the wider business, finance has been seeking opportunities to apply its core skills and competencies in business decision support and performance management roles. While the finance director is usually a pivotal figure on the Board, and often a close confidant of the CEO, too frequently the rest of the finance department does not have a close working relationship with other business functions.

A proactive, engaged finance department can leverage its central position within the business in many different ways to add value. Finance co-ordinates the budgeting and planning processes, therefore its priorities should be to reduce the effort involved in these activities, to keep budgets and targets relevant and flexible, and to support the business in identifying actions to achieve those targets.

As the steward of management reporting, finance is ideally placed to lead the analysis and interpretation of financial and non-financial data and to provide a rounded view of business performance. The more progressive finance departments are working closely with their business managers to understand the drivers of performance, determine what information is required to answer specific questions - then establishing processes and systems to generate the required analysis. To judge whether a business is getting the most out of its finance department, retailers need to decide whether the management information they receive helps them to better understand the following:

  • Impact of marketing, promotions and price changes on revenues and profits
  • Relationship between space and profitability
  • Reasons for availability issues
  • Impact on lost sales of being out of stock
  • Effect of supplier performance on profitability
  • Impact of staff productivity and cost on performance
  • Bottom line contribution of different channels to market
  • Customer loyalty, behaviour and preferences
  • Effectiveness of product and process innovation
  • Relationship between product range and sales
  • Supply chain efficiency
  • Robustness of expansion plans
  • Drivers of back office costs

Unfortunately, there are still too many retailers whose finance departments are not geared up to provide these answers and as such are not being seen as a true partner to the business, engaged in helping to generate improvements in revenue and profit.

The key to working successfully with finance is to establish an honest and open dialogue, to build trust and to clarify roles and the activities to be undertaken. Finance requires significant input from the business, starting with constructive feedback on the current levels of service being provided. In return, the financial and analytical skills within finance can be a significant source of support to business managers in achieving their own objectives.

The benefits of tapping into the wealth of experience and capability of the finance team will realise considerable benefits, including:

  • Concise and focused management reports produced with significantly less time and effort which identify specific product, store or supply chain issues that need addressing
  • Improved margins resulting from more effective pricing and promotions
  • Reduction in costs across the business as finance disciplines become widely embedded
  • Better management of working capital as finance develops business processes in consultation with other departments
  • Capital investments aligned to strategic objectives, thereby generating higher returns
  • Reduction in the overall cost-to-serve, driven by an improved understanding of the relationship between activities and the costs they incur

So at the start of the new year, one of the big question to be asked is: are we getting full value from finance and, if not, how should we address this?

Published on Friday 22 February by Editorial Assistant

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