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Role of Controller in Financial Analysis and Budgeting

Michael Losch's Profile

I am consulting for a services organization with over $75 million in annual revenues and that has recently expanded its market share through acquisitions. To date it has had all financial analysis done by the controller and his staff to an audit level of detail. This means the monthly financial reports take more than 45 days to get even preliminary data and any ad hoc requests for financials take days, not hours. I have advised the CFO that they should consider establshing a distinct financial analysis group that deals with data on a higher level and is able to complete financial analysis on a more timely basis at a higher level. As to reconciling with the corporate books that may be done on a semi regular basis during the year and certainly before any major final decisions are made. I appreciate there may be software solutions but I think the organizational issue of doing work during the year that is not audit quality is key for moving forward and making routine business decisions. Any thoughts are appreciated.

Answers

Michael Schwindle
Title: CFO / VP Finance
Company: Musician's Friend
(CFO / VP Finance, Musician's Friend) |

(Disclaimer: some will disagree with the opinions below and are reflective of my experience and observations across a fair number of generally large companies)
Almost every organization once it passes a certain size evolves an analytical function separate from the accounting function. This is an evolution of sophistication and generally requires acceptance and embracing of the rest of the organization to be successful. I am a strong believer in a hard separation between the accounting team and the analysis team within a financial organization. This comes from my observation of several potential issues with having the accounting organization performing analysis of the business:
1. Illusion of Precision: As a generality, accountants are very detail-oriented and both training and education reinforces it. As you aptly noted, this causes analysis and reporting to drag far too long to be actionable to the organization. In most cases, a 70-80% effort is sufficient to derive an actionable result. Being trained in the art of precision and accuracy, many accountants have difficulty pulling away from the details to get an actionable result quickly.
2. Accounting cycles: The accounting function typically has extreme periods of workload which makes getting information and analysis performed very difficult during certain periods of the month and year. This does not suit the needs of a business where challenges are a daily and weekly occurrence.
3. Purview to the organization: By function and necessity, accountants are generally shielded from many aspects of the organization. That will seem incorrect to some as most things in business have a financial consequence and the accountants always touch said consequences in some manner. In this interaction, however, accountants tend to be an “inch deep and a mile wide” wherein their depth of understanding of the operations is frankly shallow. This isn’t an indictment of accountants but rather the reality of being responsible for a function (tracking and recording all financial activities) rather than being primarily responsible for supporting and driving an operational area.
4. Recognition of information: In my experience, many accountants believe that most of the information necessary to manage and drive an organization is embodied within the accounting/ERP system. In reality this has been 25-30% in the businesses I have worked. The rest of the information is very operational, sometimes unstructured, and is only indirectly related to resulting financial activity. Additionally, there is a tendency to think that reporting equals analysis (how many reports have “analysis” in their title?). Reporting addresses the question of “what is it” while analysis addresses the question of “why is it” and decision support addresses the question “what do I do”.

I have a strong preference to have a dedicated analytical team whose skill and dedication is to understanding the “why’s” within the business and partnering with operational areas to provide not only data but also information and knowledge to support business decisions. This is a highly unstructured activity by nature as the situations, challenges, and needs change regularly. It is extraordinarily difficult to train for this type of activity and invariably requires more of a generalist rather than a specialist as accountants typically are. It also requires a dedication to the problem-solving process which is likewise difficult to task to the accounting team who has other key responsibilities.

I also have found that most accountants make poor analysts. Most accountants have spent a large part of their training and development understanding rules of accounting and digging deep into minutia of financial transactions to reconcile, balance, and track. These activities, while valuable to the organization, are usually poor training grounds for analysts. The best analysts come from varied backgrounds and are the ones who have seen a myriad of different situations, circumstances, and activities. As a result, strong analysts build a large toolbox of methods and frameworks that are applied in a Lego fashion in new situations.

When such a function should evolve within an organization is a function of size, cost, and profitability. In small entrepreneurial organizations, the entrepreneur performs this function intuitively. Once the organization is too large for the leader/entrepreneur to wrap his/her arms around everything, analytical roles start to form as analysis becomes the substitute for intuition by a select few. At the end of the day, the function should add more value than it consumes within the organization. This is generally easier to measure at the inception of a group rather than years later.

David Nazareth
Title: Strategy Dvlp & Business Mgmt
Company: Rimshot Partners
(Strategy Dvlp & Business Mgmt, Rimshot Partners) |

Michael's comment is dead on !

I'd add a couple of things -

1. That FP&A function tends to provide a glue-function across various functions as the company grows, which helps surface hidden issues that are prevalent in most organizations. They are business partners with functional heads and their teams and are responsible to provide eyes wide open advise and well as responsive analytical support.

2. Their role is to be forward looking, relying on good accounting and operational data for decision-making and scenario planning. Accountants have a different charter.

3. They also implement certain core methodologies - such a pricing, costing, etc. which business stakeholders need to understand in order to plan products, work with channels, etc. In my experience, they also have been effective in managing and selling certain reserve methodologies to auditors as they're close to the business, understand what's happening with customers and suppliers and live with the supporting operational data.

4. If you're a public company, you need both the analytical chops, smell of the business and speed to provide street guidance ranges and drive/manage forecast updates through the quarter. This is a critical function.

Kareem AL Zorkani
Title: Business Controller
Company: Fayrouz International (a Heineken Subsid..
(Business Controller, Fayrouz International (a Heineken Subsidary)) |

I fully support the comments made by both David & Michael. As a business controller myself, I lead a team with various responsabilities and while certainly we have to work closely with accounting, at te end of the day our role is not only to explain what happenen in the past, but to recommend the business route(operationally and financially) in the future.

Accounting teams are imperative to any organization for the reasons mentioned by my collegues above, but very few accountants can actually wear the hat of an analyst or a consultant. Indeed, I pick my team based on the variety of experiences, even at their hobbies because analysis, modelling, recommending, managing growth...etc. is all about fragmenting one's personal & professional experience and rebuilding a coherent solution for a problem with many variables.

For your organization, I would strongly recommend building in a FP&A team. If they are still at a point where the costs are unjustified, use a third party service but at least hire internally a junior candidate that could be groomed to take charge once the costs could be accomodated.

J. Ed Neufer CPA
Title: Consultant
Company: CONSULTING
(Consultant, CONSULTING) |

Agree with most comments although it is good for Finance to have an in-depth knowledge of accounting and how revenue is recognized, costs are incurred, etc. It is critical to inform key leaders HOW certain actions are going to impact the financial statements and WHEN those things will hit the financials, particularly for quarter-ends, year-ends, etc. Started out as a CPA in public accounting and stayed for 8 years, so I will always have "Accountant" in me, but I think there are plenty of CPAs who have a good feel for analysis, big picture risks/issues, how activities directly or indirectly impact other organizational activities, etc. So I think I've definitely created and provided some good analyses in my day, but some accountants, especially if too far in the weeds, do have trouble perhaps adjusting to a more Finance/Ops environment where some things move awfully fast. 45 days is a long, long time by the way.

Michael Cade
Title: VP Business Operations
Company: in-between
(VP Business Operations, in-between) |

Michael (Wow, a lot of Michael's around here)

I concur with many of the previous comments, but I am not sure that a $75MM enterprise can financially support a separate FP&A function. In my last position, I couldn't weasel a full time FP&A resource until we were over $125MM.

I think, however, that you may need to work with your accounting function to develop an interim financial reporting process (tell them its like "unaudited" statements, that might help them understand). These metrics or key performance indicators should be produced nearly automatically by your system or via simple spreadsheet analysis. These metrics should be reported "as is" in the form of a dashboard, to help management understand the basic direction of the business's operations. Further analysis can be done later, unless a metric is showing a huge variance from expectations, then the accountants should be able to build a variance analysis pretty quickly.

Clearly, 45 days to get financial reports out is completely unacceptable, so someone in senior management is going to need to reset the controller's performance measures. A typical public company close takes 3-7 days.

To help with the planning side of things, the business does need at least a part-time resource focused on building and monitoring budgets and forecasts. That person may be someone that can be pulled from the controller's shop, but they will need supervision. I started out in Accounting and moved over into FP&A, so I understand the issues that Accountants and Controllers have in moving over. GL accountants are not always able to deal with the ambiguity associated with the financial planning part of FP&A, however they are normally very good at the analysis part (if taught how to do it properly).

If the business is expecting solid growth, the CFO may indeed feel it is approaching time for a separate FP&A function, but I think that a part time resource working directly with the CFO may be the best route to start.

Best regards, --mike

Michael Ford
Title: VP & Controller
Company: in between
(VP & Controller, in between) |

Waiting 45 days for the results means that management is making decisionswithin in the financial organizatioooon based in ancient history. There should be a separate group or person if the business will not support a separate group within the financial organization that does the reporting and analysis with a high degree of accuracy but not to an audit level of detail. They should target the completed package to management with in 7 business days of the month end close. The most difficult part of the process willl be changing the mindset of the financial community that a quality close can happen in 7 days when they are accustomed to having 45 to get the job done. Best case it will take realigning incentives or changing of personnel in the worst case.

Regards
Mike

Sara Voight
Title: Controller
Company: Critical Signal Technologies, Inc
(Controller, Critical Signal Technologies, Inc) |

Although I agree with most of the above comments I am surprised by the amount of time it takes to close for this company. I always dedicate resources to improving processes so reporting is as automated as possible and close can be done within 5 days in a format that can stand an audit. There is no reason you can't keep your books as clean on a daily/weekly/monthly basis to make an audit a non-event. With close complete at the beginning of the month you are left with three weeks to focus on analysis.

A company at the $75M revenue level might not be able to afford a full time FP&A. The accounting staff needs to know how to make their metrics work for the benefit of the company as they continue to grow to this level. Not to mention that their hands would be tied in relation to useful inforamtion if they were unable to move foward until the financials were completed.

I currently handle all of these functions where I work and good processes and time management enables me to see the whole process through and offer valuable and timely advice. It also makes me a more rounded professional which increases my value at my current company and for others in the future.

Peter Lyons, MBA, CMA
Title: Finance and Technology Enthusiast
Company: Currently Looking
(Finance and Technology Enthusiast, Currently Looking) |

I'm in agreement with Sara. I'm shocked that it takes 45 days to get data to the decision makers. I would guess that there is a lack of automation in the close process and that they are relying extensively on excel spreadsheets.

I currently handle all of the accounting and finance functions and I have my area structured where I have an accounting manager, finance manager, and cash manager. My cash manager is responsible for the daily receipts and disbursements and ensuring that all transactions are coded correctly in the sub-ledger systems. My accounting manager is responsible for the close and making sure that all of the reconciliations between systems tie out as well as accruals, prepaids, LTI, and payroll are processed appropriately. My finance manager is running various analysis from ME + 1 and updating her schedules as GL data becomes available.

All of my firm's decision makers have a set of preliminary financials as well as reforecasts in their hand by ME + 3 bd's and a set of final financials by ME + 5 bd's.

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