Developing a Financial Performance Management Ecosystem

Business owners typically focus on three areas when strategically managing their companies: Vision and mission, sales and marketing, and the products and/or services they offer.  

However, a fourth area is just as critical to proper strategic management of a business: Financial performance management.  

Many CEOs believe that financial management means keeping financial records up to date and reviewing historical financial statements. However, this is only a small part of financial management. True financial performance management involves creating an entire ecosystem. 

The 3-Part Financial Performance Management Ecosystem 

Your company’s financial performance management is best understood as an ecosystem containing three main components: 

1. Financial reporting and management (the numbers) 
2. Systems and procedures (best practices) 
3. Personnel (proper staffing) 

For a healthy, steadily growing business, there must be balance in your ecosystem. The right metrics alone are not enough. The right systems and procedures only are not enough. The right people alone are not enough. You need the right people to establish and monitor the right metrics, as well as manage the right systems and procedures, for the ecosystem to function properly. 

Let’s take a closer look at each area. 

Financial Reporting and Management  

There are many numbers you can monitor when assessing the health of your business. The following numbers are the most important to know and monitor:  

• Required liquidity or working capital (Note: many business owners confuse working capital with bank financing. However, bank financing is only a component of working capital.) 
• Minimum cash balance  
• Revenues 
• Gross Profit 
• Net Profit before taxes 
• Break-even sales 

You may want to know your industry’s standards in these areas and monitor your company’s financial performance against these industry-specific metrics.  

But knowing the numbers isn’t enough. To unleash the growth potential in your business, it’s just as important to develop a financial strategy – that is, defining the relationship among revenues, expenses, cash flow, profitability, assets and liability in advance – as well as to engage in financial forecasting. 

Systems and Procedures  

To ensure that you have the right numbers – and that those numbers are correct – you need properly functioning systems and procedures. 

Here are recommended best practices when creating your financial performance management systems and procedures: 

• Systematize your operations by creating automatic, repeatable systems for every type of transaction. 
• Automate as much as you can. 
• Touch everything only once. 
• Identify and implement software systems, and use industry-specific software whenever possible. 
• Process all transactions at the lowest level possible. Don’t have your CFO do work that can be handled by a bookkeeper. 

Personnel  

The final component of a healthy financial performance management system are people. Specifically, you need the right people on your team – and you need them to be properly trained to manage your systems. 

A business may include up to four levels of financial management: 

1. Bookkeepers and accountants handle the day-to-day transactions, such as accounts payable and accounts receivable. 
2. Accounting managers and controllers supervise and manage lower-level bookkeepers and accountants. They also summarize daily transactions into monthly financial reports. 
3. Certified Public Accounts (CPAs) lend credibility to the financial reports by issuing an audit, compilation, or review. They also prepare tax returns. 
4. A Chief Financial Officer (CFO) is a financial strategist who helps guide the organization into the future using financial metrics and strategic planning. 

The biggest difference between CFOs and the other financial professionals in a business is that CFOs look forward. The other professionals are focused on what happened in the past. 

Ideally, everyone on your team should be cross trained. Ensure that at least two team members know how to perform every task in your financial management system. 

To ensure efficiency, use the right staff for each position. In addition to processing transactions at the lowest level possible, ensure that you purchase only the time needed at each level. If your business needs only one bookkeeper, you don’t need a full-time accounting manager and a full-time CFO. You need only a quarter-time accounting manager and a fractional CFO for only a day a month, plus extra time for occasional strategic planning projects. 

Finally, put measures in place to prevent fraud. Ensure that you are properly separating duties. For example, if your bookkeeper is handling accounts receivable and accounts payable, have someone else do the bank reconciliations. Also ensure that you are creating an audit trail. 

Charting Your Path Forward 

A balanced, healthy financial performance management ecosystem consists of the right numbers, the right systems and procedures, and the right people. Once you’ve established this ecosystem as a solid foundation for your business, you can start to take control of your financial performance management.  

Financial performance management involves creating a strategic plan that integrates with your vision, mission and goals. A fractional CFO can help you create this strategic plan, which in turn will help you achieve your goals more quickly, maximize profitability, and help you become more competitive in your industry.  

If you’re ready to gain the financial clarity, confidence, and strategies you need to steer your business through its next evolution, explore how our virtual CFO services can help by booking a complimentary 45-minute Strategies & Solutions Session.