Why Finance Must Put More Than Profit and Loss Under the Microscope

To deal with the future, you must first understand challenges from the past. I’ve been involved with the finance sector for long enough that I’ve seen, from close quarters, the evolution of both the sector and the technology that underpins it.

In my opinion, finance is perfectly positioned to help drive the decision-making process in the C-suite. Such is the rapid state of change facing global businesses that the need for data—both financial and non-financial—that can provide business insights to guide decision-making has never been greater.

Beyond Traditional Profit and Loss (P&L) Reporting

The challenge today is the finance function is tasked with measuring and delivering contextual information from across the business that goes beyond the revenue and cost data that boards have historically craved. Finance has a much broader and more demanding set of stakeholders and a constantly evolving business landscape. This means that not only is measuring and reporting revenue and P&L increasingly difficult, it is also not a comprehensive method for understanding how the business generates top and bottom line results.

If finance is going to be a true business partner, it must evolve beyond the traditional profit/loss view to help the broader business refine existing business models and generate new revenue.

We come from a world where finance departments measured tangible things that were relatively easy to quantify. ERP systems were designed to do exactly that—and for the most part, did a great job. Accounting systems focused on the supply chain and looked primarily at cost management. This approach was fundamentally about understanding and controlling expenses.

In today’s service-driven economy, where costs are primarily associated with people rather than things, the focus has shifted to the revenue-generating side of the business. The finance team’s role becomes one of helping the company generate new revenues from emerging markets, new sectors, and different regions. It’s not about measuring revenue and profit/loss in a typical, tick-box accounting fashion. This new approach requires an understanding of context and being able to capture, analyse, and report on this richer data. That means putting transactional data under the microscope in a way that finance has never done before, from anywhere across the business, and making that data always available to stakeholders.

If finance is going to be a true business partner, it must evolve beyond the traditional profit/loss view to help the broader business refine existing business models and generate new revenue. This requires a shift from an accounting focus on revenue and costs to one that is more insight based—the contextual who, what, where, why, and when. This all relies on technology, which is where the wheels begin to fall off.

All the King’s Horses

The business leaders I speak to daily, including people from the finance, HR, sales, and other functions often rely on different systems. When finance tries to reconcile data from these systems—itself a laborious process—the results are full of inaccuracies that don’t inspire confidence. If you start with this data in separate systems rather than in a single system, then even piecing this data back together becomes a painful task.

Another critical stumbling block is that most traditional finance systems weren’t built to capture the deeper contextual information that businesses now require. Capturing richer data at the transaction level that provide business context, rather than just basic information from traditional general ledgers, is no longer a luxury but a must-have.

Combined, these factors create gaps, leading to an incomplete view and preventing finance from supporting a deeper understanding of revenue generation.

A Data Issue, Not a Reporting Problem

Let’s remember that the audience for financial information is today, quite literally, every part of the business. This broad community is interested in the analysis of profitability, what-if scenarios, and cost models, while traditional ERP systems were built for IFRS/GAAP and regulatory output rather than delivery of contextual analysis and ad hoc reports. The problem is not at the reporting level—it’s the quality of the data and the ability to easily draw conclusions.

If the right data is not captured at the very beginning of the process, no profit/loss reporting scheme will deliver context-rich analysis. More advanced systems address this issue at the transaction level by capturing data-rich transactions so that relevant analytics can be delivered directly from the core finance system without the cost, complexity, maintenance, and control issues of aftermarket solutions.

Having the right data is the first step; making it usable is the next. Because we can no longer expect that everyone using the system is a finance expert (and they shouldn’t need to be), analytics and insight must be easy to define and understand, and simple to access. And because virtually everyone is mobile, relevant analytics must be available anywhere at any time and on any device.

Last, but certainly not least, comes agility. A finance system should enable a finance department to drive change management and help the business rise to challenges and take advantage of revenue opportunities, whatever and wherever they may be.

The shift from a product- to a service-driven economy—mixed with an uncertain economic climate—has given finance teams the opportunity to become strategic business partners capable of shaping and guiding organisational decision-making. This partnership is only possible by creating a deeper understanding of the contextual factors that influence revenue and profit and loss, and making this analytical data available to the right stakeholders when they need it. That requires a fundamental change in the way finance teams think about technology.

Read more about financial transformation in this four-part blog series.