By Stuart Bilbrough*
This is the first of six articles that look at how to transform a company’s Finance function into an effective business partner and provider of value through training.
They drill down on an article published on Interest.co.nz on the 8th October last year.
This training is focused on foundation skills required for adding value.
Although these skills have a Finance wide expectation they are of especial relevance to existing and aspiring management accountants.
These skills make up a critical and significant part of the foundation required of a management accountant.
They should master all with authority.
The six articles will discuss six interconnected skills. These skills are explored in more detail including relevant examples, handy frameworks and exercises that can be adapted to your business in the book, Bean Soup – Beyond Bean Counting – Steps for Lifting a Finance Function Skill Set Towards ‘Adding Value’.
The first four skills are core to adding value –
1) The Data – Validation and Control,
2) The Client – Stakeholder Management,
3) The Product – Financial and Non-Financial Analytics and
4) The Value – The Strategic Plan and Financial Planning.
The last two are not considered core yet still important for lifting the value of a Finance function. They look at Business Process Improvement and Risk Management.
At Radius Care we have taken the steps of ensuring all members of the Finance team have been trained in these skills and not just our management accountant.
This includes the accounts receivable, payables and payroll team members. As a New Zealand Institute of Chartered Accountant Accredited Training Organisation we have a similar program run for mentoring our aspiring and ‘soon-to-be’ Chartered Accountants.
The combination ensures there is a team wide understanding of value and my expectations of them as their CFO.
The objective of the data - validation and control
The objective of this training is “To provide a foundation for a Finance team to enable it to eliminate the risk of material error, avoid surprise and provide assurances the data integrity is correct and complete. This is for both financial and non-financial information.”
Are you hearing comments like the following?
“I’m never too certain of performance as Accounts keep getting the numbers wrong.”
“We’re not sure how much they owe us as Accounts are still trying to reconcile accounts receivable.”
“Accounts said, “It’s gone to suspense and will be reconciled at a later date.”
What is that supposed to mean?”
Would you prefer to be hearing?
“Finance always provides numbers that are materially correct. I cannot remember when there has been an error or surprise.”
“It is great to be able to focus on the business performance rather than spreadsheet accuracy and whether it can be trusted.”
Validation and control is all about ensuring that all information and advice provided by Finance to its stakeholders is complete, accurate, consistent and prepared in accordance with the organisation’s policies and guidelines along with all relevant regulatory, accounting and control frameworks.
When providing financial performance data to key decision makers within an organisation, like the Board and senior leadership team, nothing spoils the credibility of financial information more than material errors.
This can be distracting when trying to understand the performance of the organisation.
Key skills of effective validation and control
1. Materiality
Why is materiality considered a skill required for adding value?
Essentially it sets the expectation to not sweat the small stuff.
Information is material if its omission or misstatement influences a business decision.
If materiality is not considered there is a risk of slowing month-end, delays to important performance data and wasted resource for no economic benefit.
2. The Control Environment
The following five step framework is helpful for checking there is a strong control environment in your organisation.
Ensuring a strong control environment requires identifying significant accounts and understanding the transactions and processes impacting them and then asking “What can go wrong?”
A strong control environment provides reasonable assurances nothing material will go wrong.
3. Data Validation Techniques
For validation of the balance sheet remember that “every month is a year- end”.
Ensure all balance sheet accounts are reconciled and reviewed regularly.
Set procedures for the timing of substantiating to the source document or physical asset of each balance sheet account.
For validation of the Profit and Loss remember to “rely on your expectations”. Comparing the current month data to last month, the budget and the same month last year assists in identifying unusual variances and material outliers.
An effective and simple way of answering questions about variances is by using the “5 Whys” technique. Refer side panel for explanation:
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What is the “5 Whys” Technique? The “5 Whys” technique is a simple problem-solving technique that helps users to get to the root of the problem quickly. Very often, the answer to the first “why” will prompt another “why” and the answer to the second “why” will prompt another, and so on; hence the name the “5 Whys” technique to problem solving. Its benefits include helping to quickly determine the root cause of a problem. It is easy to learn and apply. This technique can be very effective when getting to the bottom of variances between months, budget and last year. Example - My car will not go because the battery is dead. I could go and buy a new one, but is that really the correct solution?
Ask - 1. The battery is dead: Why? (first why) 2. The alternator is not functioning: Why? (second why) 3. The alternator belt has broken: Why? (third why) 4. The alternator belt was well beyond its useful service life and has never been replaced: Why? (fourth why) 5. I have not been maintaining my car according to the recommended service schedule: (fifth why, a root cause) I will start maintaining my car according to the recommended service schedule (solution). |
Ask these questions about your team's understanding and validation and control
1. Can the members of your Finance team provide examples of controls in place?
2. Are there regular mistakes in the data provided?
3. Do you do a full balance sheet reconciliation on a regular basis?
A Finance team with a strong understanding of validation and control should be able to answer each of these questions positively and with authority. If they can’t then assume there will be risk of incomplete and inaccurate data.
Comments from an aspiring Chartered Accountant
This is Pallavi Thour. I am currently a provisional member with NZICA and all going well will be admitted as a Chartered Accountant (CA) this year.
At the end of each article over the next few months I will add what competency I was able to meet during my mentoring programme completing a particular skill training.
My focus is management accounting which I will complete to level 3 and then level 2 for accounting information systems and financial management. In doing so I will meet the competency requirements for becoming a NZICA chartered accountant.
Some months the skill the article refers will only meet a few competencies where as others will meet a lot.
For all of the skills training we used the exercises in Bean Soup – Beyond Bean Counting and aligned with examples from Radius Care where I am currently the management accountant. This has been a great way for me to gain the experience I need to become a value adding team member at Radius while meeting my competency requirements to become a CA.
The validation and control exercises developed three solutions that met two competencies. They are:
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Stuart Bilbrough is the author of the book, Bean Soup – Beyond Bean Counting. You can read a review of the book here. You can buy it here.
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