Prepare better month-end commentary for your business
High quality, collaborative, financial commentary will enable your organisation to make better financial decisions.
The most significant reason for completing this comprehensive commentary is to prompt discussion or provoke action if required. When completing any analysis, a structured method, loosely based on the 5 Why’s Root Cause Analysis Approach, can help you identify the reason for any variances. Not doing so will result in generic and potentially misleading commentary. And when preparing financial commentary, it is essential to consider the strategic priorities of your company.
Why the 5 Whys?
By repeatedly asking the question “Why”, you can move from a problem statement down to the root cause of the matter.
This is a fast, simple, and effective tool that allows you to make informed and insightful commentary. Start by identifying the problem statement, ask “why did this happen?” and identify if that is the root cause. If not, ask “why did this happen?” and repeat the process until you come up with the underlying reason for the variance.
Asking “Why” five times will usually result in you identifying the root cause, but you may come up with the original cause in fewer or more than five rounds. In the case of financial results, the why analysis will lead to details of adverse business events or alternatively draw a line back to the budget assumptions. This will reveal timing differences, errors in budget calculations, and/or one-off costs that were not predicted. Understanding how these variances originated will result in better budgeting and more timely identification of revenue/cost impact actions that need to be followed up.
Once the root cause of why a variance occurred is confirmed, the below four questions should be considered as a starting point to help obtain key points of commentary. These questions are designed to address action items such as why something happened, what can be done about it, and what is likely to occur going forward.
- What is the problem? Why was there a variance to budget and what specific items or market conditions caused this?
- What can be done to fix this problem? How can you bridge the gap? This could include potential marketing or sales efforts (revenue), and efficiencies of cost reductions (expense) being put in place.
- What is the impact on the future financial result? What projects will be implemented, or what adverse items are likely to occur in the next period that may impact your results?
- How does this tie into the corporate strategy? How do the first three questions align with the strategy of your business?
By applying these principles, you will have a process in place that lets you identify the pain points in your company budget and where resources need to be allocated. It allows you to get the right information to the right people, enabling the business to fix current deficits and work towards meeting and exceeding budget in remaining periods.
The production of commentary will evolve over time. There is no doubt you will go through several iterations before the right process and balance are achieved. While on this journey, it is important to consider appropriate tools to produce the required information in a timely manner.
Part of the ABM consulting service is getting to know your business and its specific needs. We can then recommend and implement business solutions and technological applications that are tailored to the specific requirements of your organisation.
Your business can be more productive, and you can get a better business outcome if you can detect budget deficits and the reasons they occur. Only then can you take positive actions to better grow your business.
If you would like to speak to me about improving your month-end commentary and how it could benefit your organisation, please email or call me on 0403 504 757.