CFO in focus part 2- Benchmarking and analytics – refining performance

CFO in focus – Refining performance – benchmarking and analytics 

For effective management reporting as a CFO, we believe in 3 main ingredients:

1. Setting up for success – attention to transactions
2. Refining performance – benchmarking and analytics
3. Strategic thinking – forecasting and budgeting

This is the 2nd in our 3-part CFO in Focus series where we explore the key ingredient refining performance – benchmarking and analytics.

Refining performance – benchmarking and analytics

Business review and understanding the ‘how and why’ of performance is essential.

A. Time-based comparison and trend analysis

This analysis perspective looks back at the past and reviews how things have performed with your business, comparatively, and what the trends are showing you. This level of analysis entails:

• Historical and periodic review – principally time-based review of financial performance
• Key Performance Indicators / Critical Trends – for example: revenue growth, gross profit growth by percentages and dollars etc. 

B. Benchmarking and comparisons

There is little point to statically looking at financial figures from the past in isolation. They need to be compared and benchmarked so you know what performance is satisfactory (or not!). This level of analysis entails self-explanatory comparison such as:

Actuals v Expectations/Quotes/Agreements/Contracts

A note from the Director: “Quite often, enterprise performance vs expectations or benchmarks are significantly different (with the stakeholders unaware!). We have had clients that have a confident view of their gross profit; however, we have identified their failure to consider particular costs, which are embedded in overheads, and this (lack of) awareness leads to a distorted view of real financial performance. Unfortunately, this is not uncommon. Benchmarking, which entails comparing your actual figures versus expectations, quotes and agreements to contracts is therefore important” Patrick McStay, Principal at New Leaf Advisory.

Actuals v Industry/Competitors

For those who may be unaware, there are publicly available ratios and benchmarks, not just on the Australian Tax Office website, but other industry specific websites, where businesses can review gross profits and gross margins relative to the industry and relative to competitors. It’s helpful to understand where your business performance is at, relative to the norm in your industry.

Actuals v Budget

Finally, looking at benchmarking your actual performance versus your budget allows you to see what you have set in place or what you plan to achieve, and whether you have achieved that or not. This is a foundational health check for a productive enterprise. If you’re not thinking of the future, planning for it, and casting forward a financial reality, you’re drifting along with economic momentum which is ultimately dire for sustainable success.

C. Exception analysis and enquiry

• Variance analysis – relates to costs that change year on year, and why
• Materiality analysis – relates to the most critical or high dollar level expenses or income to understand what’s changed, and why
• Discretionary spend analysis – relating to the analysis of all non-core, non-critical costs and understanding where costs may be cut as required
• Tax efficiency analysis – relates to the tax you’re paying for what you are earning

Want to learn more? Stay tuned for Part 3 Strategic thinking – forecasting and budgeting as we outline budgeting goals, the importance in careful forecasting and the value of cash and accruals.