An Integrated View Of Performance And Value In Finance

Countless organizations are in trouble amid the novel coronavirus pandemic. Many are rethinking their fundamentals—down to their purpose and business models. Financial survival is only one challenge. Existential threats are coupled with the ongoing needs to provide employee safety, deliver value to consumers, and partner even more closely with suppliers, governments, and communities. This adds up to the greatest threat to value creation in generations. The business community’s response to these challenges forms the judgments of investors and society for years to come.

Taking on a wider value creation lens will boost the CFO and finance function’s contributions as effective partners within an organization. CFOs and their teams can pivot by shifting their focus and enhancing their capacity. This involves continually evaluating how traditional finance and accounting work is done, investing in upskilling and talent management, and focusing on the needs of the business in the context of external trends and stakeholder expectations. An exclusive focus on financial information and performance constrains the potential of the CFO and finance team to support effective decision making and reporting.

As mentioned in the below chart, the contribution of tangible and intangible assets to the valuation of the corporations have been changed significantly during the last 30 years, as tremendous amount of value is created by intangible assets which are not even recognized in our 500 years old accounting system.

Value creation is the key for CFOs and finance functions to become effective partners rather than being perceived as a back-office function. To be considered an effective business partner, the CFO and finance function need to understand and communicate how their organization creates and protects value today, and how it will do so in the future.

Achieving sustainable long-term growth and value creation has never been more challenging. Customers and society are demanding more from businesses. A digital, data-driven, resource-constrained, and post-COVID-19 world presents much uncertainty in which there is enormous opportunity and risk. The CFO and finance function need to help navigate, measure, and communicate what matters to long-term success while dealing with the expectation for short term resilience and performance.

Driving adequate returns to investors at the same time as delivering value to customers, employees, and suppliers, and respecting society’s interests and preserving nature, is a challenging juggling act. CFOs and finance functions need to ensure that all relevant information around value creation and performance, opportunities and risks, and trade-offs is available to internal decision makers and to investors and other capital providers to steer an organization towards its business objectives.

Understanding Value Creation Process

Before being able to measure, track and communicate on value creation, it is important to understand value creation through the lens of stakeholders and how value is created through purpose, strategy, and the business model.

This can be achieved through a management process of defining, creating, delivering and sustaining value. These components help to build a complete picture of what value creation means and how it is delivered to stakeholders incorporating:

As a Finance Business Partner or Strategic Finance Leader, we need to play crucial role in the value creation of the business.

As discussed in detail in my last week's article, there is 3 way thinking to value creation in finance including P&L mindset (focusing only on selling at a mix of high price & volume whilst keeping overheads down) , Balance Sheet mindset (focusing on increasing the net assets) and Cash Flow mindset (ensuring we are in the right business and generate sufficient operating cash flows).

However, in Balance Sheet mindset, we need to really think beyond the balance sheet in order to understand and capture the value beyond the balance sheet that is created by intangible assets which are not recognized in our balance sheet and accounts for more than 80% of the value creation in business, as mentioned earlier above.

Integrated View Of Performance & Value

Integrating and connecting these three perspectives of value (Balance Sheet Value, Business Value & Society Value) is critical to understanding, monitoring and communicating the value creation process. The way performance and value are evaluated today is generally disconnected and siloed with financial analysis often divorced from wider value drivers and broader impacts related to contribution to stakeholders and society.

An integrated approach leads to shared value and creates accountability to all stakeholders. For companies and their investors, forecasting future earnings and cash flows will be a flawed exercise unless all relevant aspects of value creation are accounted for.

A comprehensive value creation process requires a mixture of measures and indicators (financial, nonfinancial or pre-financial) relating to book, business, and societal value.

Long term cash flows and earnings will be impacted by how well intangible assets and other forms of capital are nurtured and managed, and by how performance in ESG dimensions creates long term value for various stakeholders.

How do you see value beyond the balance sheet in order to play your effective role in value creation process?

Your thoughts / feedback / suggestions in the comments shall be highly appreciated.