Category Archives: Model Thinking
A lean financial infrastructure presumes the ability of every element in the value chain to preserve and generate cash flow. That is the fundamental essence of the lean infrastructure that I espouse. So what are the key elements that constitute a lean financial infrastructure?
And given the elements, what are the key tweaks that one must continually make to ensure that the infrastructure does not fall into entropy and the gains that are made fall flat or decay over time. Identification of the blocks and monitoring and making rapid changes go hand in hand.
The Key Elements or the building blocks of a lean finance organization are as follows:
- Chart of Accounts: This is the critical unit that defines the starting point of the organization. It relays and groups all of the key economic activities of the organization into a larger body of elements like revenue, expenses, assets, liabilities and equity. Granularity of these activities might lead to a fairly extensive chart of account and require more work to manage and monitor these accounts, thus requiring incrementally a larger investment in terms of time and effort. However, the benefits of granularity far exceeds the costs because it forces management to look at every element of the business.
- The Operational Budget: Every year, organizations formulate the operational budget. That is generally a bottoms up rollup at a granular level that would map to the Chart of Accounts. It might follow a top-down directive around what the organization wants to land with respect to income, expense, balance sheet ratios, et al. Hence, there is almost always a process of iteration in this step to finally arrive and lock down the Budget. Be mindful though that there are feeders into the budget that might relate to customers, sales, operational metrics targets, etc. which are part of building a robust operational budget.
- The Deep Dive into Variances: As you progress through the year and part of the monthly closing process, one would inquire about how the actual performance is tracking against the budget. Since the budget has been done at a granular level and mapped exactly to the Chart of Accounts, it thus becomes easier to understand and delve into the variances. Be mindful that every element of the Chart of Account must be evaluated. The general inclination is to focus on the large items or large variances, while skipping the small expenses and smaller variances. That method, while efficient, might not be effective in the long run to build a lean finance organization. The rule, in my opinion, is that every account has to be looked and the question should be – Why? If the management has agreed on a number in the budget, then why are the actuals trending differently. Could it have been the budget and that we missed something critical in that process? Or has there been a change in the underlying economics of the business or a change in activities that might be leading to these “unexpected variances”. One has to take a scalpel to both – favorable and unfavorable variances since one can learn a lot about the underlying drivers. It might lead to managerially doing more of the better and less of the worse. Furthermore, this is also a great way to monitor leaks in the organization. Leaks are instances of cash that are dropping out of the system. Much of little leaks amounts to a lot of cash in total, in some instances. So do not disregard the leaks. Not only will that preserve the cash but once you understand the leaks better, the organization will step up in efficiency and effectiveness with respect to cash preservation and delivery of value.
- Tweak the process: You will find that as you deep dive into the variances, you might want to tweak certain processes so these variances are minimized. This would generally be true for adverse variances against the budget. Seek to understand why the variance, and then understand all of the processes that occur in the background to generate activity in the account. Once you fully understand the process, then it is a matter of tweaking this to marginally or structurally change some key areas that might favorable resonate across the financials in the future.
- The Technology Play: Finally, evaluate the possibilities of exploring technology to surface issues early, automate repetitive processes, trigger alerts early on to mitigate any issues later, and provide on-demand analytics. Use technology to relieve time and assist and enable more thinking around how to improve the internal handoffs to further economic value in the organization.
All of the above relate to managing the finance and accounting organization well within its own domain. However, there is a bigger step that comes into play once one has established the blocks and that relates to corporate strategy and linking it to the continual evolution of the financial infrastructure.
The essential question that the lean finance organization has to answer is – What can the organization do so that we address every element that preserves and enhances value to the customer, and how do we eliminate all non-value added activities? This is largely a process question but it forces one to understand the key processes and identify what percentage of each process is value added to the customer vs. non-value added. This can be represented by time or cost dimension. The goal is to yield as much value added activities as possible since the underlying presumption of such activity will lead to preservation of cash and also increase cash acquisition activities from the customer.
“My own heroes are the dreamers, those men and women who tried to make the world a better place than when they found it, whether in small ways or great ones. Some succeeded, some failed, most had mixed results… but it is the effort that’s heroic, as I see it. Win or lose, I admire those who fight the good fight.” – George Martin
“Stories, like people and butterflies and songbirds’ eggs and human hearts and dreams, are also fragile things, made up of nothing stronger or more lasting than twenty-six letters and a handful of punctuation marks. Or they are words on the air, composed of sounds and ideas-abstract, invisible, gone once they’ve been spoken-and what could be more frail than that? But some stories, small, simple ones about setting out on adventures or people doing wonders, tales of miracles and monsters, have outlasted all the people who told them, and some of them have outlasted the lands in which they were created.” – Neil Gaiman
Heroes are not born. Circumstance and happenstance create heroes. In some cases, heroes are individuals who walk into a minefield of uncertainty that threatens their natural inclination for self-preservation in the interest of value systems and people that are alien to the individual. Thus, a private in an army is a hero already in the fact that he/she is walking into possible harm’s way and serving a cause to serve and protect people not necessarily related to him/her. One has heard the adage – one man’s freedom fighter is another person’s terrorist. Thus, someone whom we call a terrorist may be perceived a hero by someone else. Thus, in this case …it all becomes a matter of a point of view, but the fundamental point remains – a hero is considered a person who abnegates and abjures their rights to self-preservation for some greater perceived good.
Sustaining innovation is a vital yet difficult task. Innovation requires the coordinated efforts of many actors to facilitate (1) the recombination of ideas to generate novelty, (2) real-time problem solving, and (3) linkages between present innovation efforts with past experiences and future aspirations. Innovation narratives are cultural mechanisms that address these coordination requirements by enabling translation. Specifically, innovation narratives are powerful mechanisms for translating ideas across the organization so that they are comprehensible and appear legitimate to others. Narratives also enable people to translate emergent situations that are ambiguous or equivocal so as to promote real-time problem solving. With their accumulation, innovation narratives provide a generative memory for organizations that enable people to translate ideas accumulated from particular instances of past innovation to inform current and future efforts.
The concept of collective identity has gained prominence within organizational theory as researchers have studied how it consequentially shapes organizational behavior. However, much less attention has been paid to the question of how nascent collective identities become legitimated. Although it is conventionally argued that membership expansion leads to collective identity legitimacy, one draws on the notion of cultural entrepreneurship to argue that the relationship is more complex and is culturally mediated by the stories told by group members. Legitimacy is more likely to be achieved when members articulate a clear defining collective identity story that identifies the group’s orienting purpose and core practices. Although membership expansion can undermine legitimation by introducing discrepant actors and practices to a collective identity, this potential downside is mitigated by compelling narratives, which help to coordinate expansion. And that is where the heroes can be interwoven into organizational theory and behavior. It is important to create environments that by happenstance and circumstance create heroes. The architecture of great organizations imputes heroes and narratives in their tapestry.
Heroes and narratives are instrumental in organizations that forge a pathway to long-term sustenance and growth. Hence, we are quick to idolize figures – Iacocca, Welch, Jobs, Ellison, Gates, Benioff, Gerstner, Branson, Bezos, Zuckerberg, Brin and Page, etc. We learn narratives through case studies, news print, scholarly books on successful companies; and we emulate and steal and copy and parody and so much more … not necessarily because we want to be them but we want to create our identity in our own lair in ecosystems that move with or against the strongest currents.
So it is essential to celebrate the heroes and the narratives of great companies as an additional instrument to ignite engagement and foray into uncharted territories and conquer the unknown. Hence, personally I have also found solace in reading biographies of people who have made a difference, and a great pleasure in vicariously living through the ebbs and troughs of great companies