Inadequate Financial Control:
The lack of adequate financial control is one of the most common characteristics of companies that show deterioration in their performance. In these cases, the administration is unable to determine in which products or services, or in which clients money is being lost. Even worse, in situations of financial crisis, which products or businesses generate cash or consume it.
Generally, the lack of financial control is evidenced in the absence of one or all of the following control tools:
• Cash-Flow forecast
• Effective costing systems
• Budget Control
• Monitoring of suitable KPIs
• In many companies the only source of financial information is the annual balance prepared by external accountants, and generally for tax purposes.
Financial accounting, although very useful, generally does not provide enough information for financial control, since it is very aggregate information and is received very late. If in a hospital patients are monitored for body temperature and blood pressure, among other relevant indicators, on a daily and frequent basis, the same should happen with a company that evidences deterioration problems. A constant vigilance on its relevant indicators will cause corrective actions to be taken in time.
But not only has the problem resided in the absence of these controls, but in many companies the problem resides in the implementation of inadequate or inefficient controls.
Badly designed information systems: some systems are very complex to understand and to manage, others are poorly designed reports with unstructured information or others, plainly and simply, produce erroneous information. How common it is to see that many executives receive “kilos” of reports, after spending weeks of analysts in their production, which nobody finally reads. It is generally not trivial to answer questions such as – what information do I need to receive in the report, or – how often do I need the report? – Or – who will the report be distributed to?
The administration must receive USEFUL, RELEVANT, TIMELY and CORRECT information for a good decision making. It seems obvious. And why is it so difficult to obtain it then? It is very important to differentiate between what MUST be generated as minimum and essential information and what would be DESIRABLE to have. Generally, between both concepts there are very relevant costs and time investment.
The organizational structure often makes control difficult: Regarding this problem it is feasible to identify two recurrent situations. On the one hand the “over-centralization” of the control that makes it too difficult and also that sometimes it is situated at a very high level in the organizational hierarchy. It is important that the budget control and sometimes the control of the P&L be placed in the business units in a decentralized manner, providing the necessary “accountability” to be properly managed.
Finally, another of the problems detected that distorts financial control is the allocation or distribution of overhead costs. There are several methods of cost distribution and costing systems, and while we can discuss the advantages and disadvantages of each other, what matters at this point is the consistency and the consequence in the application of the criteria defined by the administration.