Information for decision making

by | Apr 1, 2024 | Articles

5 min read

Raison d’etre

I suspect starting an article with a French phrase isn’t best manners for a blogger. But it fits my topic, so I’ll risk it.

My recollection from my one or two semesters of junior high French is that this phrase means “reason for being,” or “reason for existence.”

The Finance function

In any organization, providing information for decision making is indeed a fundamental reason for the Finance function’s existence. Other reasons are relevant, but this one is prominent – very much a “raison d’etre.”

The Finance function itself may be small (a bookkeeper…who possibly also wears other hats) or massive (hundreds of professional and clerical folks responsible for diverse Finance subfunctions operating from various locations

across the country or globe). But unless that Finance function – large or small – can provide useful financial information for its business’s decision makers: (1) the decision makers will find their leadership responsibilities much, much harder to fulfill, (2) the business will suffer, or at least experience sub-par performance, and (3) the folks employed in the Finance function should find another place to work (and, truthfully, another career to pursue).1

A continuum of value for financial information

As Finance folks provide internal decision makers with information, they should assess where along the following value continuum they are meeting the needs:2

In place of the arrows, we could show the less-than/greater-than symbol (“<”) to make the same point: data is good and somewhat useful; information is better; decision makers really value and benefit from insights. But the value continuum also shows the logical and temporal flow: information comes from data; insights come from both. And, in my view, it’s possible – and well worth the effort – to move up the value scale from each stage to the next and better one.

An example: from data to information

Suppose you are in the Finance function of a manufacturing company and you have data on the Cost of Goods Sold (COGS). First, the data is a relatively natural product of your normal accounting systems.3 But if you tell the boss that COGS is $123,000, you’re only providing basic, raw, and virtually useless data.4 Yes, it’s the foundation of all the other value-continuum stages, but, in isolation, it doesn’t tell you or him or anyone else much of anything.

For the COGS number to be meaningful and informative – for you to convert the raw data into useful information – you need to provide that data within a meaningful and relevant context (or sets of contexts). Contexts to consider include: (a) that same data for your company but over time; (b) that data point relative to other financial data points (relative to sales, for a common financial ratio example); (c) that data point relative to operational data (relative to units produced, for another ratio example). And another useful context is comparing your data (usually as one of those financial or operational ratios) with your peers (if such information is available and reliable).

Thus, knowing the piece of data that COGS is $123k for last month becomes much more useful and meaningful and informative if you and the decision makers also know: that COGS was $96,000 last month and $82,000 the month before; that it is 68% of revenue (and a time series for this ratio is super useful as well); and that it equates to $16.79 per unit produced (again, three cheers for another time series opportunity). And if you then know that your competitors have COGS/revenue ratios that range between 45% and 79% and that the median is 59%, you suddenly have rich, rich information for the decision makers to analyze and take action on.

Fortunately, many standard accounting systems provide the time series contexts for key data points and also compute common financial (and sometimes operational) ratios. Your role is (a) to make sure the data is accurate, and (b) that the information from the systems is timely, useful…and actually made available to the decision makers. But why stop there? What about that next value step?

From information to insights

This step involves Finance folks treating the outputs from the accounting systems as more than mere numbers: it involves understanding the data, understanding the information (once the data is put into the most useful contexts) and, most importantly, understanding what the underlying reasons and implications are of what the data/information are telling you. And you can seldom rely on a system doing this for you.5 You, as the Finance person, must look at the numbers and understand them and be able to communicate what they are telling you.

Back to the COGS example – and some possible hypothetical implications of the hypothetical data above:
• Time series information for the COGS/revenue ratio and COGS-per-unit-produced ratio can give you insights into whether you are being more efficient or less efficient in your manufacturing operations over time, and further digging into additional related data & information can help you discern the underlying reasons…and the related opportunities to correct problems or otherwise make improvements. Or deeper analysis may simply reveal some normal lumpiness and non-concerning variability in your performance. (But you won’t know either way unless you look and think and probe.)
• The above-peer COGS/revenue ratio (68% versus the 59% median) means you are underperforming relative to your peers. Again, additional and deeper analysis can help clarify whether it’s that you are underpricing your product (their revenue per unit is higher) or that you are employing more expensive manufacturing inputs or have a less efficient/more time-intensive manufacturing process (your COGS per unit is higher). Again, you have to think and look and ponder and probe, but this extra work can yield powerful, useful insights for your decision makers.

Implications

Given the power of moving into that far righthand part of the information value continuum, all of us in the Finance world should aspire to get there more and more often.6 And decision makers should prod for (and recognize and reward) progress towards making this a habit. When it’s done well – when decision makers have a steady diet of financial insights – it’s a wonderful thing indeed and all parties (and the company) benefit. That’s a good reason for any Finance function to exist. And that’s true in any language.

Eric R. Alexander

March  2024

 

No A.I was employed (or harmed) in the creation of this content.

© 2024, Six Arrows Consulting. All rights reserved.

1 My focus here is internal decision makers, hence on management reporting. But financial information from the Finance function also helps external decision makers (via financial reporting, tax reporting, regulatory reporting).
2 I freely acknowledge this perspective is not original, but I also do not recall where I first heard it articulated. Happy to provide attribution when I know who to attribute to.
3 If your systems don’t provide basic data about your financial activities and results, you have a more fundamental problem…and we should talk.
4 …unless the boss already has at least a vague idea of what the COGS run rate has been, in which case the next topic (context) is already in play…but only in his memory, and not necessarily in your reporting.
5 To get at the underlying reasons for what you see in the data/information, ask “Why?” “Why is my COGS-per-unit increasing?” And you may need to ask “Why?” several times in succession to get to the root cause. To tease out implications as you look at data/information, ask yourself, “So what?”
6 And, for all of it, be careful to focus on what’s important and material and newsworthy in the data/information. You won’t glean useful insights if you get distracted by mere “gee whiz” information (“Hmmm…that’s interesting; not very important, but interesting”) or meaningless ratios calculated with great precision (e.g.: the ratio of sales to, say, the chairman’s waistline, computed both in $$/inch and $$/cm).