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WHY TO REPORT FINANCIAL DATA

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Seeking strategy in the finance area means turning over rocks that would normally be left alone. While this may seem painful in the short term, the benefit lies in setting a predictable and stable course for the company. The small and emerging business owner sets a dangerous course for the business by not seeking to examine the road ahead but instead allowing the future to unfold on its own. Creating a strong finance organization via sound, all-encompassing strategies will be difficult at times, as old paradigms and comfort zones are challenged.

Because developing a culture of strategy is so crucial, it is incumbent on the small and emerging business owner to establish this type of thinking where it does not exist, while at the same time altering counterstrategic tendencies in the finance function. The greatest enemy in strategizing the finance function is resistance and indifference to forward thinking. Management that does not aggressively seek to be prospective puts all stakeholders at risk. The organization may be in a strategyavoidance mode regarding the finance function and not be aware of it. The following are symptoms of strategy avoidance in the finance area:

- Having a bloated finance organization. A bloated finance organization is people heavy. Mechanizing finance tasks takes time and effort. The highvelocity business environment, however, often denies management the luxury of time. As a result, reliance on quick fixes becomes common. This demand for immediate results too often equates to individuals being called on to perform manual workarounds or odd, nonstandard tasks. This may not be a major issue for small and emerging businesses as finance tasks may be relatively simple and few in number. However, as needs change and tasks become more voluminous and complex, these one-time tasks accumulate, rendering even the best-intentioned finance person ineffectual. Letting recurring tasks accumulate and fall into the hands of finance staff eventually will lead to inefficiencies and gaps in effectiveness as employees change roles or leave the company. The small and emerging business owner must reflect on the last few finance hires. Were they hired to manage a process or perform a task? If the answer is the latter, chances are the finance organization is fraught with task-oriented jobs filled by underemployed people.

- Having exception-oriented management. Another symptom of ineffective, shortsighted finance functions is exception-oriented management. This is the tendency for management to create (in a reactive manner) unique solutions to even the most fundamental and repetitive business issues. Exceptionoriented management involves reinventing the wheel when it is not necessary. While this particular characteristic is born of good intentions and teamwork, the lack of uniform processes puts the finance function in a precarious position when it comes to managing or troubleshooting finance issues. Variables that compound this issue include employee turnover, process enhancement, and the demand for more functionality/output by data customers. Because exceptions to business processes hinder scalability, expanding needs of the organization become difficult or impossible to address.

- Pushing software applications rather than letting needs “pull” them. A problem common to midsize and large companies, this scenario is played out all too often in small and emerging organizations. Although finance should drive the purchase and development of finance-related applications, the rationale for seeking new applications should be rooted in need. Finance people often initiate software purchases on the basis of “Everyone else uses it.” Rather, soft components of the finance function should drive all infrastructure needs in the organization. Analysis paradigms, business/finance models, and key ratios/metrics promulgated by the executive level and codified in the finance strategy will yield certain informational needs. This need for information should dictate the need for hardware and software applications. Purchasing these tools for any other reason may result in underbuying or overbuying for the tasks at hand—two costly scenarios.

- Doing what was done last year. Many finance organizations have reduced the sum total of their process documentation to “Do what was done last year.” As a general starting point for transaction management, closing the books, or analyzing account balances, finance often relies on this methodology in the absence of comprehensive documentation or uniform processes. Excessive reliance on doing the same thing as last year is symptomatic of processes that are incomplete, ineffective, or not thought through. Relying on what was done last year leaves the finance organization ill prepared for a fast-moving business environment. How has the business changed in the last year? How will it change in the future? Are information needs accelerating? Reorganizations and changing business models will require the finance function constantly to rethink its business processes. Strategizing the finance function will provide for appropriate changes to business processes and information systems and yield perspectives that articulate how to accommodate changing information needs.

- Getting used to being slammed. Dealing with an inadequate finance function is bad enough; tolerating its shortcomings day in and day out is unacceptable. Symptomatic of this passive act of negligence is tolerating difficult working conditions brought about by a weak finance function. For instance, requiring finance staff members to clear their weekends or prepare to work late in normal anticipation of the close hints at a broken closing process. Although any given finance/business process (monthly close, budgeting process, or provision analysis) can have extraordinary circumstances, the routine of following through should be just that: routine. The finance function should be geared toward making recurring business processes nonevents. The overall finance strategy must focus on making the processes strong enough to easily handle the normal tasks that define them. The finance strategy also must be poised to adjust these processes as the business changes and needs evolve.

- Being unable to reorganize quickly. When the business changes, how difficult is it to reconfigure the data flow process? Is the right data being gathered? Is the organization living with outdated remnants of the old structure and processes? Change due to new products, new territories, or different management directives should result in a need for changes in how data is gathered and/or reported. Many companies live with outdated data flow schemes simply because reconfiguring systems and processes is too disruptive to the organization. Excessive downtime that may result from adjusting systems can make users depend on the old, incorrect data rather than tolerating temporary information blackouts. Systems and processes should be scalable and agile enough to adapt to changes in the business environment. Finance strategies should take this capacity for adjustment into account and provide for the ability to change the finance function in a timely and effective manner.

- Being unable to point out weaknesses in the finance area. No process or system is bulletproof. With this in mind, the finance strategy should focus on constantly evaluating and reevaluating tasks, processes, and systems. The culture of continuous improvement is essential to ensure that the finance function serves the needs of external and internal users. The absence of an urgency to improve continuously is, more often than not, indicative of the absence of strategy in the finance function. If members of the finance organization are unable or unwilling to identify and improve weak points in the finance function, processes and systems will not change, evolve, and improve. Assessing the finance function and improving it must be a part of the finance strategy.

The case of Microstrategy Inc., a maker of data mining software, brings up some provocative points related to the need to focus on strategizing the finance function.

Microstrategy announced on March 20, 2000, that it would restate revenue and earnings for 1998 and 1999. Officially, the restatement was due to the company’s historic use of aggressive revenue recognition policies that allowed it to recognize revenue on sales contracts up front in the year of sale as opposed to ratably over the life of the contract. The effect of the restatement brought results from earnings of $.15/share (before the restatement) to a loss of $.44/share (after the restatement). The share price dropped nearly 50% immediately after the announcement. Within two hours after the press release, the stock plunged over 122 points, wiping out almost $9 billion in market value. In the end, the share price slid from a high of $300/share to a low of $18/share. President and CEO Michael Saylor noted that the restatement rendered a more accurate depiction of Microstrategy’s business.

The question remains: Why did Microstrategy’s management team wait so long to employ the more appropriate, albeit conservative, methodology? Was it due to poor information systems employed in 1999 and 1998? Could it have been due to poor processes? Were they compelled by auditors or the SEC to make the change? No one knows for sure except Microstrategy’s management. Many laud the management team for coming forward and taking responsibility for the accounting change. However, excusing a one-time mistake causing a restatement is one thing, but systematically employing the wrong accounting methods over a sustained period is another. What is clear is that Microstrategy might have steered clear of this predicament from the outset if it had employed a finance strategy that addressed the decision support system as well as information systems and the processes that comprised them.

Each year thousands of executives face the same challenges as Microstrategy. It’s possible that the aggressive business model that put them in the fore led to Microstrategy’s demise. Although this change at Microstrategy was an accounting change and not operational, the Street was very unforgiving. It would be speculative to say that the company should have seen this coming early on. However, the culture of aggressive growth and rapid expansion that predominates in small and emerging businesses seemed to sweep away any remnant of conservatism, especially as it applied to financial reporting. This restatement came about as a response to a statement of position put out by the accounting profession. Would a forward-looking, strategic culture have weighed a circumstance like this and positioned the organization to avoid such a debacle?