Does the commentary in your finance performance reports sound like “sales are down x% and costs are up y%”? If so, then your Finance teams are writing ‘Escalator Commentary’.
Many management accountants become obsessed with the need to write some sort of commentary on most pages of a regular performance report.
In fact, many of them see writing commentary as the value-adding part of their role, thus justifying their title as a ‘business partner’.
But does it really add any value?
When is commentary valuable? When it highlights to the business reader the most significant issues about the data (the WHAT) and, most importantly, when it tells you the root cause of those issues (the WHY).
Better still, when the commentary goes on to recommend an action or decision that needs to be taken (the HOW).
When is commentary of little value? When it goes through a table of numbers line-by-line and pulls out what is up or what is down. Just like an escalator!
If the commentary is written in the same sequence as the line items in the P&L or Balance Sheet it usually means the finance person is writing notes as they go through the report. They’re not stopping to look back through their notes to decide which is the most important issue, and what the business needs to do about it.
The Business Unit Head at one of our clients summed up the issue very well:
“I trust my finance partner. I don’t need to see all the workings out along the way. We ask our kids to do this in exams, but not our finance teams! Tell me what matters and tell me what I should do about it”.
Where do you find the WHY? To add value, Finance needs to be telling the business WHY something is happening, as well as WHAT.
What’s the root cause? Why are the costs over budget? Why are we slipping behind on margin?
But too many Finance teams mistake WHAT for WHY.
“The reason the sales results are behind plan is because division X is behind by 5% and Division Y is behind by 3%.”
This is not a WHY. It’s more detail on the WHAT.
This might seem obvious when I write it in such simple language. But look at your own team’s reports or commentary and see if you can spot the real WHY – the root cause.
So where do you find the WHY in Finance?
The chances are the real root cause is not in the Finance reports. It’s likely you’ll need to look beyond Finance into operational or customer information and join the dots.
A good way to identify the reason WHY is to pick up the ‘phone and ask your network of business contacts what’s gone on in the business this period? Why are we off plan? If you do this before you issue your analysis of the performance report, you can include the WHY as well as the WHAT in your report. How valuable would this be to your business leaders?
The best WHYs are often found outside your company. Is the root cause a competitor action, a market shift, or a consumer change? An external cause is often invaluable insight for your business colleagues.
Escalator commentary. Sadly, I see too many examples of escalator commentary, with too many management accountants believing they are business partners just because they’ve written the escalator commentary.
Get your Finance teams to stop producing the numbers right up to the last minute and look at them! What’s it telling you? And why?
Better still, ask the WHAT-IF question. WHAT IF your main competitor continues to discount prices, or if your costs continue to over-run? What will be the impact on the business for the rest of the year?
It’s often a good idea to close the computer and use good old-fashioned pen and paper to identify the 2 or 3 most valuable issues.
And don’t feel the need to write something on every page of a performance report. Less is almost always more valuable.
So, Ask Yourself:
- Do your Finance teams generate too much ‘Escalator Commentary’ of limited business value?
- Do they routinely ask the WHY question to get to the real root cause? Do they ever look externally to find a reason?
- And do they analyse the WHAT-IF question to understand the likely impact on the future?
If you can answer yes to all 3 questions, this is exactly the sort of forward-looking business insight that your business colleagues want from their Finance teams.
This is one of the basic techniques we teach and practice in our finance partnering training courses, and it’s surprising how popular it is amongst senior and junior finance folk! You can find out more about our training on our Services page, by clicking here.
Adrian Willmott,
Managing Director
e: adrian.willmott@arcusc.com
t: +44 (0) 207 608 5096
