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🪄 Mastering Monthly Financial Reviews: 11 Key Principles

… and the role feedback loops play in the FP&A cycle

This is CFO Secrets. The weekly newsletter for CFOs not UFOs.

5 Minute Read Time

In Today’s Email:

  • 🏁 Rounding off the series on FP&A

  • ☕️ The real story behind the Larry David coffee wars

  • 🪨 Who really owns Blackrock?

THE DEEP DIVE

Closing the FP&A Cycle: The Integral Role of Financial Reviews and Feedback Loops

This is Week 6 of 6 in a series on FP&A.

Imagine heating your house without a thermostat.

Or taking your car for a spin whilst blindfolded.

Impossible, right?

The world runs on feedback loops. The vital cog in a complex system.

A simple feedback loop

As we said at the start of this series; FP&A is a complex system of different processes that work together.

So far we have covered the following processes in that system:

  • Long Term Planning

  • Annual Budget

  • Reforecasts

  • KPIs

  • Incentive Structure

But we have completely ignored the feedback loop that holds that system together.

Our journey through FP&A so far has almost entirely focused on planned performance.

Today we overlay the feedback loop.

The part of a system where the outputs of that system get used as inputs for future operations.

Definition of a Feedback Loop

In the FP&A cycle:

  • System = Financial Performance

  • Inputs = The Budget

  • Outputs = The Actual Financial Performance.

Actual financial performance is reported through the monthly management accounts. (You can find a previous post on management accounts here)

Budgets only exist to drive behavior towards a better actual realized performance. They have no relevance in their own right.

To close the FP&A feedback loop we must convert the results from the management accounts into actions that impact future performance.

We do this is through Monthly Performance Reviews.

Monthly Financial Feedback Loop

I run my world on these reviews.

Each Business Unit will have a Monthly Performance Review.

Each function too (where they have P&L input; procurement, operations, sales, etc)

This is how the CEO and I put tension back into the business. There are another four weeks ahead of us, and we want the gears grinding.

I run these with discipline, and never miss them. The tone at the top is important. You want to ensure that this monthly rigor gets replicated down at each level within team.

A connected web of feedback loops to create a ‘Golden Thread’ through the business.

The tighter this thread, the more control over performance.

Anyway, that’s the theory.

Here are 11 principles for running killer Financial Performance Reviews

1. Use a Monthly Cycle

Why monthly?

This is the shortest period for which you have a robust view of financial performance.

That’s not to say, weekly, daily, hourly, or even real time, KPIs monitoring isn’t important. The opposite. It’s essential. But only for monitoring components of performance, not total financial performance.

Monthly is also a nice rhythm for re-setting tactical actions.

I once worked in a business that run on weekly reviews, and didn’t pay much regard to a monthly rhythm. It was a fast paced business so there was some logic to it. But there was no time for quality conversations about root causes. The action list built up, nothing ever got done. And ultimately, a business that was trying to be more responsive, achieved the opposite. It couldn’t see the forest for the trees …

2. Get the Right Timing.

It’s no good holding the May performance review on 30 June. May is dead news by then.

Perfect timing would be 3-5 days after the management accounts are published. Best practice would see this meeting happen in week 2 after the end of reporting period. Week 3 is more common.

This is why it’s so important to have a fast management accounts close. The faster the close, the tighter the feedback loop.

I like to hold these meetings first thing in the morning, when everyone is sharpest. They typically take 2-3 hours.

3. Attendance is Mandatory

Scheduling them for at least 2 months ahead, so any diary clashes can get resolved.

This is quality time, to be protected. Advance scheduling removes excuses.

I’ve seen people go to extraordinary lengths to avoid financial review meetings. always when performance is bad.

“Hey I was thinking we should postpone this month’s review, as we are flat out working on getting sales back to plan.”

Nice try my friend, no can do.

4. Create Pre-Meeting Tension

You don’t want that monthly review to start cold. The tone should be set before the meeting starts.

There are a few ways of doing this, but I always use the monthly management accounts as a platform.

Once the previous month’s results get published, you should send a clear message to the attendees of the review. E.g. the senior team of each business unit or function to set the tone for the upcoming financial review

This could come from either CFO or CEO.

That could be anything from

a) exasperation at continued poor performance

b) exhilaration at a great month, and questions or concerns about how we keep it going

c) or anything between

You can be pleased, but never ever be satisfied.

Done well, this will set the teams thinking and with an open mind ahead of the review.

5. Get the right materials for the meeting

It is important that these conversations are structured. The structure comes from the discipline in the room, and the meeting materials.

Key points on the materials:

  • A mix of templated format and free form. Financials should have a mandated template. But it’s also helpful to allow management some space to tell the story in their own words

  • Financial information should cover all three financial statements. Laser in on Income Statement and Free Cash Flow performance. The Period and YTD variances to budget on EBIT and FCF should be the 'hero variances'.

  • Good quality bridges are vital. Actual to planned performance, and prior year. Goal here is to make sure the true drivers of variances understood. The root cause of a performance issue is rarely evident from the financial statements alone. It needs drawing out.

  • A good risks and opportunities schedule, will help you keep one eye on a forecast, without getting bogged down.

  • Also cover non-financial performance. Use the KPI approach we discussed two weeks ago.

  • Governance, legal and compliance issues. This is important for getting visibility on anything that brings risk to the business or its directors.

It’s important that the pack is well prepared (responsibility of the BU CFO). There should be zero tolerance for a sloppy pack. A bad pack will destroy the meeting.

Many CEOs / CFOs like these packs ahead of time so they can read before the meeting. This isn’t important for me, but I understand why it suits some. I prefer to have the meeting sooner, and feel that a ‘pre-read window’ widens the feedback loop.

6. Get the Right Attendees

Ensuring the right people are in the room for these reviews is critical.

There are several key roles needed in the meeting:

  • Chair; Normally the CEO. The person who controls the meeting, and the one the room is answerable to. Also plays 'tough but honest' broker to get to the right answer.

  • Agitator; This is often the CFO. Asking difficult questions, and posing challenges. Making sure the meeting never gets too cozy.

  • Performance Owner; This is the person who is the leader of the part of the business being reviewed. i.e. Business Unit or Functional President. They are the one whose head is on the block for performance.

  • Truthmeister; This person is the arbiter of truth in the room. The person with the facts. This is often the CFO of the Business Unit, or the Head of FP&A or similar.

  • Contributors; This is often the senior team of the person ‘Performance Owner’. It’s important to get the right people in the room. And does no harm for the BU exec team to see their boss under a bit of pressure from the CEO.

  • Secretary; Someone needs to capture the actions, and keep the thing on time. It could be any one of the above, but it must be clear who.

In my current role, the CEO and I tend to alternate who is Chair and who is agitator. We have a close relationship, so don’t need to discuss this. We can do so with a moments eye contact. We even reverse roles mid-meeting if necessary. Good cop, bad cop.

7. Get the Right Balance of Challenge and Support

This is the art of managing these meetings.

Sometimes its about joining hands to find the solution. Sometimes it needs some confrontation to clear the air, and surface the issues.

If these end up stale corporate affairs with everyone staring at screens or slides talking monotonously... they are a waste of time.

It’s why the role of ‘agitator’ is so important. The meetings should never feel comfortable or boring.

Theatrics can go a long way too if used sparingly.

Whatever happens in the meeting, everyone should leave the room feeling energized.

8. Be Clear on What the Issues Are

To get the most traction, you need root causes, not surface issues. I see a lot of sloppy thinking that settles for fixing surface issues.

And the surface of the financials won’t give you the answer either.

Imagine you have a business who is beating their revenue target by 20%, but margin is 500 bps lower than budget. You have a margin problem right?

But what if I told you that the extra sales came from a deep discount, that brought sales forward from the next month. And without that they would have missed sales by 10%.

Is that a margin problem, or a straight sales problem? The response would be very different depending on the answer.

Example where the financial statements don’t tell the real story

I gave an example of how to work through ‘complex problem solving’ in a recent post.

And every business has issues. Even if performance is perfect, now and into the foreseeable future. The issue is how do you sustain, or speed up that performance.

Remember… pleased, but never satisfied.

So the actions come in one of two types;

  • Reinforcing actions (do more of this good thing) - Positive feedback loop

  • Corrective actions (change what we are doing) - Negative feedback loop

And this is not as simple as green variances = good, and red variances = bad.

As in the example I gave above, the root cause is often a few layers deep. And considers the relationship between, and drivers of, the variances.

Most accounting and finance pros are not as good at understanding financial root cause as they think. It's one thing to zoom in to root cause the performance issue. But it's another to zoom out again to give it proper context.

Nearly everyone can do one or the other.

You can become special in finance by being able to do both brilliantly.

This skill has been one of the cornerstones of my career journey. We’ll dedicate a whole newsletter series to this in the future.

A hot take

9. Agree the Action Plan

You should find that if the issue is well defined, most of the time the course of action becomes clear.

The action should be well defined, and with a single owner and a delivery date. All actions should be cleared by next meeting.

Avoid big ‘strategic’ ideas. Or long dated actions.

This meeting is about execution and financial performance.

Strategy is important but this is the wrong forum.

Strategic pontification in these monthly reviews... What a great way for an underperforming business to procrastinate!

10. Follow Up Post Meeting

After the meeting the assigned ‘secretary’ should circulate the actions by email to everyone in the meeting.

It’s also a good time for the CEO to respond to that email and reinforce a few key messages.

Leave everyone in no uncertain terms of what needs to be done, and by when.

11. Zero Tolerance on Broken Commitments

Save the fiercest wrath for people who don’t do what they said they would do.

If one person doesn’t play their role, the whole feedback loop disintegrates.

The outputs are not controllable but the inputs are.

And on that note, we come to the end of our 6 week series on FP&A.

6 weeks ago we started at the super strategic Long Range Strategic Planning Process. And today we connected it all the way down to a monthly execution rhythm.

Here are the most critical takeaways from the FP&A series:

  • Use the Long Range Strategic Process to force alignment between The Board, The Exec and Finance. Recap

  • Budgets are not a finance process. They are a business process, and finance are the guardians. Recap

  • Don’t bog the business down with unnecessary forecasting. It isn’t just a time drain, it sends the wrong message on priorities. Recap

  • Profit and Cash generation is downstream from customer and operations success, which is downstream from people. Use KPIs to measure the chain. Recap

  • Detail matters on incentive structure. Any incentive will create unintended consequences, think them through. Recap

  • None of the above matters if there isn’t a robust feedback loop to improve performance vs the plan.

  • You as the CFO are the glue that keeps the process together. Do it well and the rest of your job is 10x easier. Recap

Plenty of you have sent me pictures where you have used my content in your internal slide decks. Or printed and put it on your wall. Keep them coming!!

BOOK CLUB

This week I recommend the first business book I ever read; Liar’s Poker.

In the early 90s a young Secret CFO found a second hand copy of Michael Lewis’ classic in an old book store. I’d never heard of it, but I bought it on the strength of the cover alone:

A hilarious document of the absurdity of banking excess in the 1980s. It totally gripped me.

And whilst it helped me decide I never wanted to work in a bank, it did cement my excitement about a career in finance.

THIS WEEK ON TWITTER

My twitter threads are like my children. I shouldn’t have a favorite, but I do.

And it’s this one …

MEME OF THE WEEK

The sh*tposting king of FinTwit (and LinkedIn) raised the bar this week.

FEEDBACK CORNER

What did you think of this week’s edition?

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A review of last week’s edition:

For life 🤝.

POACHED GREG

It’s time to say goodbye to an old friend. This will be the last Poached Greg.

With Succession complete, and Greg now busy in his role of ‘Gregging’ for the new Waystar CEO, our work is done.

Thank you sweet prince.

Anyway …

That’s all for this week. As always you can find me here on CFO Secrets, Twitter, & LinkedIn.

That’s the end of our FP&A series. Hope you enjoyed it. I’ll be taking a week’s break to write the next series, so see you on July 1 with a brand new topic.

I’ve got two ideas for the next series of newsletters. What would you prefer?

What are you most interested in for the next series?

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Until next time…

Stay Crispy,

The Secret CFO

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