What is Financial Performance Management? A Complete Guide

Financial Performance Management is a highly challenging and difficult job. It requires vision towards desired objectives, realistic assessment of the current operations, and change with a flexible and responding approach. It also contains voluminous data, many calculations, and reports which need accuracy, timeliness, and relevance. How then can the managers rise to this challenge to make sure their organsation accomplishes the financial goals? The answer is Financial Performance Management (FPM). Keep reading to know more. 

Table of Contents: 

1) What is Financial Performance Management? 

2) What is Financial Performance Management software? 

3) Process of Financial Performance Management 

4) Benefits of Financial Performance Management 

5) Conclusion 

What is Financial Performance Management? 

Financial Performance Management (FPM) is one of the leading-edge Performance Management method used by organisations to measure, analyse, and improve their financial performance. The main role of FPM is to support the managers in a way that they can align planning, forecasting economic results, reporting, and communication of performance with the goals and strategies. Besides, the available resource identification and mitigation of the firm's risks are involved. 

FPM covers a number of Financial Management areas such as budgeting, forecasting, reporting, and planning, among many others, including risk management. FPM also helps in integrating the financial process with relevant technologies and tools, which help in automation, integration, and smooth processes with a view to insight and recommended execution.
 

What is Financial Performance Management software? 

Financial Performance Management software supports and facilitates the FPM process. FPM software provides a platform for managers to access, manage, and analyse financial data from various sources, such as accounting systems, Enterprise Resource Planning (ERP) systems, Customer Relationship Management (CRM) systems, and other operational systems. FPM software also enables managers to create, modify, and share budgets, forecasts, reports, dashboards, and scenarios. FPM software can also perform advanced functions like variance analysis, what-if analysis, predictive analytics, and artificial intelligence (AI). 

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Process of Financial Performance Management 

The FPM process consists of several interrelated and iterative steps. The following are the main steps of the FPM process: 

1) Goal setting and strategy alignment 

The first step of the FPM process is to define and communicate the organisation's financial goals and strategies. These goals and methods should be aligned with the organisation's overall vision, mission, and values. They should all keep in mind the expectations and needs of the stakeholders. 

The goals and strategies should also be SMART. Financial goals and strategies include revenue growth, profitability, market share, customer satisfaction, cost reduction, innovation, and sustainability. 

2) Budgeting and forecasting 

The second step of the FPM process is to plan and estimate the financial outcomes of the organisation based on the goals and strategies. This involves creating and updating budgets and forecasts that reflect the organisation's expected revenues, expenses, cash flows, assets, liabilities, and equity. 

Budgets and projections should be based on realistic assumptions, historical data, and external factors, such as market trends, customer behaviour, and competitor actions. Budgets and forecasts should also be flexible and adaptable to changing conditions and scenarios. 

3) Financial reporting 

The third step of the FPM process is to collect, consolidate, and present the organisation's financial data in a standardised and consistent format. This involves preparing and publishing financial statements like the following: 

a) Balance sheets 

b) Cash flow statements 

c) Income statements 

d) Statements of changes in equity 

Financial reporting also involves creating and distributing financial reports, such as profit and loss reports, budget vs. actual reports, variance reports, and performance reports. These reports provide you with detailed and relevant information on the organisation's financial performance. 

4) Variance analysis 

The fourth step of the FPM process is to compare and explain the differences between the organisation's actual and planned financial outcomes. This involves calculating and analysing the variances, such as revenue, expense, profit, and cash flow, that indicate the deviations from the budget and forecast. Variance analysis also involves identifying and evaluating the causes and effects of the variances, such as volume, price, efficiency, and quality. This explains the reasons and impacts of the deviations. 

5) KPIs 

The fifth step of the FPM process is to measure and monitor the organisation's financial performance using Key Performance Indicators (KPIs). KPIs are quantifiable metrics that reflect the progress and achievement of the organisation's financial goals and strategies. 

KPIs should be aligned with the SMART criteria and the balanced scorecard framework. This would cover four perspectives: economic, customer, internal, and learning and growth. Financial KPIs include Return On Investment (ROI), net profit margin, revenue per employee, and working capital ratio. 

6) Financial planning 

The sixth step of the FPM process is to plan and execute the organisation's financial actions and decisions based on the economic data, analysis, and KPIs. This involves setting and prioritising the organisation's financial objectives, initiatives, and projects. Financial planning also involves allocating and managing the organisation's financial resources, such as capital, cash, and credit, as well as raising funds, investing funds, and controlling costs. 

7) Risk management 

The seventh step of the FPM process is to identify and mitigate the organisation's financial risks and uncertainties. This involves assessing and quantifying the potential threats and opportunities that could affect the organisation's financial performance. Potential threats and opportunities include market volatility, currency fluctuations, interest rate changes, inflation, regulation, and competition. Risk management also involves the following: 

a) Developing and implementing risk response strategies and plans, such as hedging. 

b) Diversifying, transferring. 

c) Avoiding that could reduce or eliminate the negative impacts or increase or exploit the positive effects of the risks. 

8) Performance improvement 

The eighth step of the FPM process is to improve and optimise the organisation's financial performance. This involves finding and applying the best practices and benchmarks that could enhance the financial results and efficiency of the organisation. 

Like Lean Management, Six Sigma, total quality management, and business process reengineering. Performance improvement also involves implementing and evaluating the corrective and preventive actions like root cause analysis and problem-solving. This could resolve or prevent the organisation's financial issues and challenges. 

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9) Compliance 

This step involves adhering to financial regulations and requirements, such as taxation, auditing, reporting, and disclosure. These are imposed by authorities and agencies, such as the government, central banks, securities and exchange commissions, and accounting boards. Compliance also involves verifying and validating the accuracy, completeness, and reliability of the financial data and records that are produced by the organisation, like invoices, receipts, and vouchers. 

10) Resource allocation 

The next step is to allocate and distribute the organisation's financial resources among the various units, departments, and functions. This involves deciding and assigning financial responsibilities and authority. Resource allocation also involves balancing and reconciling the organisation's financial demands and supplies like revenues, expenses, assets, liabilities, and inflows and outflows. 

11) Communication and collaboration 

This involves sharing and exchanging financial information and insights. Communication and collaboration also involve soliciting and providing feedback and suggestions, and recommendations, on the financial performance and improvement of the organisation. 

12) Technology and tools 

Using and leveraging the technology and tools that support and enhance the FPM process makes the final step of Financial Performance Management. This involves selecting and implementing the appropriate software and hardware, like FPM software, ERP systems, CRM systems, accounting systems, and Cloud Computing, that enable and facilitate financial data collection, consolidation, presentation, analysis, and reporting. Technology and tools also involve adopting and utilising advanced features and functions, such as automation, integration, and Artificial Intelligence, as they provide financial insights and recommendations. 

Benefits of Financial Performance Management 

The FPM process offers various benefits to the organisation and its stakeholders. Some of the main benefits are as follows:
 

a) Improved financial performance: FPM helps the organisation achieve its economic goals and strategies by providing clear direction, a realistic plan, and a reliable feedback mechanism. It also allows the organisation to improve its financial results and efficiency by identifying and resolving challenges and applying best practices. 

b) Enhanced decision-making: FPM helps the organisation make better and faster financial decisions by providing accurate, timely, and relevant economic data, analysis, and reports. FPM also helps the organisation make informed and proactive financial decisions by providing insights and recommendations based on predictive analytics and artificial intelligence. 

c) Increased stakeholder satisfaction: This process helps the organisation increase the satisfaction and trust of its stakeholders by delivering consistent and transparent financial performance. FPM also helps the organisation meet and exceed the expectations and needs of its stakeholders by aligning its economic goals and strategies with their interests and values. 

d) Reduced financial risks: FPM helps the organisation reduce and manage its financial risks and uncertainties. It assesses and quantifies potential threats and opportunities. It also develops and implements risk response strategies and plans. It also helps the organisation mitigate the negative impacts by using hedging, diversifying, transferring, and avoiding techniques. 

e) Ensured financial compliance: FPM helps the organisation ensure and demonstrate its compliance with the relevant financial laws. FPM also helps the organisation avoid or minimise financial penalties and sanctions by complying with the financial authorities and agencies. 

Conclusion 

This blog discussed Financial Performance Management (FPM), a process of measuring, analysing, and improving an organisation's financial results. It discussed how FPM helps managers align their goals and strategies with the available resources to identify and mitigate risks. Further, we discussed the benefits it provides to the organisation and its stakeholders. 

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