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Third Summer Forum of Financial Directors in Russia

Author: Alexander Kurnikov
Published: 2 August 2012


On 5-6 July 2012 Moscow held the Third Summer Forum of Financial Directors. The event is organized semiannually by the company CFO Russia, although in winter it is, of course, called differently - The Winter Forum of Financial Directors. GAAP.RU provided info support for the conference, which is why we were able to be there and listen to presentations of participants. Again, if any of you knows Russian, feel free to access the complete report here. This English version is, however, a bit shorter because not all of the subjects raised during presentations are relevant to our international audience.

Centralization of separate function in business: pluses and minuses

The first report was made by Tatyana Shelyagina, deputy CEO of the real estate agency MIEL. In the beginning she reminded that she represented probably the most important market, meaning the importance of decisions we all make here. Thats the real estate market where all of us sometimes make a decision to buy a house, for example. Business of the company she represents is well diversified: investments, franchising, brokerage, construction business, etc.

Any business not only the one were taking about may be divided into two main parts: production and services. The latter look after the main process for it not to be interrupted. Tatyana Shelyagina admitted that she had worked in three different business directions in her life, but until now she hadnt made her mind what was betted monarchy or democracy. Here she meant ways to do business, of course. Understandably, centralization is more of a monarchy.

Note: in one of our articles (see: we raised this question as well, although indirectly. More specifically, not even us, but Dr. Ichak Adizes who met several presidents of the United States in his lifetime. Each of them he asked what was the hardest thing in presidency, and the answers were very similar: basically, making decisions. In running a company, you need to behave democratically when making decisions, but for their implementation youll need to be a dictator! GAAP-IFRS.COM

So what are the pluses (or minuses) of centralization of business functions? Tatyana Shelyagina was discussing this question in relation to her companys business, making judgments on her work experience. Take technologies, for example: those have become an integral part of our lives, they are everywhere. When a company like MIEL is planning construction of an object, it first of all thinks of constructing supporting infrastructural objects like bridges, telephone lines, internet, etc. those always go first. Okay, but what about telephone databases who should be in charge of servicing them and whether it is possible to do that by democratic principles? It appears that it is not possible because databases are an important source of information which could leak to rivals. If that happens, this will be a strong hit on the companys reputation, the one which cant be allowed, which is why there are very strict rules for operating managers in place. For example, no one is able to copy a database alone even if he or she wants to.

How about centralization of financial functions do we need it or not? When they work in such complicated business as construction, the companys managers try to keep different financial projects separately. There is a slight mess with finances in this sector (in Russia at least) and although this cant be seen as completely normal, in Russia it is somehow logical, so no democracy here again.

To centralize financial functions, one has to decide first:

  • Whats the main goal?
  • What to centralize (i.e., accounting, budgeting, cash flow management, credits, etc.)?
  • How to centralize (i.e., methodology, internal regulations, standardization, single platform, etc.)?
  • Who is in charge of centralization (i.e., financial departments, an insourcing company, cost centers, etc.)?
  • Finally, what results should be expected?

In the construction business in Russia, many violations happen. There are some which no one even heard of in other industries admitted Tatyana Shelyagina. Auditing cold help, but alas, there isnt a big supply of auditors (including internal auditors which could control the process better) on the Russian market at the moment. As a result, centralization is probably even necessary on the market at the moment.

Danila Kotlyarov, financial director of IRC Ltd. Choice of appropriate methods for budgeting

The second report was made by CFO of IRC Ltd. In Russia, the company goes by a longer name Pertopavlovsk - Black Metallurgy. The companys main business is geological exploration and ore mining.

The market today has its own specifics, the main of which, according to Danila Kotlyarov, is uncertainty or volatility, to put it another way. The whole situation has changed dramatically during the last decade: it is the end of the supply epoch and its replacement with the demand epoch. It is the end of the super-cycle - global demand for raw materials which has been caused since the beginning of 2000-es by the Chinas economic uprise. Today it is different: it is now global competition and struggle for financial resources and consumers. Taking those tendencies into account, what will be the main goals for budgeting in the black metallurgy industry then? To answer this question, one has to look at traditional goals first.

  1. Forecasting the future
  2. Controlling expenses
  3. Redistribution of resources
  4. Goal-setting, motivation of employees

Lets look at them in detail.

Goal 1: Forecasting the future. What are the main problems here?

  • Normally a typical forecast horizon is 1 year, and its gets shorter as we move to the end of the period. Its like driving a car with full headlamps: in the beginning, we see the road ahead of us clearly, but as we move closer to the end of the road, we see smaller distances (one quarter, three months, etc.);
  • The other important problem is the conflict of forecasting (what will be) and budgeting (what we want to be)

Goal 2: Controlling expenses. What are the main problems?

  • Budgetary redistribution of expenses: not only ceiling, but floor as well. At the same time, you cant guarantee that expenses provided by the budget are indeed effective;
  • Limited understanding of expenses;
  • Low effectiveness of the plan/actual approach to analysis;
  • Control over expenses once in a year.

Goal 3: Redistribution of resources. Main problems here:

  • Ignoring good, although off-budget expenses, low flexibility. That is, once the budget is complete, it is too late to propose another project, no matter how profitable it could be;
  • The impossibility to plan all business projects for one year ahead.

Goat 4: Goal-setting; motivation of employees. Problems:

  • Focusing on financial indicators at the expense of non-financial ones;
  • Ignoring comparative indicators;
  • Too short forecast horizon makes it inappropriate to analyze long-term development of business.

What are the ways to solve those problems? Again, let us consider those one after another

Forecasting the future:

  • Adoption of the rolling forecast approach (once in a month or a quarter, and done for one year ahead);
  • Redistribution of goal-setting and forecasting functions: goal-setting is done through KPIs, forecasting with rolling forecast approach.

Controlling expenses:

  • Adoption of a practice of continuous control over expenses;
  • Shifting the focus from the plan/actual approach to analysis (which is based mostly on budgetary numbers) to trend-analysis and benchmarking;
  • Implementation of KPIs.

Today the company IRC Ltd. is, so to speak, at the very beginning of the way to develop those indicators told the speaker. Nonetheless, they already have a more adequate attitude to budgeting. For example, there is no such thing as a fixed budget: it may already be approved, but expenses are not fixed. This, however, is not related to production. Anyway, efficiency of how resources are used is estimated continuously at each stage of planning and decision making. KPIs are applied to all major business-processes in the company. Production costs are estimated traditionally with planned indicators.

Redistribution of resources

The solution to the problem is stimulating new ideas concerning development of business. In the IRC Ltd. company, they have no restrictions from the budget. The main idea is that if the investment project is great, it is important to at least inform the governance on it. If there is money for it, maybe it is worthy.

Goal-setting; motivation of employees:

  • The main basis for goal setting is not the annual budget, but the system of KPIs aligned with the companys strategy;
  • KPIs should be developed by the main business blocks: finances, marketing, operating activity.

Conclusions. Appropriate budgeting actually means absence of it. To survive in the unstable world, we need a scenario for a variety of outcomes, which implies that we cant have a fixed budget for just one year ahead. Our actions depend on changing conditions around us. Thus, business efficiency has nothing to do with how correct budgetary numbers are. Neither it is dependent on the plan/actual analysis. We need a more precise forecast for the future the rolling forecast to make decisions right.

Darya Dmitrieva, financial controller of Amur Zoloto Lean Planning: specifics of the approach

Darya Dmitrieva told the audience that she had been into the subject of Lean (there are three directions at all: Lean Production, Lean Accounting and Lean Planning) for about 5 years already. Today we are going to discuss Lean Planning what it is all about.

The model is based on the production principle employed in Toyota: a certain group of researchers once tried to understand high results of the company. They came to the conclusion that production was organized almost without anything in excess and called this Lean Production. The term was then applied to accounting and planning as well.

So what do we mean by Lean Planning? Let us first remember one of the greatest managers of all times Jack Welch, former CEO of General Electric who in his famous book Winning described many important aspects of modern corporate kitchen.

Imagine a bargaining process going between employees and their employers. The influence from the bottom (from the side of employees) is motivated by its own factors, which are conservative financial plans. There are certain results they expect to reach say, 6% (as an increase in profits, for example, but can be anything). However, from the above, there sits their governance which aims at its own indicators, from the point of view of revenues and profits. They dont want simple following the financial plan they want a sharp increase in profits. The final result they want to get is 14%.

Thats only the beginning, though, because after that there commences what Jack Welch calls arm wrestling which leads to the final result of 10%. All parties leave the bargaining process satisfied with the result, but at the same time they all get less than expected. The lower party will have to work more to get 10%, which is more than 6% they initially planned to reach. The upper party gets 10%, which is lower than 14% they initially counted for.

Why does this arm wrestling happen anyway? The reason is in Management by Objectives (MBO), the methodology which implies paying by objectives as well. The solution to this problem is replacement of budgeting with operational planning (monthly rolling forecasts we discussed in the previous presentation GAAP-IFRS.COM). However, in order to switch to operational planning, two conditions should hold:

  • Employees have to believe that they wont be punished for not reaching target goals, and their governance supports their belief, and
  • The governance has to believe that the employees will do their best to reach all the goals, and the employees support its belief.

Practical aspects

What is a budget anyway? First, ask yourself 5 questions to decide whether you need it at all (if you fail to answer the first question positively switch to the second, and so on). 1) Control do you get it with your budget or not? 2) Motivation (from the point of view of KPIs) is it in place? 3) Accountancy do we receive it? 4) Precision is your budget precise at all? 5) Modeling is it possible to model further development of affairs? If answers to all those five questions are negative, then why should we keep such budget at all?

Theres a simple test for quality of any budget. Four simple words: Speed, Flexibility, Simplicity, and Sense.

To put it simple, there are basically two types of budgets, depending on what accounting system we are working with. If we take IFRSs, for example, this system changes everything upside-down because it is external accountancy try not to forget that! We dont need IFRSs because IFRSs principles negatively affect management decisions of a company, says the speaker, Darya Dmitrieva.

What do we need then? Lean accounting - the second type. First of all, it is a quantitative, not qualitative accounting. Analysis here reflects the real nature of your business. The logic is simple: if your quantitative indicators are improving, then most likely this also implies that your financial results are doing better as well (the reverse is not true). Thats not Management by Objectives it is more like Management of Improvements.

Lets now switch to planning to evaluate production from the point of view of efficiency in terms of incurred losses. What types of losses there exist at all?

  1. Excessive processing (of data). Dont think that if you have a very complex and sophisticated processing system in place which is able to process thousands of operations in one second, then it is good. Quite the contrary!
  2. Transportation (of the budgetary process). With more complex systems we spend more time!
  3. Movement (of employees). Here we mean their physical movement around the office building they go with their documents from one office to another, losing their time.
  4. Stockpiling (the documents). How many budgets do we store? Lots of them. Finding the needed one is a hard task. Understanding what you found is even harder
  5. Waiting. One department (for example, the one in charge of accounting) may wait for quite long for the information from another department to finish its work. Thus, we get losses.
  6. Defective goods.

Another important aspect is accounting for yourself. When operational accounting is not related to management accounting, then what planning there may be at all? Aligning operational accounting with management accounting is a vital condition for effective management!

And one more important principle of the Lean theory: the 5S methodology, from the corresponding Japanese words, all starting with S. Thats the methodology used to remove obstacles correctly.

  1. Seiri Identification of the biggest ones
  2. Seiton Sorting, from smaller to bigger. Stabilizing. Straightening out
  3. Seiso Sweeping
  4. Seiketsu Standardizing, developing of standard approaches
  5. Shitsuke Sustaining the practice

Author: Alexander Kurnikov

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