Five Pillars of Financial Control

This informal CPD article Five Pillars of Financial Control was provided by Sue Courtney, Communications Manager at FISCAL Technologies, a proven leader in Procure-to-Pay (P2P) risk management​ solutions.

In a post-pandemic world facing an horrendous energy crisis, rising inflation, a war in Europe and possible recession, organisations are recognising that, now more than ever, financial resilience is critically important. Accounts Payable, Procure-to-Pay, and Shared Service teams find themselves on the front line; defending against risks that would otherwise damage their working capital, supply chain, and reputation.

Five Pillars of Financial Control

This article uses the following 5-pillars framework to manage and implement financial controls that keep fraud, risk, and compliance issues at bay.

• Leadership and People
• Controls and Protection
• Value Creations
• Supplier Management
• Use of Technology

1st Pillar - Leadership and People

When we look at the five pillars of financial control, it’s clear that the first pillar is always leadership and people. No organisation, business, or group can effectively function without solid leadership. It’s a necessary foundation for smooth operations. Leaders inspire people, they make sure that everybody is where they should be in terms of the vision of the company, and their role within it. It’s vital to have strong leadership. 

Your project, regardless of what you’re trying to do, relies upon the people you choose to do it. Therefore, everything you do with them needs to be done properly. There needs to be an effective use of your time and resources. You need to make sure that you have worked out the team dynamic at the start, because it can’t be left uncertain halfway through.

Setting a Vision

It’s generally agreed that a good company has to set the vision for its team at the beginning. It is essential for leaders to identify who is part of the team:

• What are their strengths and weaknesses?
• What do they bring to the situation?

Team members must also start exploring who they are as a team, what habits they have got into, what their mindset and behaviours are.

• What are we trying to achieve?
• What’s the journey?
• How are we going to get there?”.

Through these exercises, opportunities can emerge for individuals and the team as a whole to successfully thrive.

The Right Hiring 

Build the right team with complementary skills. It’s very tempting when putting a team together to pick a group of forward-thinking, ambitious, bright businesspeople, but those kinds of personalities can invariably clash because they’re all striving for the same thing, and there can only be one or two people at the top. There’s no point hiring a team of people where everybody wants to be the manager, and nobody wants to go and talk to the retailers.

It is also essential to make sure that you establish the team’s dynamic, give everybody a chance to put across their ideal characteristics, and showcase what they can do.

2nd Pillar– Controls and Performance

It is essential to be able to monitor and track how the company is performing. Everybody understands the importance of performance tracking because it’s so ingrained now into business. When it comes to getting the best results for your control and performance systems, it’s important to remember that an overreliance on methods can be a problem. You need to have a diverse set of control measures in place and use system-driven controls rather than manual controls. We have modern technology available, so it makes sense to use it.

It’s also important to remember that you don’t need hundreds of KPIs to gauge how well the company is doing. Less is often more, and being able to track performance is quite simple when you have a few key performance indicators that target the following important areas:

• Process Performance Measures for tracking spending and order purchases
• Business User Performance Measure for tracking training opportunities and areas of improvement
• Team performance measurement which point to how fast internal paperwork such as invoicing is completed.

Above all else, it’s important to have targeted control measures that do a specific thing. You need to match the purpose of what you’re doing to the controls that you develop because this guarantee is the most effective way of doing things. Everything else is often just fluff; it doesn’t contribute meaningfully to the running of the company, just provides people with confusing numbers. Basically ensure you also have the right policies for the job but ensure you give P2P freedom to challenge these policies and enforce them.

Communication

It’s necessary to educate people on how performance and control are prevalent at all levels in a business. It’s not just about the higher-ups. Encourage communication from the bottom up to the top.

System Driven Controls

Finally, we discuss the importance of system driven controls rather than person-to-person driven controls. However, beware of being over-reliant on certain operating systems, financial directors can have an overreliance on three-way marching. then discovered later that actually this allowed a costly items to slip through the gap.

It is therefore essential to take the approach that it’s necessary to have a flexible control system, something which has many different avenues to make sure that nothing gets missed out. The overreliance upon one system is where a lot of businesses tend to fall apart because every system has its failings, and if you don’t have a backup in place to deal with that, you very quickly start to see the problems.

3rd Pillar– Value Creation

Value creation is an important part of successful financial control and an important part of a successful financial control system. Creating value within a company can be one of the hardest things to do because you must look at both external and internal policies. There are many people that believe you can create value externally through your interactions with suppliers or general procurement practices, but there are also equally valid lines of thinking which suggest you can create value internally by stopping unnecessary spending and tightening up the way capital is used. 

Both views are completely valid, and our experts at FISCAL Technologies have presented a rather balanced take on them. There is no right or wrong answer because there’s no right or wrong way to do things; there’s simply what works in the situation. 

Creating value externally is always a good idea, but at the same time, it can also be worth focusing internally, working out where you need to try and tighten up value creation, and then using that as a framework to make sensible decisions. Look at how spending takes place inside the company, and you’ll start to see that maybe things could be improved. It can take a bit of time at first, but it’s worth it to get right in the long run.

Adding Value in Procurement

This approach is grounded in the idea that you can add either value to the initial procurement process or the renegotiation of assets. If you are paying all of your invoices for procurement within the contract terms, then there’s no need for anybody to spend time and resources chasing up these contracts, which helps to create value. Ultimately, this is putting an emphasis on looking at things in a very end-to-end basis, and it’s an approach which really does do well. 

Keen Reporting

Another approach is taking making sure “reporting is over the top” so you know you are going to go in, you know where you’re going to focus, whether that is working capital or cost reduction, and just using data insights to make smart choices. This reporting offers businesses early access to data that can help them track whether or not they’re creating value and serve as a warning system for other things. It’s a very multifaceted approach, but it’s one that has many practical benefits at the same time. It just serves as an additional control; it’s incredibly helpful for business.

Plugging Smaller Gaps

Another belief is that it is necessary to plant the smaller gaps by introducing policies that help to prevent issues. For example, one of FISCAL Technologies customers has implemented travel desks and small order desks, which are places where people can stop by and get help with their day-to-day processes, and by doing this, they have been able to really put a lead on erroneous spending. by building these policies into systems, that’s an area they can always improve in, capital management.

Like a balloon that’s been poked full of holes, there are often tiny gaps where spending gets out of control, which means the value can be created by successfully plugging those gaps and building policies into everyday systems that effectively help to manage the flow of capital. Sometimes, in order to successfully create value, you have to address where a company is bleeding money and preventing false spending and correcting bad habits is often a great way to create value internally, without having to go anywhere else, which helps a lot with financial control because the internal system is so well polished.

4th Pillar – Supplier Management

Supplier management is a pretty normal part of financial control, and a lot of people will pass the buck routinely down to procurement, which isn’t necessarily the best thing to do. So in this section we discuss many views of supplier management. Is it the responsibility of the procurement department? Is it down to another part of the company to make that decision? Is it something everybody should know about?

Not just Procurement jobs?

One viewpoint is when it comes to supplier management, it’s not about procurement. It is very rare that procurement was the one handling the master supplier file. It is usually the responsibility of someone else, like AP, or P2P, or even a separate specialist data management team… AP in particular, knows what’s happening with suppliers, which means that they’re going to be working with them more often. Essentially this gears around the idea of having a proper management system for suppliers, which is fair enough. To just pass the responsibility down to procurement isn’t necessarily the best course of action because they’re not always qualified for the job. It’s often understood that AP has a better understanding of suppliers, what they’re going through, what they are feeling, and they deal with payments, which sometimes makes them the best choice.

The other side of the coin?

It’s a pretty rare situation that our experts at FISCAL Technologies disagree with each other however on of our experts has an entirely different perspective on supplier maintenance. He believes that it should be given to procurement. He does outline his thoughts on this quite well, as follows.

“We used to have supply maintenance in the hands of AP, and up until a couple of years ago, I would have been in complete agreement that it was the best way to do it. However, as time has gone on, it’s become obvious that what we really need to do is put supplier management back in the hands of procurement, give them the necessary tools and resources to handle it, and make it their responsibility on an official basis.“

It’s an interesting perspective, and it basically boils down to this Director’s belief that the assignment of duties is fine, so long as you afford departments the proper tools for doing it. Procurements are more than capable of handling the master supplier file, but they just need the proper systems in place to handle the processes, do the checks, and take care of supplier management in a cohesive, organised way.

The Middle Ground

As the sort of tiebreaker that we have, another of FISCAL’s experts’ approach is unique. She refers to a series of things that happen every time a company starts work with a new supplier, and she outlined that like this:

“When a new supplier was set up, there were three things that we did. Firstly, we would allocate a part of the company to serve as the owner of that supplier, which meant that they handled the reporting and everything else that went with it. Secondly, if we could allocate a category for the spending, we would do that because that helps to keep track of things. Thirdly, we would follow up any contact with a phone call and put them through to the right department and talk to them about every part of the process, to make sure there was nothing left misunderstood”.

It’s clear to see that this middle ground effectively implements the sides of the other two experts but manages to find a unique balance. It employs a distinctive three-step process to assign ownership, categorise the spending, and make sure that everybody understands what is going on.

So which is best?

Essentially, when it comes to supplier management, there are different schools of thought. Some people believe that procurement should never be part of the process, instead of leaving it to something like AP. There are others who think that procurement should be given the resources and adequate dispensation to deal with supplier management. Finally, in the middle, you have the idea that supplier management should be designated to individual departments as necessary. The broad spectrum of different opinions means that there is no right way to do things; it’s just what works for the business at the time.

5th Pillar – Technologies

Technology is a vital part of financial control, but it's how technology is used, implemented, and expanded that allows for proper financial control.

Supplier Portals and P-Cards

When asking our experts at FISCAL for two main technologies that help improve financial control they all were advocates for supplier portals, justifying it as “they could know where they were in the chain, they could see where their documents were, they could see where invoicing was at, and it gave them a lot of control.". They also encourage the use of purchasing cards, citing them as a way to get rebates, which is good for generating a little bit of money, and at the same time, keeping a close eye on financial control and helping to mitigate the risks of unchecked spending.

Automation as an Aid

It’s not exactly a secret that a lot of businesses clamour about automation as a great way of making menial tasks no longer a problem and making businesses much more streamlined, but there is a much more reasoned take on it than simply gushing about the benefits of automation. Automation technologies are very useful as long as they are empowering and driving people who work in finance, giving them the right information at the right time. Technology is a great supporter of businesses, and automation is helpful, but it shouldn’t be the end game.

 Automation is a powerful tool and, as a technology, is incredibly useful, but it can’t replace humans entirely. There needs to be some level of nuance, some need for humans to be able to cast over these processes with a critical eye and look for patterns and figures that maybe automation can’t do. That human element is incredibly important in financial control because automation has no contextual ability. If you program something to be automated, it will just keep doing it, even if it’s not necessarily the right decision. A human can look at the situation and make a judgement call.

Building Targeted Solutions

Finally, we must not forget the importance of building a tailored approach. One of our experts at FISCAL designed unique Accounts Payable solution that worked at 99% efficiency for payments on time because it was designed to follow the entire invoicing system through and then deliver support where necessary.

It is important to build, from the beginning, a proper relationship with a technology provider and design something uniquely tailored to the situation. You can’t just have generic industry technology because they don’t always work. You need to bring something custom made to the equation if you want to really tighten up financial control.

When it comes to technology, the general consensus is that good technology helps to manage risks. That’s primarily the role it plays within financial control - risk management. Automation is an effective tool, but it can’t be something that consumes a business that drives all of its decisions. Finally, there is the need to make sure that you have a tailored system that has been built around the specific side of processes.

It’s good to see that even though technology is a very useful thing, all of our experts have a layer of cynicism in terms of how they look at it. Nobody is professing it to be the ultimate solution to every problem, they are suggesting certain caveats to its use, and this is a good thing. It becomes very tempting to just use technology as a way to enhance a business, but without a practical purpose, without a specific need, there’s just no point in doing so. Instead, we need to focus on designing and using technologies that play a specific role.

We hope this article was helpful. For more information from FISCAL Technologies, please visit their CPD Member Directory page. Alternatively please visit the CPD Industry Hubs for more CPD articles, courses and events relevant to your Continuing Professional Development requirements.