Is Your Association's Finance Function Ready for this
Century?
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I suspect many associations neglect to develop
strong financial management competencies and don't understand
the changing finance function. I'm not suggesting that associations
are failing to provide financial accountability or that they make
poor business decisions. What I am suggesting, however, is that
the bare minimum is being done. This is likely because the finance
function has been neglected for a long time and that awareness
of changes in the finance function is limited. Associations, by
not keeping pace with change in the finance function, may not
be making the best decisions.
Are you using, as an example, Activity Based Costing (ABC) or
financial modeling for new program, service development, pricing
or abandonment decisions?
There are two key tracks in the accounting road. The tracks are
financial and management accounting. The difference must be understood.
Financial Accounting
Financial accounting is the formal process of recording and reporting
what has happened in an organization in financial terms. Financial
accounting information is governed by principles and rules that
are subject to external audit. Financial accounting systems are
put into place to support financial accountability, disclose financial
position through statements, and provide information to support
decision-making and budgetary control.
Management Accounting
Management accounting is concerned with the information needs
of individuals or teams within an organization and develops information
to support and improve future decisions about strategy. Management
accounting focuses on the way financial information is analyzed
and presented. For example, it uses plans, budgets, performance
targets and measurement, reporting and evaluation as control processes.
Management accounting can involve the use of Activity Based Costing
(ABC), whereby an item's cost is compared to its price, ensuring
a reasonable level of cost-effectiveness. It can involve the use
of financial modelling whereby an association can "look into
the future" to see the effect, in financial terms, of pending
decisions through scenario-building.
In the profit sector, strong management accounting activity
is essential to success. This trend has not reached a large number
of associations. Why not? Many respond with, "We don't have
the time, knowledge or the technology." In fact, a profit
organization that does not produce management accounting reports
is in jeopardy. The same could apply to associations. The finance
function in organizations is changing, with most of these changes
occurring in the management accounting area. Association managers
are familiar with financial accounting – they need to learn
more about management accounting.
Management accounting differs from financial accounting. The
latter is concerned with accurately reporting valid historical
financial information and, the former is concerned with the development
and interpretation of information to improve an association's
future strategic position.
Students in CSAE's Association Management Education Program (AME
300) discuss the association managers' responsibilities with respect
to financial and management accounting. A common message coming
from students is that today's association manager needs more timely,
accurate and meaningful financial and other information to assess
today's results and to plan for the future. This need is resulting
in changes to the finance function.
The Changing Finance Function
Although it is commonplace for associations to hire or contract
financial managers, an association's chief staff officer (CSO)
is ultimately responsible for the association's financial health
and management. Therefore, it is the CSO's responsibility to understand
what finance managers do and why, and keep the association up-to-date
with changing requirements in the finance function.
A major change occurring in the finance function is a shift from
transaction processing based activity (i.e., traditional accounting
functions), and control and risk management (i.e., financial management
activities) to a decision support function (i.e., strategic planning
support, cost analysis, performance analysis).
This shift means an association will need to understand the
changing role and acquire the knowledge, skills and capabilities
of the new finance function. The financial manager must:
- understand the association and its financial management matters;
- serve as an advisor and be part of the senior decision-making
team;
- assist with developing strategy and delivering business plans
and accountability;
- engage in analytical, strategic, and value-added oriented
activity; and
- focus on performance enhancement.
Examples of the new responsibilities for finance managers should
include:
- Identifying areas to improve performance such as removing
non-value-added work;
- Identifying the costs and benefits of current processes and
alternative processes to reduce the cost of transaction processing
and eliminating costly rework;
- Conducting benchmarking studies to identify best practices;
- Working towards the development of integrated information
systems and using technology to reduce time, effort cost and
complexity;
- Creating an analytical, measurement and reporting system
to forecast, monitor process productivity, costs and trends
and providing financial advice to support strategic decision-making.
These new responsibilities focus more on results, avoid waste,
strengthen information support and access, replace inefficient
processes, improve the quality of work, and use controls and measurement
of activities in formats similar to the balanced scorecard approach.
Engaging in learning activities in the areas of management accounting
and information technology is paramount for finance managers as
opportunities to convert information to knowledge that will support
decision-making are moving at an unprecedented pace. Realistically,
this may require an investment on the association's part to acquire
part-time support for basic transaction processing to provide
time for the finance manager to develop and participate in new
responsibilities.
Given the shift to the decision support function, the finance
manager should be working with the rest of the management team
to shape direction and ensure that resources are efficiently and
effectively acquired, maintained, and deployed in the best interest
of the association.
Remember, there is a difference between financial and management
accounting reports. As we move into this century, it is critical
for associations to keep pace with new practices and the changing
finance function. If you would like to learn more, an Internet
search will provide current information on the changing finance
function and on financial and management accounting.
This column features innovation and practical solutions applied
to challenges, trends, issue and opportunities for the association
community. Column editor Jim Pealow, MBA, CMA, CAE is a consultant
and the Association Management Education Program Lead Instructor/Coach
for CSAE. He can be reached at jim@amces.com.
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