This week we welcome back FP&A expert Anders Liu-Lindberg to the Jedox blog. In this piece, he defines value creation in the context of business partnering and gives answers on how to measure the value of the practice.
Any business partner initiative should start by answering the simple questions: Why should we invest in business partnering? Why would you want a business partner at the table when critical business decisions are made?
To us the answer is simple. Good business partners enable higher shareholder value creation by improving the quality of business decisions and ensuring that decisions lead to action. The “superpower” of business partners is that we understand how various business decisions impact value creation. Other functions will tend to pursue other goals that might not necessarily maximize return to shareholders. Thus, by creating insight and constructively challenging financial consequences, we can improve the quality of business decisions.
The ultimate purpose of any business partner should, therefore, be to improve the valuation creation in a company.
Let’s agree on a definition of value creation
Now, what is value creation? Many people talk about it, but few actually bother to define exactly what value creation is. Many equate value creation with a better bottom-line, however, as finance professionals, we know that balance sheet, cash flow, and risk matters just as much as the bottom-line. That’s also why our definition of value creation is wider than most use. We’ve outlined it in full detail in below value driver tree.
As you can see there are many components of value creation but in simplified terms, we defined it as the “discounted cash flows to equity owners”. We then specify this as ten distinct value drivers.
- Growth in turnover
- Growth in margins
- Net working capital
- Fixed assets
- Net interest rate
- Net interest-bearing debt
- Operating risk
- Liquidity risk
- Financial risk
Each of these value drivers exists in all companies although their further breakdown might look different as well as different teams could be working with only some of the value drivers.
As a business partner, you create value, if you can help move the needle on any of these 10 value drivers. You should constantly ask yourself: Is what I am working on helping to improve a value driver. If not, you are likely not spending your time on the right tasks.
How do you know if you are creating value today?
Measuring the impact of business partnering is seen by many as challenging, as you mainly create an impact in collaboration with the others.
In simple terms, there are three ways in which you can document your impact:
- Business results are improving
- Business stakeholders believe that you’ve contributed to the improved results
- By solving specific problems or delivering specific insights, you’ve documented behavioural and financial change for the better
Good business partners consistently track and try to improve all three parameters.
A global pharma company took it one step further and have implemented a value log to track the positive impact contribution of Finance. The annual target: USDm 150. The purpose of the log is not “to claim success”, but to drive behaviour, where all finance employees actively are conscious about, how they contribute to the value creation of the company.
How much impact have you created in the last year?
Looking back at the past year:
- Did you take part in qualifying and likely improving any decisions?
- Were you invited from the start or only asked to validate decisions that had already been taken?
- What have your stakeholders said about you?
Creating an impact is the alfa and omega in business partnering so we hope you’re well underway on your journey. If not, now is the time to get started. Learn more about business partnering and how to unlock the future of FP&A and drive the right strategic choices in the company with the eBook by BPI and Anders Liu-Lindberg here.