• Written by Azhar Aliyar, Director

A finance team implements a new accounts payable process, expecting to reduce late payment fees, but when they try to measure the impact, they find that the fees have increased, despite their best efforts. This is because the counterfactual, the state of affairs if they had not implemented the new process, is invisible, making it difficult to determine the true effect of the intervention. This is a common problem in measuring the return on investment (ROI) of finance interventions, and it requires a thoughtful approach to measurement.

Leading measures you can actually observe

One way to address this challenge is to focus on leading measures that can be observed, such as the number of invoices processed on time or the percentage of payments made within the discount period. These measures can provide early indication of whether the new process is having the desired effect. By tracking these leading measures, the finance team can identify potential issues before they result in increased late payment fees.

A shift supervisor in the accounts payable department, for example, can check the invoice processing log to see if the new process is resulting in faster payment times. This can help the supervisor identify any bottlenecks or issues with the new process and make adjustments as needed.

Why aggregate outcome metrics move for unrelated reasons

Aggregate outcome metrics, such as total late payment fees, can be influenced by a wide range of factors, making it difficult to determine the impact of a specific intervention. For example, a change in the company's sales volume or a shift in the mix of customers can affect the total late payment fees, even if the accounts payable process remains unchanged. This means that the finance team cannot rely solely on aggregate outcome metrics to measure the ROI of their interventions.

Most people get wrong the idea that aggregate outcome metrics are a reliable way to measure the impact of finance interventions, and they are wrong. These metrics are often too broad and can be influenced by too many factors, making it difficult to isolate the effect of a specific intervention.

The finance data this depends on

The ability to measure the ROI of finance interventions depends on having access to accurate and timely finance data, including the general ledger, budget, open commitments and purchase orders, and receivables and terms. This data provides the foundation for tracking leading measures and analyzing the impact of interventions. By integrating this data into their analysis, the finance team can gain a more complete understanding of the effects of their interventions.

For example, the general ledger provides a detailed record of all financial transactions, while the budget and open commitments and purchase orders provide insight into the company's financial obligations. The receivables and terms data, on the other hand, provides information on the company's payment terms and history, which can be used to identify potential issues with the accounts payable process.

What it changes about variance explanations and budgets

The approach to measuring ROI described here changes the way variance explanations are developed and budgets are created. Traditionally, variance explanations are developed after the period, and budgets are created based on historical data. However, by focusing on leading measures and using finance data to analyze the impact of interventions, the finance team can develop more accurate and timely variance explanations and create budgets that are more closely tied to the company's actual financial performance.

A category manager, for example, can use the finance data to compare the actual performance of different suppliers and identify areas for improvement. This can help the category manager develop more effective budgets and variance explanations, and make better decisions about which suppliers to use.

Measured with: variance to budget, commitment coverage, days sales outstanding

The ROI of finance interventions can be measured using a variety of metrics, including variance to budget, commitment coverage, and days sales outstanding. These metrics provide insight into the company's financial performance and can be used to evaluate the impact of specific interventions. By tracking these metrics, the finance team can identify areas for improvement and make data-driven decisions about where to focus their efforts.

For more information on how to use these metrics to measure ROI, please visit our finance page. If you have any questions or would like to discuss how to apply these concepts to your organization, please contact us.

What this does not do

This approach to measuring ROI does not provide a complete picture of the company's financial performance, and it is not a substitute for traditional financial analysis. It is also not suitable for all types of finance interventions, and it requires a significant amount of data and analysis to be effective. In some cases, other approaches to measuring ROI may be more appropriate, and the finance team should carefully consider their options before selecting a methodology.