Finance Mindset

To capture the mindset for effective finance, we extend the principles, promises, and guidelines of the Disciplined Agile^® (DA^™) mindset with philosophies.

To be effective at finance, we embrace these philosophies:

1. Spend the money wisely. Your true goal should be to help your organization invest your revenue well, not just to set and monitor budgets. In other words, finance people must help others to make important decisions, not just “count the beans.”
2. Positively constrain teams with budgets. A budget is the total sum of funds set aside for a given purpose, it is a ceiling on how much you’re willing to spend on an idea. Financial constraints can motivate teams to be more creative and to focus on just the key aspects of a value stream. However, when teams have insufficient funding their ability to react to new opportunities will be greatly diminished.
3. Distinguish between financial reporting and financial budgeting. Financial reporting is often quarterly and annual, as per common legal requirements of publicly traded companies. Financial budgeting, on the other hand, can be on a schedule of your own choosing and does not need to be tied to the calendar.
4. Prefer rolling wave budgeting over annual budgeting. A Disciplined Agile Enterprise (DAE) must be able to respond rapidly to new opportunities and unpredictable events, but the annual budgeting approach was never designed to enable that. In the book Beyond Budgeting Jeremy Hope and Robin Fraser describe how to take a continuous approach to budgeting that enables you to invest revenue, control costs, and ensure you are moving in the right direction more effectively than traditional annual budgeting strategies ever did. The basic idea is to think through current expenditures in detail and future expenditures in less detail, monitoring both opportunities and challenges so that you can flexibly and sensibly direct funds where they are most needed today.
5. Provide financial guidance to others. Your financial staff will regularly help teams and people within your organization to understand the financial implications of their decisions. They will also help to educate people in the fundamentals of finance to enable them to make more informed decisions.
6. Monitor the cash flow of value streams. Finance people will collaborate with value stream leaders to provide guidance into their go-forward strategies. Sometimes a value stream needs to pivot, sell off the business, or simply end it before it goes too far into loss territory. You want to ensure that your incoming revenues are sufficient to fund the enterprise and to identify which of your value streams are healthy “going concerns.”
7. Prefer activity-based accounting over resource-based accounting. With an activity-based approach you allocate the total costs to the value stream that drives those costs (and generates the revenue) so that you have a true picture of the financial benefits provided by the value stream. With resource-based accounting you allocate costs to functional areas such as IT or marketing, often treating them as an overhead instead of as a key part to your value stream(s).
8. Prefer team-based accounting over individual time tracking. Tracking individuals’ time with time tracking software can be very time consuming, and the data collected is usually not accurate. It can be incredibly difficult for team members to track how they spend their day in today’s modern collaborative team environments. If the goal is to separate CapEx from OpEx there are much simpler ways to track this at the team level, such as setting reasonable ratios for how time is being spent, rather than individual timesheets.
9. Automate, automate, automate. As long as someone is typing financial data into a spreadsheet there is room for greater automation. In recent years great strides have been made in real-time financial reporting via business intelligence (BI) technologies feeding automated dashboards. Particularly important is cash-flow trend analysis to enable timely, fact-based discussions.
10. Fund three growth horizons. An important focus of your Finance efforts should be to enable the growth of value streams. Figure 1 depicts the Three Horizon Growth Model, each of which requires its own approach to finance. Horizon 1 requires an operational mindset because the value streams in this horizon are mature and self-funding, requiring financial monitoring and perhaps guidance when important changes are made. Horizon 2 requires an entrepreneurial mindset and the value streams here may require investment funding to enable them to grow into Horizon 1. Value streams in the Horizon 2 state will require robust financial governance to keep them on track and in some cases to cull value streams that do not appear to be working out. Horizon 3 requires a venture capital mindset, requiring seed funding to initiate new value streams.