Post-Investment Monitoring: At What Intervals Does Strategic Financial Management Measure Return

In most companies an investment decision is considered complete at the moment approval is given. A budget is set aside, the contract is signed, installation begins and the agenda moves on to the next heading. The result an investment brings to the company, however, emerges not on the approval date but in the periods that follow. From the perspective of Strategic Financial Management, the decision process continues after the investment is brought into operation.

Post-investment monitoring is what gives effect to that continuity. Monitoring is a body of work that tracks how the assumptions used at the approval stage are realised. Volume, price, unit cost, commissioning period and funding conditions appear in the approval file as defined figures. Where the course of these figures is not tracked during the period, the result of the investment is assessed only years later and as a general impression.

The question of monitoring is usually framed in terms of what the return is. In practice there is a question that comes before it: at what intervals and with which set of definitions will return be measured. The result of a capacity investment begins to appear in the first quarter; the result of a digitalisation investment becomes measurable several periods later. This article addresses the place of post-investment monitoring within Strategic Financial Management, the setting of measurement intervals, and the connection of measurement results to the management agenda.

The Place of Post-Investment Monitoring within Strategic Financial Management

Investment approval rests on a set of assumptions. That set covers the volume the investment will produce, the price at which that volume will be sold, the level at which unit cost will arise, the period within which installation will be completed and the conditions under which funding will be provided. From the perspective of Strategic Financial Management, monitoring ties each item of this set to a defined tracking structure. The realised figure for each assumption is recorded, the variance is reported, and the reason for the variance is documented.

The place of post-investment monitoring within Strategic Financial Management is also linked to resource allocation decisions. The resource a company can allocate in a given period is limited, and which investment that resource goes to is a question of sequencing. The measurement results of ongoing investments provide the information used in updating that sequence. Where results are not tracked, resource allocation decisions continue to be made on assumptions prepared at the approval stage.

The first condition of monitoring is that the approval file is retained. Where the assumptions on which an investment decision rested are not preserved in writing, the basis for measurement disappears in later periods. Among the elements useful to hold in the file are volume and price assumptions, the items making up the investment amount, the commissioning schedule, the funding structure and the method used in the return calculation. When these elements are kept together, monitoring ceases to be an assessment resting on memory.

The second condition is that the definition of measurement is made at the outset. The account from which the investment's revenue will be read, the cost attributed to the investment and the measure by which shared expenses will be allocated are all determined in advance. Where the revenue of a new production line is tracked within an existing product group, the investment's own result becomes invisible. For this reason, opening a tracking field for the investment within the recording structure forms the technical basis of monitoring. The same approach applies on the cost side; tracking separately the energy, maintenance and personnel expenses that rise with the investment provides the basis for the unit cost calculation.

The third condition is that responsibility is defined. Identifying the unit proposing the investment and the unit carrying out the monitoring keeps measurement regular. Within Strategic Financial Management this responsibility is often assigned to the finance unit; it is preferred that the relevant operating unit also takes part as the party reporting operational indicators. Defining responsibility by role rather than by name allows monitoring to continue through changes in personnel.

The fourth condition is that monitoring is tied to the company's existing planning structure. Where investment monitoring is run as a separate exercise, it may fall outside budgeting and periodic reporting processes. Once the same work is defined as a heading within budget revisions and period reports, measurement becomes a repeating practice on its own. A monitoring structure placed within planning and management processes also removes the need to establish an additional structure.

The fifth condition is that the scope of monitoring is set according to investment size. Tying every item of expenditure to a separate monitoring file does not create a workable structure in practice. Full-scope monitoring can be defined for investments above a certain amount, and tracking through a limited number of indicators for investments below it. Setting the threshold amount according to the company's scale and annual investment budget keeps the monitoring structure sustainable.

A by-product of monitoring is the information it produces about the investment decision process itself. Once the realisation of the volume and cost assumptions used in approval files is recorded across periods, the direction in which each type of assumption takes shape becomes visible. This information can feed directly into the way later investment files are prepared.

The funding side of the investment is also included within the scope of monitoring. The maturity, repayment plan and cost of the credit used are addressed in the same statement as the cash the investment produces. The period between the date the investment begins to generate cash and the date repayment begins may give rise to an additional funding requirement within the period. Having calculated this requirement at the approval stage can prevent an unanticipated search for resources during implementation.

How Strategic Financial Management Sets Measurement Intervals

The measurement interval is defined according to the nature of the investment and the stage it has reached. In Strategic Financial Management practice, intervals are generally established in three layers: expenditure and cash tracking, tracking of operational indicators, and return assessment. Each layer has its own frequency and its own audience.

The first layer runs monthly. At this stage the elements tracked are the course of investment expenditure within the approved amount, the progress of the schedule and the alignment of cash outflows with the plan. Since return has not yet arisen during installation, the subject of measurement is expenditure discipline. Monthly tracking allows delays in the schedule and variances in amounts to be seen at an early stage. The cost equivalent of a delay identified at this stage can be reflected in the cash plan of the following periods.

The second layer runs quarterly and begins once the investment is brought into operation. At this stage the elements tracked are the level of capacity utilisation, the volume produced and sold, unit cost and indicators relating to product or service quality. A quarterly interval allows operational indicators to reach a degree of maturity. In the first periods after commissioning, fluctuation in indicators is regarded as ordinary; the purpose of measurement in this period is therefore to follow the course rather than to assess the result.

The third layer runs annually and covers the return calculation. At this stage the cash produced by the investment, the investment amount and the funding cost are addressed together, and the point reached against the payback definition set at approval is established. The annual assessment forms the basis for decisions on continuing the investment, widening its scope or reviewing its structure.

The commissioning period is defined as a separate heading in setting measurement intervals. This period covers the time between the date the investment is physically completed and the date it reaches the anticipated capacity. Its length depends on the nature of the investment; the learning period of personnel on production lines and the adjustment period of users in system investments fall within it. Defining the commissioning period at the approval stage allows the results arising during that time to be kept outside the return assessment.

The source of measurement is also part of the interval decision. Indicators produced from accounting records arise with a certain delay, since they depend on the period close. Indicators produced from production and operating systems can be tracked on a daily basis. For this reason it is common practice to base the monthly layer on indicators of operational origin and the quarterly and annual layers on indicators of accounting origin. Defining the choice of source at the outset prevents the same indicator appearing with different figures in different reports.

The nature of the investment determines the content of the intervals. In capacity investments, volume and capacity utilisation become measurable at an early stage. In efficiency investments, unit cost and waste rates carry meaning once a certain production volume has arisen. In digitalisation and system investments, breadth of use and process durations are tracked first, with the financial equivalent arising in later periods. In market and brand investments, the maturing period of measurement may extend across several periods depending on its nature.

Linking the layers to one another is also part of the measurement structure. A delay identified in monthly tracking affects the measurement date of quarterly operational indicators; the course of quarterly indicators in turn updates the assumptions of the annual return calculation. Defining this connection prevents the three layers from being run as three independent reports and allows them to be addressed as a single whole on the Strategic Financial Management agenda.

The elements useful to define at the outset within the measurement framework can generally be listed as follows:

→ The list of indicators to be measured and the items from which each indicator will be produced,

→ The measurement frequency of each indicator and the date of the first measurement,

→ The length of the commissioning period and which indicators will be held outside assessment during it,

→ The source from which the indicator will be produced: accounting records, the production system or management reports,

→ The amount or rate of variance beyond which a matter will be taken to the management agenda,

The company's reporting calendar is also taken into account in setting measurement intervals. Running investment monitoring on the same calendar as period reports prevents the same data being produced in two separate exercises. The date the monthly close is completed, the timing of quarterly management meetings and the annual budget preparation period are the fixed points of that calendar. Tying measurement dates to these points can prevent monitoring from being seen as an additional workload and keeps results available at the meetings where decisions are taken.

Holding the set of definitions constant across periods allows measurement results to form a series. Changing an indicator definition within the period affects the traceability of the data accumulated to that point. In business models where seasonal fluctuation is pronounced, it is preferred that the measurement calendar covers in-season and off-season periods separately; the effect of seasonal fluctuation is therefore an element taken into account in setting measurement intervals.

Connecting Measurement Results to the Strategic Financial Management Agenda

The value of measurement emerges in the agenda the results enter. Within Strategic Financial Management this connection is established through three elements: identifying the audience, setting thresholds and listing decision options in advance.

Identifying the audience determines whose agenda the result of each layer enters. Monthly expenditure tracking is generally the agenda of the project owner and the finance unit. Quarterly operational indicators are addressed as a heading of senior management meetings. The annual return assessment enters the agenda of the body that took the investment decision; depending on the size of the investment, that body may be the board. Determining the audience of each layer at the outset also defines how results are reported.

Setting thresholds clarifies which variance is taken to the agenda. Once a certain amount or rate is defined as a threshold for expenditure, schedule and volume, ordinary fluctuation remains within routine reporting, while variances beyond the threshold form a separate agenda item. Once this distinction is made, the management agenda is not overwhelmed by detail and the matters requiring attention become visible.

Listing decision options in advance allows the measurement result to be tied to a decision. These options are generally continuing the investment within its current scope, widening the scope, extending the schedule, allocating additional resources or reviewing the structure of the investment. Defining the options in advance sets the frame of discussion when a variance appears and makes decision times predictable.

The way results are reported is also part of reaching the agenda. Presenting the output of investment monitoring in a short and defined format allows results to find a place on the meeting agenda. When the assumption at approval, the realised figure, the variance and the reason for the variance appear on the same page, the assessment can be made at a single glance. Holding the format constant across periods also makes it easier to read alongside the output of earlier periods.

Measurement results also serve later decisions. Keeping realised figures in the same statement as the assumptions made at approval provides information about the company's practice in producing assumptions. Where volume assumptions show a consistent variance in a particular direction, this can form the basis for redefining assumption ranges in later investment files. In this respect, post-investment monitoring offers a source of information on the company's decision quality beyond the tracking of a single investment.

Measurement results also have a function towards audiences outside the company. In credit and funding discussions, the progress of an investment, the alignment of expenditure with the plan and the commissioning schedule are among the matters raised. In companies where a monitoring structure is in place, this information can be presented in a ready format. The same information also forms a basis in partnership and investor discussions, showing the company's practice in investment management.

In group structures the scope of monitoring calls for a separate definition. Where the investment sits in one company, the funding in another and the sales in a third, the result of the investment does not appear in a single statement. In that case establishing measurement at group level allows the result produced by the investment to be assessed in full. The subject of a consolidated view in group companies is therefore addressed as part of the scope decision in investment monitoring.

Once this structure is established, post-investment monitoring ceases to be a reporting obligation. Carrying out measurement at defined intervals, tying results to a specific agenda and listing decision options in advance turn the implementation period of an investment into a managed process. In this respect Strategic Financial Management is not confined to the moment a decision is taken; it also covers the periods in which the result of that decision is tracked.

At NT Finans Partners, we support companies in establishing post-investment monitoring structures, defining measurement indicators and intervals, and connecting results to the management agenda. You are welcome to contact us to establish a working structure suited to the monitoring of your investments.