PART 3: FP&A best practices

‍<Read Part 1 >

Support strategy, not accounting

There is a natural division in most mature organizations, strategy teams develop the high-level operational focus for the business, and FP&A teams measure the outcomes of operational execution. Strategy teams undertake point-in-time analysis to support decision-makers in charting the direction of travel for organizations. These board-level decisions are supported by a significant investment of time and resources into the creation of analysis, scenarios, and plans. External data sets are used in analysis alongside internal and historical data. Business cases are explained in detail using this analysis.

However, once a strategic decision is taken and operational activities are underway, the reporting on progress reverts to the FP&A team. Strategic priorities are then measured using the same variations of P&L, balance sheet, cash flow, sales, and cost analysis that is used for the rest of the business. The important context needed to support strategic endeavours is lost when the external datasets can no longer be applied.

This is often due to the constraints in automating the transformation processes needed to present external data with internal finance data, or alternatively, the investment of time needed to do this creates an untenable situation for the FP&A team to manage. IT systems in this scenario present a barrier to the business being able to generate the insight it needs to understand performance when performance cannot simply be judged (effectively) by reviewing the P & L.

• How can a new product’s performance be judged without understanding if it is gaining market share?
• Is our expansion into a new geographical area generating organic results?
• or are we just seeing revenues being driven by discounted initial prices?

Blueprint action 3:
High-performing FP&A teams take on the responsibility for supporting the strategic activities of the business and break out from simply looking after the accounting. They deliberately align themselves with Strategy teams to ensure that they can adjust forecasts, update budgets and make changes to long-range plans to capture future performance, knowing that the reporting requirements are already taken care of. New datasets are integrated quickly into reporting to provide that the external context needed to evaluate performance.

Improve execution

Having tackled the special attention needed from FP&A to support the Strategy team within the business, the final comment to make on becoming a higher-performance financial planning and analysis team is regarding the execution of the core function of the business. Traditionally, FP&A teams have shied away from the operations of the business, sometimes kept at arm’s length due to being perceived as only being interested in cost control. Taking responsibility for posting journals, intercompany re-charging, month-end, quarter-end and year-end are all trusted to finance, but input into the actual operations of the business are generally not areas in which finance teams have much experience.

This should be proactively challenged. Taking the time to rotate finance teams into operational areas of the business fosters greater knowledge of the operational challenges faced by the business. This is invaluable insight for the people responsible for creating the budgets and plans which support these activities. Operational effectiveness in the execution of the core roles of the business should be a subject that FP&A teams are well versed in if they want to achieve high performance. This knowledge allows for faster, more informed decision-making creates opportunities for the increased use of non-financial measures in performance reporting and removes the potential cultural barriers between teams.

Blueprint action 4:
Improving execution is all about understanding the series of actions and activities which create value for the organization (and revenue conversion). FP&A teams often build business models which although wonderfully complex, fundamentally miss key areas of operational input. For example, an FP&A team working in a  business which is selling products or services may have a great model of the business which brings in the costs of production, real estate, debt financing, revenue by type, inflation, and many other variables but may miss the real drivers of performance within the business; how many customers do I have, how many new customers am I contacting, how many customers does each sales person manage, how long does it take to successfully sell and deliver to my customers? High-performing FP&A teams are as focused on these operational measures as they are on net sales, COGS, margin, etc. Only by being able to comment and advise on both (with context and supporting nonfinancial data!) can operational execution be understood and improved.

‍