Financial planning and analysis (FP&A) is a decision-making platform that includes reporting and analysis, planning and budgeting, forecasting, and financial modeling, and is a big part of the management accounting body of knowledge. This SMA provides the principles of effective FP&A organized into 12 principles and how to prioritize them, and details what the best-run organizations do differently with FP&A. It also discusses the role of technology, the competencies needed, how to get started, and how to “sell” the need for FP&A improvement to top management. Appendix 1 provides survey evidence supporting the 12 principles.
In general, the best-performing organizations take a more rigorous approach to FP&A:
• They have tightly integrated all the components of FP&A.
• They have merged operational and financial planning.
• They track progress of initiatives designed to improve the operational numbers just as
closely as they monitor financial results.
• They hold people accountable for delivering results, including linking pay with
• They translate strategy into action and make sure initiatives are properly resourced
and accounted for in the budget.
• They are agile enough to make course adjustments when they identify the need.
Few processes within the purview of a CFO have so much potential to create—or destroy—business value than FP&A. How a company allocates its resources will impact its success or its failure. Even if an organization has the right strategy, if the budget does not reflect those priorities and properly fund tangible initiatives, the strategy will likely not succeed. Beyond money, if people are not actually spending their time executing the plan, it simply will not happen. Executing the plan requires that people know what the plan is and their role in executing it. While aspects of FP&A may seem routine, such as budgeting or monthly variance reporting, they are all links in the chain of the value creation process.
Unfortunately, many companies are not achieving the full potential of their FP&A activities. A study by American Productivity & Quality Center (APQC) found that just 40% of finance executives from large organizations rated their FP&A as effective. Two-thirds of the executives said that their finance teams are too busy doing basic financial management duties such as periodic forecasting and actual-vs.-budget analysis. KPMG has published a report suggesting that it is the “financial” in financial planning and analysis that reduces the effectiveness of the FP&A function. Too much focus on forecasting and budgeting within a fiscal year with an emphasis on meeting short-term targets takes time away from the “planning and analysis” that is needed to help the company develop and execute its strategy.
This article is an excerpt from the book Performance Dashboards: Measuring, Monitoring, and Managing Your Business by Wayne W. Eckerson, former Director of Research and Services at The Data Warehousing Institute, a worldwide association of data warehousing and business intelligence professionals.
THE CONTEXT FOR PERFORMANCE DASHBOARDS
The Power of Focus
Executives in Training
This summer I found my 11-year-old son, Harry, and his best pal, Jake, kneeling side by side in our driveway, peering intensely at the pavement. As I walked over to inspect this curious sight, I saw little puffs of smoke rising from their huddle. Each had a magnifying glass and was using it to set fire to clumps of dry grass as well as a few unfortunate ants who had wandered into their makeshift science experiment.
In this boyhood rite of passage, Harry and Jake learned an important lesson that escapes the attention of many organizations today: the power of focus. Light rays normally radiate harmlessly in all directions, bouncing off objects in the atmosphere and the earth’s surface. The boys had discovered, however, that if they focused light rays onto a single point using a magnifying glass, they could generate enough energy to burn just about anything and keep themselves entertained for hours!
By the time Harry and Jake enter the business world (if they do), they will probably have forgotten this simple lesson. They will have become steeped in corporate cultures that excel at losing focus and dissipating energy far and wide. Most organizations have multiple business units, divisions, and departments, each with their own products, strategies, initiatives, applications, and systems to support them. A good portion of these activities are redundant at best and conflicting at worst. The organization as a whole spins off in multiple directions at once without a clear strategy. Changes in leadership, mergers, acquisitions, and reorganizations amplify the chaos.
Organizational Magnifying Glass
To rectify this problem, companies need an “organizational magnifying glass”—something that focuses the work of employees so everyone is going in the same direction. Strong leaders do this. However, even the voice of a charismatic executive is sometimes drowned out by organizational inertia.
Strong leaders need more than just the force of their personality and experience to focus an organization. They need an information system that helps them clearly and concisely communicate key strategies and goals to all employees on a personal basis every day. The system should focus workers on tasks and activities that best advance the organization’s strategies and goals. It should measure performance, reward positive contributions, and align efforts so that workers in every group and level of the organization are marching together toward the same destination.
Performance Management System
In short, what organizations really need is a performance dashboard that translates the organization’s strategy into objectives, metrics, initiatives, and tasks customized to each group and individual in the organization. A performance dashboard is really a performance management system. It communicates strategic objectives and enables business people to measure, monitor, and manage the key activities and processes needed to achieve their goals.
“Graphical excellence is the well-designed presentation of interesting data — a matter of substance, of statistics, and of design. Graphical excellence consists of complex ideas communicated with clarity, precision and efficiency. Graphical excellence is that which gives to the viewer the greatest number of ideas in the shortest time with the least ink in the smallest amount space.” − Edward R. Tufte
Financial planning and analysis professionals are increasingly using charts and graphs to visualize data, interact with information, and present it to senior management and the board to tell stories and drive important conversations.
Graphical information is more intuitively absorbed in our minds and can capture large amounts of data in a much more succinct format, allowing FP&A to spot and show trends, patterns and anomalies more effectively. Using graphics, finance professionals can tell better stories, pinpoint action items, and create effective dashboards that allow management to see the business at a glance. These dashboards need to be tailored to audiences — more high-level for the board, more detailed for operations. However, they should all draw on the same set of data, or version of the truth.
FP&A professionals are only beginning to use high-level visualization to interact more effectively with their data, perform their own analyses, validate hypotheses, ask deeper questions, and prepare presentations for senior management. They can do so at increasing rates of speed, which means more time to think and analyze, more dynamic, real-time analysis and reporting, and less time spent collecting data and struggling with creating charts.
New tools are emerging that allow analysts to use data visualization to dig into patterns and identify problem areas quickly, often tied directly to the company’s performance database. Going forward, interactive data tools will allow finance professionals to not only confirm hypotheses, but ask additional questions and continue to interact with the data to explore new areas, thus providing continuous feedback to management.
As the use of data visualization becomes more widely used by finance, which many say is lagging compared to areas like marketing and sales, it will unleash a greater power of analytics and enable professionals to deal with an increasing amount of data.
Introduction: The Trend
Survey shows more finance professionals are looking to data visualization to help solve problems, identify patterns and anomalies, and understand what’s driving their organizational performance.
The trend toward greater use of visualization among FP&A professionals is still growing. “A lot of them are still focused on numbers,” said Craig Schiff, president and CEO of BPM Partners, a vendor-neutral advisory services firm specializing in business performance management (BPM) and business intelligence solutions. However, the data from the 2014 BPM Pulse Survey of finance professionals shows the desire for change is strong. Asked if they require data visualization beyond typical charts or graphs offered in Excel, 40 percent of the finance professionals surveyed responded that they do. “That’s a large and growing number,” Schiff noted.
Link to full article: https://www.bpmpartners.com/wp-content/uploads/2018/07/FPAGuideDataVisualizationvF.pdf
Facing greater market volatility, a fast-changing business environment, and a constant push from senior management to improve the planning process, more FP&A teams are incorporating driver-based modeling into their forecasting methodology. “Technically, the definition [of a driver-based model] is building a model that has any kind of calculation that references some other variable, i.e., a driver,” said Mitch Max, CEO and president of BetterVu.
In the case of FP&A specifically, according to Sholape Kolawole, EPM transformation associate principal at The Hackett Group, “Driver-based modeling is a way to leverage operational metrics that have a mathematical relationship with financial outcomes, particularly revenue or expense items in the P&L or the balance sheet.” Thus, he said, “driver- based planning is the process of using those metrics to drive outcomes. It’s about what moves the needle and identifying the operational/financial relationships.”
According to Pras Chatterjee, senior director of product marketing at SAP for Enterprise Performance Management, the key is to look at the number and metrics and identify what they’re comprised of. “Numbers are not just absolute,” he said. “You’ve got to understand the different variables that comprise the numbers and see how granular you need to go based on those drivers.” Price X quantity is the most basic model. “But you can go deeper than that,” he said. “For example, look at turnover, sales-force attrition, etc.”
For FP&A, the concept brings a multitude of benefits. Not only does it help the group increase the frequency and accuracy of the forecast, but it also engenders closer collaboration with business leadership. After all, while finance must lead the effort, it cannot uncover key drivers all by itself. It needs to work directly with business owners to identify the drivers that have the most impact on financial performance. In addition, driver-based models
give finance the ability to better support management decision-making and provide actionable information. As FP&A professionals seek a more strategic role in the organization, they can add tremendous value by providing critical business-driver data to management with plenty of time to take action to change and improve corporate performance.
“One reason we see an uptick is that companies are dealing with a lot of uncertainty and volatility,” said David Axson, managing director of Accenture’s Strategy, CFO & Enterprise Value practice. “Historically, companies used historic data to trend their financial budgets and forecasts. They used last year’s data to predict next year’s performance. That’s no longer sufficient,” he said. “Companies need to look at activity that’s occurring now to see what’s driving financial performance in the future.”
Ultimately, as more companies move to a rolling forecast, realizing it’s no longer sufficient to look forward only to the end of the year, driver-based models will become more commonplace. Simply looking out 12 months does not give companies enough time to course-correct, as the recent AFP FP&A Guide, “Implementing a Rolling Forecast: Success Factors and Pitfalls,” outlined. A rolling forecast allows FP&A professionals to play a leading role in strategic discussions and communications by providing management with a range of possibilities that are dependent on market conditions or the actions of competitors. The benefits they provide increase lead time for senior management, thus allowing executives to make important decisions on how to allocate key resources in order to drive continued profitability.
What is driver-based modeling?
“Driver-based modeling and planning use operational drivers to predict financial results,” said Philip Peck, vice president of Financial Transformation at consulting firm Peloton. These models are essentially equations that represent mathematical relationships between key operational drivers (e.g., volume, rates, conversion ratios, brand awareness, etc.) and anticipated financial outcomes.
Article: Measuring and Managing Customer Profitability
Author: Gary Cokins
Publication: Strategic Finance, 2015
As companies shift from a product-centric focus to a customer-centric focus, a myth that almost all current customers are profitable needs to be replaced with the truth. Some high demanding customers may indeed be unprofitable! Unfortunately, many companies’ managerial accounting systems aren’t able to report customer profitability information to support analysis for how to rationalize which types of customers to retain, grow, or win back and which types of new customers to acquire. With this shift in attention from products to customers, managers are increasingly seeking granular nonproduct-associated costs to serve customer related information as well as information about intangibles, such as customer loyalty and social media messaging about their company and its competitors. Today in many companies there’s a wide gap between the CFO’s function and the marketing and sales function. That gap needs to be closed!
Activity-based costing (ABC) is the method that will economically and accurately trace the consumption of an organization’s resource expenses (e.g., salaries, supplies) to products and to the types and kinds of channels and customer segments that place varying degrees of workload demand on the company. It should no longer be acceptable not to have a rational system of assigning so-called nontraceable costs to their sources of origin. ABC is that system. Yet many companies still don’t use it.
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