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Clinical & Statistical FP&A

By Karl Kern, Founder/President, Kern Analytics LLC

In his book THINKING, FAST AND SLOW Daniel Kahneman describes two schools of psychology within the study of decision making.  Clinical psychologists advocate the use of methods like heuristics (rules of thumb) and intuition for making decisions.

Statistical psychologists, on the other hand, advocate the use of methods like simple algorithms or formulas for making decisions.  Clinical psychologists believe their methods are better than the methods used by statistical psychologists and vice versa.  The passion that each school of psychology has for its methods led me to examine my work as an FP&A practitioner.

I found myself to be a clinical FP&A practitioner.

Clinical Psyhology 

The methods used in clinical psychology, heuristics and intuition, are used in my work as an FP&A practitioner.  A heuristic that I use when preparing financial plans is when in doubt do not overstate revenues and understate expenses.  A heuristic that I use when conducting financial analysis is to start with a review of current assets and liabilities in order to assess liquidity.  I use intuition when conducting financial analysis by listening to people describe the intent of their actions as well as observing facilities like offices, factories, and warehouses in order to assess the viability of organizations.  I consider heuristics and intuition to have value in my work due to what I learned through situations with not only my employers but also my clients.

After reading how I use methods within clinical psychology for my work in FP&A one may state that I am a clinical FP&A practitioner.  Using heuristics and intuition help me but these methods are not enough to do my job.  I also use methods that are outside the school of clinical psychology.

By using methods outside the school of clinical psychology I found myself to be a statistical FP&A practitioner.

Statistical Psyhology

The methods used in statistical psychology, simple algorithms, and formulas, are used in my work as an FP&A practitioner.  I use these methods primarily for financial planning.  I have simple algorithms to calculate forecasts of year-end balances in accounts like accounts receivable, inventory, and accounts payable.  I use the simple percentage of revenues formulas to calculate expenses like cost of goods sold, selling/general/administrative expenses, as well as research and development.  These methods although simple provide a framework for reasonable estimates within financial plans.
After reading how I use methods within statistical psychology for my work in FP&A one may state that I am a statistical FP&A practitioner.  Like the methods within clinical psychology that I consider helpful, the methods within statistical psychology also are considered helpful.  It is the use of methods within both schools of psychology that help me do my job.

I find myself, therefore, to be a clinical and statistical FP&A practitioner.

Clinical & Statistical FP&A 

FP&A is a learning process that creates insight into what organizations are doing and where they are going.  The key word in this definition is the process.  No process is perfect but the pursuit of creating a perfect process may create an excellent process.  In order to seek excellence in FP&A, a practitioner should not limit oneself to the use of methods to do one’s job.  An FP&A practitioner should have a number of methods to use.  The method that works in one situation may not work in another because the situation is different.  As a result, a word that should describe the effort of FP&A practitioners is flexible.

Remember…satisfaction from outcomes arise from satisfaction from tasks.

Remember…one can think without planning but one cannot plan without thinking.