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Framing FP&A

By Karl Kern, Founder/President, Kern Analytics LLC

Framing is how situations are presented to people.  How situations are presented affect the decisions that people make.   Framing has a role in the work of FP&A practitioners.

FP&A practitioners can work through narrow frames.  Narrow frames can appear on income statements through revenues from specific products, executive salaries, and equipment depreciation.  Narrow frames can appear on balance sheets through work in process inventory, interest payable, and common stock.  Narrow frames provide an opportunity for FP&A practitioners to employ a bottom-up approach to their work.  Employing this approach improves the ability to be precise in areas like financial plans.

FP&A practitioners can work through broad frames.  Broad frames can appear on income statements through net income.  Broad frames can appear on balance sheets through total assets, total liabilities, and total equity.  Broad frames provide an opportunity for FP&A practitioners to employ a top-down approach to their work.  Employing this approach improves the ability to think and learn about the value proposition that businesses have.

Finance is about wealth.  Wealth can be measured in a number of ways.  Measuring wealth is based on framing.  Narrow frames like revenues from new customers or products, the average collection period, or the average age of inventory can provide insight into the ability of businesses to create wealth.  Broad frames like net income, return on assets, and return on equity also can provide insight into the ability of businesses to create wealth.  The key for FP&A practitioners is to manage biases, i.e. errors in judgment, when assessing wealth.  One way for FP&A practitioners to manage biases when assessing wealth is to know which method of framing, narrow or broad, is more appropriate to use under certain situations.

FP&A is called upon to stimulate thinking and learning about how organizations earn revenues, incur expenses, and generate cash flows.  Thinking and learning are processes that are subject to errors.  Understanding the concept of framing can help FP&A practitioners minimize the effects of errors in their work.