Today, Financial Planning & Analysis has evolved as a distinct and, arguably, the most important function within a company’s finance organization in which many finance professionals aspire to build careers. Most professionals working in the FP&A discipline do, in fact, have degrees in finance or accounting and previously worked as accountants or auditors. The transition from such backend core finance functions to a highly business focused partnering function is one that requires certain shifts in mind-set as well as skillset. Below is a discussion attempting to highlight some of the key ones.
What Accountants do
The aim of accounting and reporting, simply put, is to capture the activities and transactions of a business in the books and present a picture of the performance and position of the organization. Accountants and controllers busy themselves in ensuring transactions are recorded accurately and entirely in accordance with the regulatory requirements and maintaining controls and processes in the organization. Thus, accountants are basically focused on the details of capturing “what happened”. By performing these duties, they add value to various stakeholders who rely on their reports such as investors, bankers, government authorities, etc.
What FP&A does
FP&A is a much more dynamic function focused on the future. The two broad goals of the function are clear from its name - planning and analysis.
Planning – FP&A partners with business in building budgets and forecasts. This involves analysing business trends and historical performance, working with cross-functional teams across the organization to develop plans for the future which are realistic and ensure optimal performance in terms of the company’s objectives: revenue growth, margin expansion and other strategic goals.
Analysis – FP&A teams are also expected to deliver actionable insights through deep dive analysis of the company’s financial and other data. Thus, they help find reasons for the “why” behind the numbers, that is the story hidden in the enormous data and provide answers on how things can be better. This facilitates more informed strategic and tactical decision making by the top management.
Considering how different the responsibilities and functions of these two disciplines are, accountants need to make certain changes in their mindset and skill sets to enable themselves to transition to FP&A.
1. Backward-looking to forward-oriented
While accounting is focused on accurately capturing the historical events and transactions, FP&A is entirely focused on the future. Whether it is building more accurate and optimal forecasts and budgets or analysing marketing spends data to provide actionable insights into more efficient resource allocation, the focus is on the future.
Since the future, unlike the past, has not already occurred, an FP&A professional must learn to take responsibility to shape it. Through better analysis and insights, FP&A professionals have the power to shape the future differently and in a way that maximises the achievements. Accountants, while adding value in their own way, simply cannot contribute in this manner.
2. Focus on business vs controls and compliance
An accountant needs to first be proficient with accounting standards, regulatory requirements and internal controls. Of course, a fair understanding of business processes and transactions is essential to ensure accurate accounting and reporting. However, in FP&A, that is not enough. It is important to deeply understand the business and its various metrics and drivers. Without this, no value-adding insights can be provided and, in fact, no analysis itself can be conducted. It becomes vital, therefore, to have more meaningful conversations with business teams from Sales and Marketing as well as from across functions such as supply chain and manufacturing. It is not enough to be able to count the beans, but one must understand how the beans are grown and seek ways to grow more!
3. Accuracy vs Estimation
Accounting demands a high level of accuracy, although some areas such as intangible asset valuation would always require a degree of estimation. This is, primarily, due to the fact that the data being worked on is historical and transactions have already occurred. Thus, seeking accuracy is not only desirable but, in fact, possible. For example, if a sale worth $ 50,000 has been made, then it should indeed by recorded at $ 50,000 and nothing else.
However, FP&A, by its very nature cannot be accurate as the future simply cannot be predicted. An FP&A professional must have the capability to build forecasts that are directionally correct as well as different scenarios that allow agility in decision making in response to different circumstances and outcomes. The level of accuracy required and expected in forecasts is also dependent on the context. For example, if sales of a new product launch (with no historical sales data) are estimated to be $ 2 Mn and they actually close at $ 1.9 Mn, this would be deemed in most setups to be an excellent forecast given that it is at a mere 5% deviation.
4. Managing Stakeholders and Influencing Decision making
The stakeholders of accountants are mostly finance professionals such as auditors, tax experts, creditors or regulators, besides the top management. These people understand accounting and finance jargon. For FP&A, the stakeholders are various business teams. It is very critical that an FP&A professional understands their concerns and requirements and is able to communicate to them in their language. There are also no standardized reporting formats as is the case with accountants’ deliverables. The reports and dashboards FP&A delivers should speak to their audience.
Also, in order to be a really value-adding FP&A professional, one must have stellar influencing skills to really influence better decision making and business results. Without this capability, all analysis and dashboards are worthless.
In summary, while FP&A professionals definitely need to know the fundamentals of accounting, they need to proactively work on realigning their mind-sets and developing some critical skills beyond what accounting demands in order to successfully transition from bean counter to strategic business partner.
The article was first published in Unit 4 Prevero Blog