According to recent findings by CFO Magazine, Chief Financial Officers are increasingly disappointed with the return on investment received from their financial planning & analysis (FP&A) function.   This is no surprise.  Companies that don’t get the most from their FP&A functions tend to focus meticulously on accounting data, its presentation, and what the numbers mean.  While data accuracy is critical to successful data-driven analytics, HOW that information is used is what differentiates an exceptional return on FP&A investment from a modest one.

When companies put greater weight on what the numbers mean, they often rely more heavily on financial reporting and perceive FP&A as a ‘nice to have’.  But it’s quite the contrary.  FP&A should be used to assist company leadership in problem-solving, risk management, and growth planning including the following:

• Anticipate forthcoming decisions
• Evaluate “what-if” scenarios and contingencies
• Contrast new insights with conventional wisdom

The reasons leadership doesn’t use FP&A to its full potential (or at all) is three-fold:

• A lack of trust in data
• A poor understanding of how to interpret and use financial information
• A culture of pervasive, gut-instinct decision-making

Lack of Trust

An overwhelming number of decision-makers interpret data incorrectly because of bad information.  The adage of garbage in, garbage out rings true here and leads to leadership getting continuously burned.  The fault often lies with inaccurate, untimely, or irrelevant financial reporting stemming from poor systems and unqualified personnel.

If the rubbish output becomes a chronic issue, leadership will adapt to making decisions without data – a logical, but dangerous response.  If and when the company realizes success, over time, leadership may begin to rationalize:  “We’ve gotten this far without access to good data, so we must be doing something right.”  

Poor Understanding of How to Interpret and Use Financial Information

Most owners tend not to come from deep financial backgrounds but possess enough knowledge to understand financial health and what’s going on in their businesses.  But there’s a major difference between having an objective understanding of the finances and creatively knowing how to use the information in making future decisions.   Often it isn’t that leadership doesn’t see a need for FP&A; they have a poor understanding of how to interpret and use financial information and therefore don’t know how to build a function to support it.

Pervasive Gut-Instinct Decision-Making

Business builders can be a confident bunch.  When a business grows and profitability increases, it gives decision-makers the impression they’re on the right track.  Echoing the above, they explain: “We’ve gotten this far, so we must be doing something right.”  There is a tendency to be self-assured, often deceptively, in their abilities to interpret figures and make smart decisions.  Who needs FP&A when gut-instinct has proved effective?

The combination of a lack of trust in data, poor understanding of how to interpret and use financial information, and over-confidence gained from prior wins results in misuse of available information and poor decision-making.

Truth and Consequences

Historical achievements are not always a signal of future success.  Accomplishments of the past may give rise to risks and competitive interference never previously seen.  A ‘shoot-from-the-hip’ mentality will eventually lead to disastrous consequences – some recoverable, some not.  However, intuition, when combined with financial intelligence and analysis, lowers risk exposure and gives rise to better decisions.  FP&A is not meant to replace the experience and instinctual nature of leadership; it’s meant to complement it. 

First, the CFO, Finance VP, or Controller professional must build out the enterprise resource planning (ERP) system or financial platforms to ensure information is timely and accurate.  Those responsible for generating the numbers should not only understand what they are gathering and reporting, but why they are doing it and how it will be used for making important decisions.  This may introduce a cultural shift that should be reinforced by training, coaching, and demonstration of its importance.  Without trust in the information, leaders won’t use it and will instead rely on their intuition.  

Second, instead of relying extensively on objective financial reporting, the business must adopt a more subjective, forward-looking mindset.  It is a move from being reactive to proactive.  FP&A should readily be able to provide an all-inclusive view of the business and where it might go.  Analyses of near-term and future decisions should be conducted with ‘what-if’ outcomes reflecting alternatives and uncertainties.  Evaluation of these scenarios should be considered mandatory, not just a ‘nice-to-have’.  Outputs generated from FP&A will assist in more credible negotiations and discussions with lenders, venders, customers, and other stakeholders. 

Making Educated Decisions

Business leaders should beware of overzealousness and believing what got them here will get them there.  Complacency, aimless strategy, and poor decisions can all lead to missed opportunities, stagnation, or distress.  We’ve witnessed in countless instances the damage caused by a lack of foresight and failure to react to changing circumstances.   A strong FP&A function emboldens leadership to make educated decisions rooted in genuine information well in advance.   In its absence, decision-makers place greater faith on back-of-the-envelope calculations and gut instinct.  No doubt, the shift from reactive to proactive thinking takes courage and investment, but it supports the businesses’ ability to be nimble and avert future pitfalls.