FP&A Trends Survey 2023: Define the future of FP&A
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By Michael J. Huthwaite, Director of FP&A at Walmart
Financial Business Partnering has been gaining a lot of traction over the last several years. Embedding Finance into business teams to help provide guidance and financial rigour.
When done right, Finance stops taking on the persona of a deal killer and starts to look like a trusted partner. This is the way Financial Business Partnering should be.
This new way of collaborating eliminates the old stage gates approach, which often brought Finance and the business together at minimal points in time; only to end in frustration, scepticism and discontent when projects are red-lighted.
The power of Finance Business Partnering enables Finance to step outside of their traditional Performance Management roles (setting budgets and reviewing actuals) in order to contribute to real value creation initiatives.
Simply put, spending more time working together is mutually beneficial for both Finance and the business.
But what is the best way to structure that relationship? Should Finance operate as an advisor, a consultant or perhaps even an investor?
A trusted advisor is a good place to start. It’s the way most well-intentioned Finance teams operate today.
Entrenching Finance into the business is extremely important because it enables the two parties to really understand each other and begin to decide whether a specific project or initiative is worthwhile.
But embedding Finance into the business also comes at a cost, and the trusted advisor relationship does little to motivate Finance or the business to maximise value creation opportunities. Project goals are often set upfront and conclude when the project timeline and milestones are met. But this type of partnership doesn’t really maximise value as much as it minimises risk and helps keep the project on schedule and within budget.
In some organisations, finance business partnering is treated like a consulting arrangement. Under this arrangement, Finance provides a service to the business, which is then charged back to the business in the form of an hourly rate or allocated as a shared service.
This is a savvier way to structure Financial Business Partnering because it forces the business to realise the value of Finance and encourages the business to want to generate a bigger return in order to achieve a profit.
It also incentivises Finance because they now operate as a Profit Center. Of course, there are varying levels of sophistication that can be applied here, such as fixed-fee arrangements, hourly arrangements and outcome-based payment schemes.
For organisations looking to bring on a consulting partner or contractor to help provide financial expertise, this option can make a lot of sense because the fees associated with internal consulting can often be less expensive, plus the relationships tend to be relatively strong because both parties work for the same company in the end.
The Finance as an investor model is very similar to the VC business model. As expected, Finance looks for opportunities to partner with the business to help drive value for both the business and their Finance function.
Under this relationship, Finance can make early speculative investments and then work with the business to justify the growth story and make follow-on investments when necessary. This approach can often combine Finance Business Partnering and Capital Planning. However, unlike traditional capital budgeting, which can wind up frustrating project owners when investments are denied or deferred, the investor model enables the two parties to work together to try to justify and grow the investment opportunity together. This approach not only elevates the frustration of a quick NO answer, but it also enables the business to de-risk investments while strengthening the best opportunities in their portfolio over time.
In the end, it’s easy to make a case for any one of these three partnership models. But in order to maximise real value creation (i.e. generate sustainable Growth in Free Cash Flow over longer periods of time), organisations should consider stepping up their approach to Finance Business Partnering.
Building capable Finance teams whose skill sets extend beyond the standard Performance Management and traditional Variance Analysis realm is critical for the success of the organisation as a whole.
The article was first published in Unit4 Prevero Blog
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