Making assessments is one part of an FP&A practitioner’s work.  The purpose of assessments is to stimulate learning about the relationship between processes and outcomes.  How can an FP&A practitioner give meaning to assessments? 

One assessment that requires meaning is profitability.  Profitability is an assessment on the ability of organizations to earn income. Giving meaning to this assessment can be accomplished through answers to two questions: why would someone buy what we sell and how do we fulfill these reasons?  The answer to the first question is characteristics that someone expects from what they buy like accessibility, competence, courtesy, durability, and reliability.  The answer to the second question is the responsibilities of resources like people, processes, and technology.  These answers are what give credibility to numbers like sales, cost of goods sold, selling and administrative expenses.  An FP&A practitioner must not focus strictly on numbers, an FP&A practitioner must focus on the stories behind the numbers.

Another assessment that requires meaning is liquidity.  Liquidity is an assessment on the ability of organizations to pay bills when due.  Giving meaning to this assessment can be accomplished through the examples of two companies, Dell and TJX.  Dell serves as an example due to its application of just-in-time production, a management philosophy that views inventory as a liability rather than an asset.  TJX serves as an example due to its commitment to pay suppliers within 30 days. I learned about Dell’s application of just-in-time from case studies in several courses that I took in graduate school and TJX’s commitment to pay suppliers within 30 days from an article that appeared in Businessweek magazine week several years ago. The point I want to make about the use of these examples is this: giving meaning to liquidity assessments is based on words that express what, how, and why people within companies do what they do in regard to cash flows.   

Another assessment that requires meaning is solvency. Solvency is an assessment on the ability of organizations to exist over the long-term.  One can make solvency assessments through ratios like debt/equity and times interest earned however that is not enough.  Giving meaning to solvency assessments should focus on characteristics that add value.  One characteristic is the ability of companies to modify its actions, i.e. flexibility.  Another characteristic is the ability to implement new ways of doing things, i.e. innovation.  Flexibility and innovation are elements that expand on the fundamental characteristic that gives meaning to solvency assessments, the characteristic of continuous improvement. 

Assessments are a vital part in the work of financial analysis.  They are vital because they enhance the ability of people within companies to make better decisions that improve financial health.  In order to improve financial health through better decision making financial analysis must go beyond the provision of financial data by including non-financial data that gives meaning to assessments.