2024 FP&A Trends Survey. Empowering Decisions with Data: How FP&A Supports Organizations in Uncertainty
Click here to read the report
2024 FP&A Trends Survey. Empowering Decisions with Data: How FP&A Supports Organizations in Uncertainty
Click here to read the report
This article is about a basic understanding of main value creation concepts and how those impact the work of FP&A.
We take a look at value creation from a financial lens – the DuPont analysis framework for calculating return on investment (ROI).
In 1912, the key principle introduced was the idea of the “return on investment” (ROI) as a simple and intuitive measure of performance.
This measure gives a sense of the earning power of the organisation's assets. It is a simple and intuitive way of looking at and analyzing financial statements and also comparing companies in widely different industries. This method changed the corporate finance world forever.
Ultimately, every investor in every business wants, amongst other things, to see some kind of financial return. The expected return can be linked back to the strategies and operational management of the business.
For finance professionals, who are guardians of the financial capital of the business, Value Creation is a key element.
The basic illustration of the framework is given in the image below.
On the left-hand side of the chart, we can see elements that relate fully to the Profit and Loss (P&L) or Income Statement. This is the side that is focused more on the "outcomes":
On the right-hand side, there are elements that relate to the Balance Sheet (BS). This side is more focused on the “resources”:
FP&A / Business Control has been very good at monitoring profit and margin ratios and, increasingly, able to link that back to the underlying business drivers. Traditionally, FP&A has been working with the Business Unit (BU) management to optimize business unit profitability.
More interesting elements are on the Balance Sheet (BS). Traditionally, the BS has been seen as an accounting domain used for correct reporting. Primarily it has been driven by the concept of legal entities which have to be audited and for which statutory reports have to be filed.
However, Corporate FP&A (and even BU FP&A) should be willing to demonstrate more interest, ownership and access to the operational parts of the balance sheet in particularly two areas:
This requires a broader end-to-end process understanding (e.g. order to deliver, invoice to cash, procure to pay, etc.). FP&A should be able to ...
Otherwise, FP&A misses the potential to focus on a critical performance improvement lever.
There are several things that should be considered:
In this article, I hope to have shown that a hundred-years-old framework such as the DuPont framework continues to be relevant today. It is an invaluable tool to help link to a broader Value Creation story for both external consumption as well as internal alignment to strategy and operations.
The article was first published in Unit 4 Prevero Blog
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