Kedar works as Manager - Financial Planning & Analysis at Godrej Consumer Products Limited, India's largest homegrown consumer products company. He has previously worked in various finance roles at Colgate-Palmolive and EY. He is an Indian Chartered Accountant, has cleared all levels of the CFA course and has an Advanced Diploma in Management Accounting from the CIMA. He has a keen interest in the future of finance as a function and analytics and loves to write.
Every large organization in the world today, from Apple to P&G and from Ford to Goldman Sachs has a dedicated Financial Planning & Analysis team with bespectacled finance professionals claiming to be “more than mere accountants” or even “value-adding business partners”. What is FP&A and why has it become arguably the most important function in a company’s finance organization?
While Investment bankers may scoff at any acronym that ends with “&A” other than their all-too-glamorous “M&A”, the FP&A buzz has surely caught on within young finance students and professionals. FP&A Heads are being looked at as the CFO’s right hand and in many instances, their potential successors. What is it that FP&A professionals really do? Let’s try to demystify the buzz.
The work profile of FP&A Professionals can be divided into two broad components clearly indicated by the name – Planning & Analysis.
1. Financial Planning:
2. Financial Analysis:
An ever-increasing amount of analysis and insightful inputs are expected out of FP&A teams today. Let me categorize this broad analysis function into three heads –
a) Actual Performance vs Budget / Past Performance:
b) Real-time ad hoc analysis:
c) Other Value-adding analytics:
In conclusion, I would say, as businesses increasingly build FP&A capabilities and look to them for value-adding inputs, finance professionals too need to adapt to the new reality and move past the bean counting days to find out how the beans are grown and seeking ways to grow more! Only then will we be able to become true strategic business partners!
In February 2020, the Dubai FP&A Board gathered for the 7th time to discuss the subject of "Building Winning Financial Planning and Analysis (FP&A) Teams". Lukas Herbert, FP&A Director at Takeda Pharmaceuticals, facilitated the meeting.
“There is a magic in graphs. The profile of a curve reveals in a flash a whole situation — the life history of an epidemic, a panic, or an era of prosperity. The curve informs the mind, awakens the imagination, and convinces.”
― Henry D. Hubbard.
“The greatest value of a picture is when it forces us to notice what we never expected to see.”
– John Tukey.
Today’s world is characterized by information overload and attention deficit. The amount of data being created, processed, and hence available is exploding. More data was created in the last 2 years than was created since the beginning of humankind.
We wake up to see multiple notifications on our smartphones, we scroll through our Facebook and Instagram feeds through the day, we keep getting alerts from the various apps we have subscribed to and then of course there are the infinite emails we receive every day. There is no wonder that a consumer’s attention span is now less than before.
The combined effect of data explosion and reducing attention spans is that the window of opportunity one has to communicate a message with a stakeholder – be it a consumer, a business leader or even a friend is shorter. Especially when dealing with business leaders who sit through back-to-back meetings all day, it is vital to be able to get a message across in the most effective and efficient manner possible.
As FP&A professionals, our job is to analyse financial, as well as, increasingly, non-financial data to identify the story hidden in the data, the “why” behind the numbers, and provide actionable insights to business leaders to influence better decision making.
The quantum of data available with FP&A teams is ever increasing and becoming more and more difficult to analyse using traditional tools and methods. The communication of the story or insights to top management or decision makers is even more challenging given that they are subjected to information overload leading to reduced attention spans.
Data visualization is a key enabler for FP&A teams in handling increasing volumes of data and effectively communicating insights to stakeholders.
Data visualization is the presentation of data using visual objects such as charts, pictures, graphs or maps. The goal of data visualization is to communicate a message more clearly and efficiently to the audience.
The concept of using pictorial representation to communicate important findings has existed for centuries. However, the advancement of technology has both increased the sheer quantum of data available but also delivered the capabilities to process and analyse the data.
While there is a good awareness of data visualization techniques and various software available from a number of service providers, it is vital for FP&A teams to keep the following in mind to truly harness the power of data visualization:
1. Prioritize simplification and be purposeful in analytics
FP&A teams deal with a large quantum of data regularly and it is easy to complicate a business problem as well as confuse the audience. In order to truly move towards data visualization techniques, an FP&A professional should make simplification in both his analysis as well as communication a top priority. Without this clear focus on simplification, one tends to stick to traditional means of analysis, in spite of voluminous data. Similarly, ensuring purposefulness in analytics will guide an FP&A professional towards visualization techniques since the purpose of any analytics is in its effective communication to influence decisions.
2. Understand the Stakeholder
Any message can be communicated effectively by understanding the target audience better. Whether to use data visualization methods and to what extent needs to be determined accordingly. For example, most CFOs would be comfortable with data in numeric form rather than visual. However, for stakeholders from non-finance functions, a graphical representation would be more comfortable and easier to understand. It is important to not project one’s own level of comfort with data or biases onto the recipient but instead understand his preferences to communicate a message better.
3. Understand the Content and Message
While data visualization is a collection of various visual objects, choosing the right one is critical. This requires a perfect understanding of the content and the message sought to be communicated. For example, a scatter plot would be suitable if the aim is to understand the distribution of data and identify outliers, a pie chart or stacked bar would be more suitable for analysing the composition of sales in a region, and an area chart would be perfect for showing part-to-whole relations like showing individual products’ contributions to the total sales for a year.
4. Leverage the power of colour
We know that the human brain is conditioned to respond to particular colours in a particular way. It is important to pick the right colours and colour scheme to drive home a message even more effectively. For example, a sequential colour scheme (e.g., shades ranging from white to pink to red) should be used to communicate a progression while a diverging colour scheme (e.g., red and blue) should be used to communicate a contrast.
5. Real-time Dashboards
Today, data visualization is no longer about static presentations. Business leaders are looking for real-time dashboards that get updated every minute and where scenario analysis can be easily performed. FP&A has a great role to play in enabling such dashboards. Partnering with IT teams, FP&A can take the initiative on building or further enabling such dashboards to deliver real-time analytics.
6. Do not mislead
The problem with data visualization vs data in a numeric form is that it can be used to mislead the audience if the entire picture is not revealed. This is a commonly applied technique by consultants or marketing teams to highlight only positives or paint a rosy picture. As FP&A professionals, we should be mindful of this and ensure we remain the conscience keepers of the organization. We must ensure data visualization does not end up misleading our stakeholders but in fact bring out the whole reality in the most effective manner.
In conclusion, FP&A teams cannot function effectively in today’s data-heavy and dynamic business landscape without data visualization. However, to truly harness its power, it is important to challenge the status quo, be purposeful, become more tech-savvy and grasp the nuances.
The article was first published in Unit 4 Prevero Blog
The idea of a budget is so core to financial wisdom that it’s one of the first lessons we learnt from our parents for keeping our finances (and lives) on track. Annual Budgeting exercises have been the norm in almost all companies, big and small, across the world for decades. However, in recent years, there has been a lot of news about companies, some very prominent headline-grabbing ones, doing away with their annual budgets and moving to a monthly rolling forecast-based system. This has made finance professionals and business executives question their own company’s budgeting processes and their worth, especially since they eat up a significant amount of organizational time. While each company must decide what works best for it depending on the nuances of its operations, below is a discussion on some key issues impacting this decision.
An annual budget is, essentially, a plan of an organization’s revenues and expenditures for the coming year. The process of formulating an annual budget is an elaborate one wherein the long term strategic goals of the organization are identified and translated into targets for the year and optimal allocation of resources is determined to achieve the same. Depending on the organization, the plans will be made at a division, segment, category, brand, or geography level. For example, a global consumer products company would have budgets for their different categories such as personal care, hair care or home care further broken down at a brand level as well as at a geography level for various countries where they operate.
The entire annual budgeting process in most companies takes around 2-3 months. Thus, if a company is operating on a calendar year basis, the budget would be worked upon during September to November of the previous year and finalized by December.
Today’s business world is extremely dynamic. Considering that the budget is formulated around 2-3 months prior to the year even commencing, the business realities at the time of making the budget vs as the year actually progresses may be significantly different – a new foreign competitor with deep pockets may have entered the market, an existing competitor may have slashed prices, crude oil prices may have skyrocketed taking input costs through the roof, a natural calamity may have occurred, a new revolutionary technology breakthrough may have been achieved or a new tax law may have been passed by the regulators! With the pace of change in business environments increasing by the day, it won’t be an exaggeration to say that the budget is outdated the minute it is made.
In order to adapt to the dynamism of the world, organizations have devised processes to mitigate the shortcomings of annual budgets. A popular mechanism is to have scheduled Budget revisions (latest estimates) made once or twice during the year, for example in April and August. The revised budgets allow the organization to take cognizance of the new circumstances and make a more realistic plan for the remainder of the year.
Most organizations today, also have monthly rolling forecasts of 12-36 months, depending upon the nature of the business. A bottom-up monthly forecast with inputs from across divisions and functions captures the impact of events that have occurred during the month and ensures maximum agility. The value added by such forecasts is immense as it allows management to respond quickly to changing dynamics such as raising prices of their products in response to increases in commodity costs or allocating discretionary resources such as media budgets to a business segment which is seeing tremendous growth potential rather than a segment facing hurdles. In the absence of a rolling forecast, business teams would just stick to the original annual budget. In a scenario where the sales of a division have been sorely hit in the first half of the year leading to a significant shortfall vs the annual target, sticking to the annual target may lead to demotivated business teams who know the shortfall is impossible to make up anyway and, hence, deliver sub-optimal results in the remainder of the year too. Holding teams accountable for realistic monthly goals set just before the month ensures optimal performance of divisions and, hence, the organization.
Despite the obvious limitations of the traditional annual budgets, however, they arguably, still serve some purpose. An annual budgeting exercise is quite distinct from rolling forecasts in that it is an elaborate process that starts with laying down a long term strategy. This represents where the organization intends to reach in the next 5 or 10 years – which business segments or categories, how much sales revenues and net worth, which geographies, etc. This is then broken down into years and translated into an annual plan for the upcoming year. This process ensures the end goal is kept in mind. While business environments may change and need to be responded to, it is critical to measure the actual position of the organization at the end of a year against the intended position.
For example, if a cigarette manufacturer has determined its strategic direction as diversification into consumer packaged products over the next 10 years, it is critical to ensure that investments are made in that direction every year although this may mean lower margins or higher capital and media expenditure initially. In the absence of an annual budget that captures this strategic intent and allocates resources accordingly, mere reliance on monthly rolling forecasts may lead to the organization cutting its investments in the new business and directing it to the familiar higher-margin cigarette business.
While it is clear that “once a year budgets” are no longer capable of enabling companies to handle the complexities and pace of today’s business environments, companies across the globe seem to have realized that the annual budget remains critical from a strategic as well as controlling standpoint. However, it is also true that allowing an annual budget to dictate how business is managed on a daily basis would severely restrict the agility that today’s dynamic landscape demands of organizations. Thus, most companies seem to have decided to follow a hybrid system of annual budgets which allow tracking of their strategic direction supplemented by rolling forecasts which allow the business to be managed dynamically.
The article was first published in Unit 4 Prevero Blog
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.
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.
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.
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.
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!
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.
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
In February 2020, the Dubai FP&A Board gathered for the 7th time to discuss the subject of "Building Winning Financial Planning and Analysis (FP&A) Teams". Lukas Herbert, FP&A Director at Takeda Pharmaceuticals, facilitated the meeting.
Today’s world is characterized by information overload and attention deficit. The amount of data being created, processed, and hence available is exploding. More data was created in the last 2 years than was created since the beginning of humankind.
The idea of a budget is so core to financial wisdom that it’s one of the first lessons we learnt from our parents for keeping our finances (and lives) on track. Annual Budgeting exercises have been the norm in almost all companies, big and small, across the world for decades. However, in recent years, there has been a lot of news about companies, some very prominent headline-grabbing ones, doing away with their annual budgets and moving to a monthly rolling forecast-based system.
Most professionals working in the FP&A discipline 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.
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