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.

What do FP&A professionals do?

The work profile of FP&A Professionals can be divided into two broad components clearly indicated by the name – Planning & Analysis.

1. Financial Planning:

• Every business organization operates according to clear Operating Plans and Budgets. FP&A professionals are responsible for drawing up these Plans and Budgets.
• This involves a range of activities starting from analysing business trends and past company performance to working with cross-functional teams across the organization to develop plans for the upcoming period which are realistic and ensure optimal performance in terms of company’s objectives: revenue growth, margin expansion and other strategic goals.
• For example, FP&A analysts would typically work with Marketing to forecast potential growth for a product category or brand and the marketing expenditure that would entail. Using financial metrics such as ROI, revenue targets would be set along with the allowable expenditures towards their achievement.

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:

• This is the more traditional analytical work FP&A teams are responsible for.
• It involves tracking the company’s performance vis-à-vis Operating Plans and Budgets laid down during the Planning Stage and analyzing variances to identify causes and highlighting to senior management.
• The performance is also tracked vs past corresponding periods.
• Such analysis often takes the form of periodic flash reports and monthly review decks (MIS).
• The inputs provided through this analysis are very critical to ensure business performance stays in line with plans and any corrective actions needed can be promptly taken.

b) Real-time ad hoc analysis:

• Business environments are changing rapidly and there is an increased expectation from FP&A teams to provide real-time strategic inputs to leaders and decision-makers to ensure quick responses and best results to changing circumstances.
• For example, when a competitor launches a new cheaper product or slashes the price of an existing one, an FP&A analyst is expected to be ready with a shadow P&L of the competitor product, likely impact on market share and thereby, revenues and margins as well as probable response scenarios to protect the company’s business and P&L.

c) Other Value-adding analytics:

• Today, there is no dearth of data available with business organizations and it’s becoming more and more difficult to make sense of the vast data to make better tactical and strategic decisions.
• FP&A professionals are perfectly positioned to address this problem – they are deeply aware of the way the business functions, the impact business decisions have on Financial KPIs and are Excel monkeys.
• From spreadsheets analysing profitability of various business channels to calculation of the cannibalizing impact of a well-funded new launch on existing product portfolios to comparing the effectiveness of R&D and Innovation spends vs ATL / BTL Marketing spends in enhancing the company’s top line and bottom line growth, the potential to analyse and contribute is truly infinite.

How FP&A differs from traditional finance functions

• From the above understanding of what work an FP&A role entails it would become obvious that the FP&A function is truly embedded into the business organization and forms a critical component of successful business strategizing and performance.
• In a marked departure from the isolated financial accountant or auditor persona, the FP&A professional is a strategic business resource.

Why so many young finance professionals aspire to be FP&A professionals

• As young aspiring Chartered Accountants (MBAs have had it the easier way!), most of us have hustled as auditors or accountants either during internship or after qualification.
• While we all loved the part where we got to see different businesses and understand financial statements, we all felt we were not too involved in adding value to a business. We complained that our work was more of a “post-mortem” or “compliance” activity.
• And then there came FP&A! FP&A offers an opportunity to use our deep domain expertise in financial accounting and reporting, number crunching and business understanding to actually have a say in better decision making. It holds great potential to add value to a business (which we have all aspired so much to do)!

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!
 

“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.

Increasing Data and Reducing Attention Spans

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 Challenge

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. 

The impact on FP&A

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.

What is Data Visualization?

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. 

FP&A and Data Visualization

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.

What is the Annual Budget and how does it work?

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.

Modern-day business environments and shortcomings of Annual budgets

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.

Processes that cope with the changing times

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.

Time to say goodbye to the traditional budget then?

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. 

The Middle ground

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.

What Accountants do

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.

What FP&A does

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. 

1. Backward-looking to forward-oriented

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.

2. Focus on business vs controls and compliance

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! 

3. Accuracy vs Estimation

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. 

4. Managing Stakeholders and Influencing Decision making

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

Organisations often struggle to find a balance between their long-term strategic objectives and short-term goals. Being a key player in an organization’s strategy setting and budgeting process, FP&A professionals also face this dilemma as a part of their roles.
 
Balancing both long-term objectives and short-term goals requires a deep understanding of the business and its nuances and learning to perform a tightrope walk. How much an organization and its executives succeed in striking this balance determines the very success and sustainability of the organisation. Below is a discussion on this issue and the nuances involved.

What are long-term strategic objectives?

Every business organisation needs to have a long-term strategy that details the direction it intends to grow in within the next 5 or 10 years. The right time period for strategic objectives is dependent on the nature of business and the maturity stage of the organisation. For example, a start-up in the technology space may have a shorter timeline while a 50-year-old steel company may have a longer one. 

The importance of having clearly laid out strategic objectives cannot be overemphasized. It is vital to have a clear end in mind while formulating shorter-term plans and making strategic and tactical business decisions. Without it, business leaders and executives will steer the ship that is the company in arbitrary ways leading to a directionless pursuit which is bound to fail.

What are the short-term goals?

An organization also works on a set of short-term goals – in the form of annual budgets, quarterly forecasts, monthly rolling forecasts, weekly targets, etc. While annual budgets are a decomposition of the long-term strategic plans into an annual target, quarterly and monthly forecasts are more dynamic plans that are vital to ensuring the business is managed with agility in response to rapidly changing environments.

The Balancing dilemma

“Life is what happens to you while you're busy making other plans.” – John Lennon.

In an ideal world, the long-term strategic objectives would translate into annual plans that would decompose into quarterly and monthly plans. The achievement of the shorter-term plans would roll up into an achievement of annual plans and a move in the direction of the strategic objectives. However, the reality of business environments with so many moving factors ensures that it would never be this smooth. When a business organisation with clearly articulated long-term strategic objectives faces a dynamic business environment, the dilemma of long-term vs short-term goals begins.

Let’s take the case of a hypothetical cigarette manufacturing company, Cigar Ltd. Cigar Ltd’s top management and Board of Directors have determined in 2010 that considering the increasing awareness against smoking as well as the tightening government regulation in their country of operations, their 100-year-old flourishing cigarette business is at potential risk in the future. Hence, in order to ensure sustainability and growth in the future, they decide to diversify into non-cigarette portfolios where they can leverage their manufacturing and selling capabilities such as CPG (consumer packaged goods) over the next 10 years. 

This objective is clearly laid out in the form of a strategy document with an alignment that such diversification would necessitate initial investments into R&D, Manufacturing Operations and Brand building as well as a dilution of margins and profitability due to entry into categories with lower margins than cigarettes.
 
In 2012, the business suddenly faces headwinds with a 100% increase in duties on cigarettes, bad tobacco crop leading to reduced supply and regulation to put pictorial warnings on cigarette packs. As a consequence, the business starts falling terribly short of its annual targets. The business executives, whose incentives are linked to the current year’s bottom line delivery decide to roll back all investments in developing the new categories in order to save costs. This, however, is clearly at odds with Cigar Ltd’s strategic intent. 

Considering that this is an exceptionally unfortunate series of headwinds faced in a single year, the decision to roll back investments in new categories would not be entirely unjustified. However, looking at things more carefully, one would realise that other than the bad crop, the other two factors of increasing taxes and pictorial warnings are, in fact, what Cigar Ltd predicted and the very basis for making the decision to diversify. 

The nuances of the situation would also have to be assessed such as how much investments have already gone in and by what timeline will the new categories start to be sold and begin to contribute to bottom-line delivery. While some postponing of investments may be required, a complete roll back of investments in order to protect current year’s bottom-line and incentives would mostly be unjustified.

What role FP&A should play

It is easy for a business executive or a sales and marketing person to get caught up with the daily business and develop a short-term vision. In a bad year, it is easy to lose sight of long-term strategic objectives and make rash decisions that are not in line with them. As a strategic business partner, an FP&A professional should play the role of a conscience keeper and raise a contrarian voice in ensuring the direction of a company stays on track towards the strategic objectives. 

One can add tremendous value by performing deep-dive analysis and bringing out actionable insights that make decision-makers more aware and avoid misinformed decisions. For example, in Cigar Ltd’s case, an FP&A professional is in an excellent position to analyse the additional investment involved (ignoring the sunk costs) and the projected sales and contribution of the new categories. Various scenarios and their financials can be worked out in order to ensure minimal additional depreciation hit to the P&L or maximum preponing of new category sales to contribute to the bottom-line within the year. While the aforementioned analysis is only illustrative, the scope for adding value in such situations is immense and would depend on the initiative of the professional and his understanding of the nuances of the situation. 

In conclusion, an FP&A professional is an excellent position to help organisations and business leaders manage the balance between long-term strategic objectives and short-term goals and through this contribute tremendously to the organisation’s continued success and sustainability. 

The article was first published in Unit 4 Prevero Blog