We live in an era with an interconnected global economy, where constant change and uncertainty are taken as a given but planning for such an environment is not easy. Financial planning and analysis (FP&A), whether undertaken by treasurers, controllers or other finance professionals, can help firms to cope. The financial crisis in 2008 affected many companies and some of them became all too familiar with the spectre of unexpected ‘black swan’ events or ‘perfect storm’ market conditions that adversely impacted their business. Those that survived understand the value of FP&A.
Some organisations have not had enough time to re-align their cultures, systems and processes to suit the ‘new normal’ conditions, but they should as most chief financial officers (CFOs) and other finance professionals know that the ability to forecast results is the number one concern of modern business.
The financial planning and analysis (FP&A) function has undergone a dramatic transformation and re-modelling around the globe over the last decade to help it to provide these predictive capabilities. New technologies and ‘big data’ software interrogation tools mean that numbers can be crunched and accurate scenarios run thanks to the rise of cheap ‘big computing’ power.
Traditional methods of budgeting and planning are no longer fit for the purposes and challenges of the 21st Century. There are a number of different studies and papers that I have read that prove this, from Accenture which claims that only 11% of companies are fully satisfied with their planning procedures, to a recent ‘CFO’ magazine study which claimed that 70% of its respondents were not able to see more than one quarter ahead. Speadsheets often still dominate the planning and budgeting procedure, whether it’s housed in the treasury or not, and this further limits the ability of corporations to predict future revenue streams, business growth areas, cash positions or other useful ‘value add’ information far enough into the future to plan effectively. FP&A might be able to help in this regard but before I go any further I’d like to define the term.
What is FP&A?
Currently there is no consistent definition for FP&A across industry. However, I like the following simple definition by Mark Gandy, a business-to-business CFO freelancer, who explains that: “While the financial controller typically looks backwards, the FP&A professional looks forward and sideways, diagonally, upward, downward, multi-dimensionally, and so on.”
The acronym FP&A (financial planning and analysis) is still relatively new. Ten or 15 years ago the function would typically be called budgeting and planning, or business finance. Very often it would not even be separated from the function of financial reporting.
Figure 1: The Typical FP&A Cycle.
Source: Larysa Melnychuk.
Top Five FP&A Challenges
According to the renowned ‘sage of Omaha’ Warren Buffet, in the business world the rear view mirror is always clearer than the windshield. In other words hindsight is a great thing but it doesn’t necessarily help in predicting the future. Currently, there are many challenges facing our nascent FP&A profession, but I think that five stand out as the most pressing:
1. Traditional Budgeting Culture: Traditional budgeting strategy is outdated, expensive and dysfunctional. However, it is also deeply embedded in the corporate culture. The political acumen of the traditional planning process is well-known. David Axson describes the budgeting process in his book ‘The Management Mythbuster’ as “a game where executives demand ever better numbers and their subordinates seek to ratchet down expectations”.
2. Misalignment of Strategic and Operational Planning Processes: Strategic and operational planning processes are greatly disconnected in many organisations. These two top-down and bottom-up planning processes are often generated from different systems and by different people, and are therefore not harmonised. It is hence unsurprising that the vast majority of companies do not succeed in implementing the strategy they have lined out. Paul Niven describes the following barriers to strategy execution in his book entitled ‘The Balanced Scorecard’, prompting the thought that is it any wonder that planning and strategy do not always follow on into successful execution:
- Only 5% of the workforce understands the strategy.
- Only 25% of managers have incentives linked to strategy.
- 85% of executive teams spend less than one hour per month discussing strategy.
4. FP&A Teams: There is much debate on what the type of employees are needed in an FP&A department. A vast spectrum of skills are needed for an effective and efficient FP&A function and these can be sourced from treasurers, financial controllers, accountants, tax specialists or other trained finance professionals. I am a strong believer in the power of the synergetic team in which both the functional and team roles are well balanced.
5. Releasing the ‘A’ in FP&A: You need the right infrastructure in a financial planning and analysis department in order to minimise non-value adding activities and focus on high quality analytics and predictive planning that can used to accurately assess cash positions way in the future or future calls upon company money. The majority of staff time at the moment is wasted on non-value add activities. In order to transform FP&A so that it is as forward looking as possible, the analytical capabilities of the function should be improved and expanded significantly using ‘big data’ technologies, good training and skilled employees. The planned new Association for Financial Professionals (AFP) FP&A Certification may be able to help in this regard.
Where is FP&A Heading?
In order to deliver a competitive advantage to a company, the modern FP&A function needs to be flexible and dynamic, to have a basis in sophisticated analytics, and be able to look at life-time values for products and projects, while encouraging business partnering where possible. As Charles Darwin famously said: “It is not the strongest of the species that survive, nor the most intelligent; it is the one that is most adaptable to change”. It is as well to bear this quote in mind when assessing if your company can afford to invest in FP&A.
There are significant changes in the role of the FP&A function, as it pivots towards a more predictive and analytical future, which will require internal cultural shifts.
Figure 2: A Summary of the Current Trends and Movements in FP&A.
Source: Larysa Melnychuk.
Big FP&A Changes to Watch
The movements described in figure 2 above will result in some significant transformational changes in the FP&A world:
- Business Intelligence (BI) technologies and advanced driver-based planning models will significantly reduce the time spent on non-value added activities. Routine tasks will be automated. Advanced and predictive analytical techniques will be widely used for better planning and decision-making.
- The traditional budgeting process will be significantly changed or even abandoned. FP&A processes will become shorter; our time horizon will expand. Rolling forecasts will replace traditional planning techniques. Cultural changes will encourage planning flexibility; when multiple scenarios are analysed, a participative planning process becomes the norm and the political acumen of the traditional planning process is addressed. Figure 3 below summarises modern FP&A tools and techniques that are available to corporations.
- FP&A teams will be multifunctional. Risk professionals, BI experts, risk managers, modellers, idea-generators and business partners will work side-by-side, creating synergetic teams with strategic vision and enormous analytical capabilities.
Figure 3: Modern FP&A Tools and Techniques.
Source: Larysa Melnychuk.
The above discussion aims to provide a generalised overview of the current state and outlook for the FP&A function and its development as a profession. The FP&A world is a complex and exciting one to be a part of, particularly in these unstable economic times when a predictive capability is highly prized.
FP&A is gaining increasing recognition as companies realise its importance and the need for alternative, post-crash ways of doing business. It is certainly a field to watch, and more importantly- to get acquainted with.
Larysa Melnychuk is director of strategy and FP&A at the Novolar Solutions consultancy and one of the founders and secretaries of the non-profit London FP&A Club established in February 2013. Please email Larysa Melnychuk firstname.lastname@example.org for details about forthcoming Club speeches and events, including an address on 17 April by Dr Peter Bunce, a director of the Beyond Budgeting Partnership (BBRT) and key supporter of the new initiative, who will talk about the ‘beyond budgeting’ approach that emphasises future-gazing and predictive accounting and finance. The London FP&A Club aims to bring together the knowledge and experience of FP&A professionals and aid the development of the discipline. Melnychuk is a qualified management accountant and former group FP&A director at the technology and services firm, Invensys. She was also European head of financial planning and analysis at Combined Insurance (ACE Group). Melnychuk is also involved in the project to launch a global AFP financial planning and analysis (FP&A) certification.
- If you would like to find out more about FP&A and the plans for the Association for Financial Professionals’ FP&A Certification please follow this link for information about signing up to the AFP FP&A e-newsletter or visit the FP&A website.
Coffee is the second most traded commodity in the world and is subject to plenty of price volatility. Costa Coffee's treasury manager discusses how the company hedges pricing and foreign exchange risks to minimise volatility.
Ireland is a potential beneficiary as businesses relocate from the UK post-Brexit, but this is undermined by the threatened disruption and complexities that increasingly appear to be a likely consequence.
A US study, based on the quick service restaurant chain Chick-fil-A, offers conflicting evidence on whether a TMS is the best option when upgrading from Excel-based forecasting.
With four hikes since late 2015 - three of them in the past six months - US interest rates are moving higher in line with a strengthening economy. However, for many American corporates the trend has raised concerns over their working capital management.