Before delving into financial planning and analysis (FP&A), let us start with the basics of business and enterprise. In most cases, businesses are set up and run to make profit, which in turn fuels the engine of enterprise and eventually the economy. Profits generated are a valuable resource, as they not only form the basis of shareholder returns but are also the source of future investments for the enterprise.
With the backdrop of profit maximisation, a crucial part for any enterprise then becomes understanding the various puts and takes that lead to profit maximisation. It is important to note that profit maximisation is referred to in the context of long-term sustainable profit and to address short term needs. The latter without the former is a guaranteed path to the proverbial cleaners. Thus, knowing what moves sales either up or down as well as what costs help it along those paths, becomes akin to knowing if your heart has the capacity to endure a 100m dash before you attempt it or risk ending up in a casket at the other end.
This is where FP&A comes to the party, and one that is generally a fun party if the finance teams are truly business partners. From a career of over 20 years in finance across various roles and industries, one aspect that jumps out very clearly – both in the early days of learning or more recently when teaching – is that getting to the essential heart of FP&A is the most crucial aspect.
Finance as a function – and the FP&A team even more so – enjoys a home ground advantage in understanding the drivers of the enterprise. Team members not only have access to the data showing where the organisation stands, but also the ability to predict where it is destined to end up if the enterprise fails to stay on the path of profit maximisation. Herein, though, lies the crucial difference between what has traditionally been seen as FP&A value-add and where value is truly added.
The complete picture
FP&A is not solely about playing defence, by creating reports that generate a variance to a budget and providing some high-level explanation as to what caused it. It is a start, but not the earth-shattering analysis that is going to change the course of the game. Proactive FP&A is about getting to the insights that lie at the intersection of what the markets, the industry and your own enterprise are doing now and where each of them is headed. As is in football, it is not enough to know where each opposition player is, but rather about knowing what the entire formation is going to do as a team.
Similar to humans, enterprises, industries and markets have a DNA of their own and it is this unique DNA that is the pivotal difference between success and failure. The only difference is that human DNA is unique to us individually. Enterprise DNA, on the other hand, sits at this intersection of enterprise, market and industry, hence the need to gather insights at this level.
Without it, the enterprise’s actions would be akin to a team playing with Ronaldo as goal keeper – a great player but very little value-add in goal. If the imagery adds to what I am trying to convey, it is exactly that. Traditional FP&A has been played in its own circle without much thought about the other two. Proactive FP&A understands and relishes the thought of getting to dissect such a meaty confluence of insights. This is where the future of FP&A lies.
But that is the easy part of knowing where one needs to play. The difficult part lies in having the right formation that can help you score and win. Just as Real Madrid does not put Ronaldo in goal but uses his strengths on the left and right flank and at the back, FP&A teams need to understand the importance of having the right people in their team. Traditionally, FP&A is seen as the training ground for analysts to develop and hone their business skills, and it works while you are playing in your own enterprise circle. When you aim at playing in the intersection you need to be able to have a team that is capable of comprehending what it sees and what actions the organisation needs to take.
It has regularly been evident that teams are full of analysts who are good at understanding their own enterprise, but have no idea how to read the market or the industry they play in through no fault of their own. If this is a play that is going to build the future of the enterprise, it only makes sense to have the ‘A team’ play. This team, which hopefully has matured with experience, can bring more to the proverbial table than just internal insights. This illustration is no different from football teams playing their first team in the finals of the Champions League, versus fielding the B team, not because they are not good but because it is ultimately about having a sure shot at the title.
For FP&A teams anything short of such a formation would make getting a seat at the table impossible, especially if the organisation is truly in the game to win it – unless, of course, if there was already a spare seat to begin with.
FP&A is about taking the enterprise to the next level of the game, and this can only be done with the right team focusing on the intersection between enterprise, market and industry.
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