Jeremy Gray – Show 9 Season 4. Introduction to FP&A
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So far this season we have talked about the importance of strategic planning and how to manage a successful acquisition. Both in strategic planning and by implication operational planning and M&A you will have made financial projections. It is important that you measure actual results. Your accounting team is probably capable of doing this. But even more critical is the ability to understand what is driving the actual results, what corrections need to be made to improve performance, how you can influence the future and matching the resources available to the plan.
Show Objectives - The Why
As your business grows the more complex it becomes and the harder it is to understand what is driving your business performance, good or bad. But this understanding is vital to moving your business forward and this is where FP&A comes in.
A good FP&A function is a profit center not a cost center. Many CFOs are surprised when I make this statement. Traditionally Finance has been seen as a cost center but FP&A should add value to your business. If not why hire an FP&A person or team? You would not hire a sales person unless they were bringing more value than you are paying them, or a manufacturing operative. FP&A is not legally required, you do need a finance team to keep the books, ensure taxes are paid etc. But FP&A is optional.
One reason could be that some CFOs are surprised when I say FP&A is a profit center because in their organization it is seen as a cost center and these low expectations are the source of many problems.
Key Issues - Owner Perspective
When you started, accounting was probably not a priority, you probably outsourced the function or did it yourself when you had the time.
If you acquired investors they would have expected some accounting of where their money was going and what returns it was delivering. So likely you added budgeting and variance reporting to your financials. But all this is backward looking – it tells you what happened compared to what was expected.
You may have added some analysis capability and got reports such as sales were down x% because product/service y sales were down z%. It’s a start but it does not tell you that much. What you need to know is why product y sales were down. Have you lost a customer? Is there a seasonal trend? Is a new competitor taking a share? Or is the market moving away from your product to an alternative? This is the information you need to make decisions to improve your company’s performance. And this is the information a good FP&A function will provide.
Other typical FP&A functions include:
What You Need to Know - The What
The challenge in many companies is that FP&A delivers little more than a budget that quickly grows stale. That is unacceptable.
The best-performing organizations use FP&A to drive business outcomes, not just to budget spending or forecast sales and expenses.
They do more than predict desirable results; they develop rigorous, well-conceived plans to deliver those results.
One of the keys to that is linking operational and financial planning. To use a simple example, a best practice FP&A company will recognize the relationship between productivity and cost of goods sold (COGS). If the company establishes a target of increasing earnings by a specific dollar amount, it will assess the required productivity gain necessary to reduce COGS and increase profitability.
This underscores that financial projections aren’t divorced from operational planning. In fact, it’s just the opposite: Financial projections are seen as worthless without an operational plan to achieve them.
In modern thinking FP&A now sits between the financial leader and the operations leader. The CFO and COO in lager organizations. FP&A should support the entire organization. Helping sales in pricing strategies, R&D in goal setting and the management team in decision making.
A sign of success is when no manager will hold a decision making meeting without a member of the FP&A present.
What You Need to Do - The How
The key to achieving a high performing FP&A team is to hire the right people.
Are accounting skills needed? A basic understanding of double entry debit, credit is required. A solid understanding of the relationship between the P&L, balance sheet and cash flow is essential. A detailed knowledge of accounting rules is not required. Candidates do not need to be qualified accountants to be a good FP&A analyst leader.
Always hire for the next position. My best FP&A leaders had the capability to become Marketing Directors or General Managers. This shows the type of person you should hire. Similarly analysts should be capable of being the leader or moving into other roles such as marketing or as commercial leader.
Develop Skills: The four Es
The FP&A function is an excellent opportunity to develop your next generation of leaders.
Next is to create the right environment for success. You have hired good people do not waste their valuable time in routine low value added activities.
Systems should be capable of providing one truth. This is harder than achieve than say. The more detailed you breakdown your company the higher the risk that reports will provide inaccurate information. So the FP&A team should always question and validate numbers.
Use technology to simplify data extraction manipulating and reconciling data.
Consider back office functions to run reports – centers of excellence.
Dashboards can provide overviews for senior management. If interactive, they can provide a self service analysis function for operational managers
Standardize and simplify processes.
Can you be sure FP&A is delivering value? This is a challenge but ideas include:
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