Unexpected situations like the COVID-19 pandemic can throw the best laid plans out the window. However, the same can be true for more common situations: changes in product mix, cash flow shortages, talent shortages, M&A opportunities, etc.
Some organizations are able to navigate these situations, making well-informed, data-driven business decisions and setting themselves up for success. Others struggle to get the information that would help them know what to do.
COVID-19 has been a good test of everyone’s financial planning and analysis (FP&A) capabilities. Organizations with a strong approach to FP&A are able to pivot quickly and easily when opportunities or disruptive events arise. So, what does it mean to have strong FP&A capabilities? It helps to focus on three key FP&A activities: planning, metrics and analytics.
In today’s world, finance leaders cannot just report the historical impact of an event on sales or operations. Finance needs to anticipate events that could occur and understand the likely resulting consequences. This is typically done by preparing plans such as budgets, forecasts and projections.
What’s critical is how they are prepared and what you do with them. A single annual plan that remains untouched until the next annual planning process may have been “good enough” before but will not sustain your organization going forward. Successful organizations have a strong approach to forward-looking planning for multiple situations throughout the year.
Because it’s important for leadership teams to make decisions proactively instead of reactively, you need to employ scenario planning. Identify events that could significantly impact the business and anticipate multiple outcomes to best understand the potential impacts. With that information, you can identify appropriate responses before they are necessary. As events unfold, your scenarios will set the organization up for faster pivots in strategy and ultimately drive the best results.
An ongoing planning approach is called continuous planning — highly collaborative, highly inclusive, rapidly revisited adjustments and improvements to already approved plans throughout the year. With a continuous-planning mindset, the entire Finance organization shifts toward a dynamic, forward-thinking approach and provides leadership teams with more relevant, up-to-date information that helps them more effectively lead the business.
The importance of metrics
Now, more than ever, it’s critical to make the right decisions at the right time with the right resources — before your competitors do. This means Finance teams need to focus on those metrics that matter most. Identify and build into your planning the most impactful leading indicators, such as new orders. Those are much more important than lagging indicators, such as sales.
Lagging indicators tell you the results that were achieved, whereas leading indicators point to likely future outcomes. In order to align your metrics with your future-focused planning efforts, it’s important to identify the most relevant indicators for your organization to measure and track. This can be quite challenging, however, and sometimes a lagging indicator can be a leading indicator if you monitor it on a real-time basis.
As you evaluate the metrics that may be the most important to track, remember to incorporate operational data. Consider driver-based variables such as units, prices, headcount, cost of acquisition and date-driven metrics so that changes in your forecasts are quickly understood and adjusted. If you’re a project-based organization, consider life of project impacts. It’s natural to want to make decisions largely based on “gut instincts.” However, those decisions should be supported by and/or reconciled to your data.
When you have a real-time dashboard continuously refreshed with your top 7-10 key metrics, your leaders can more effectively guide the organization through all sorts of situations. But it doesn’t end there.
Achieving actionable insights with analytics
While monitoring the most critical metrics improves awareness, analytics is the deeper investigation into those metrics so you can identify and interpret meaningful patterns, ultimately gaining data-driven insights that make it easy to ensure the appropriate actions are taken.
Many Finance teams do a great job with the historical-based descriptive and diagnostic analytics (i.e., what happened and why?). However, to be a strong, competitive and relevant organization today, a forward-looking approach must leverage predictive and prescriptive analytics (i.e., what could happen next and/or how can we ensure it does or does not happen?). These forward-looking analytics depend heavily upon data mining and modeling and can be more challenging to understand and implement in organizations that have been more focused on historical-based information.
In order to help their organizations be successful and agile in our quickly changing world, Finance teams need to have a strong future focus for planning, measuring and analyzing financial information. So how does an organization advance their FP&A capabilities? Two ways:
Technology: Excel is always a quick option, but it has its limitations, especially when pulling information from disparate data sources, relying on varying levels of sophistication from contributors, and modeling for quick change.
A better option is to leverage your existing financial and/or budgeting system. Many financial systems — such as Sage Intacct, Oracle NetSuite and Microsoft Business Central — support at least some level of budgeting and visualization of KPIs, financial and non-financial.
The best option utilizes robust business intelligence solutions. Technologies such as Planful®, Qlik, Sage Intacct Budgeting and Planning, and Microsoft Power BI are built both to consume and adjust data from a mountain of data sources, as well as visualize and analyze data while providing superior reporting flexibility. They are quick-value, sustainable solutions when you’re looking for either short-term or long-term planning excellence.
People: Technology is only as good as the people who use it. Look within your current Finance team for a candidate with strong FP&A acumen and the interest to strengthen their skills and expertise in this area. It does take time to grow the talent in-house versus buying it, so keep in mind that this approach may take longer to achieve your goals and see results.
If you cannot source the FP&A talent internally, consider outside specialists. The demand for FP&A experts is growing; however, with unemployment rates also rising, now may be a good time to seize that talent.
If hiring isn’t an option, consider outsourcing an FP&A resource to supplement your existing team. An outsourced resource can not only jump in quickly to provide immediate support but also help you identify and/or train a longer-term in-house solution.
Finance’s value-add contributions
As the world continues to change quickly, organizations of all sizes need to anticipate and plan for the future in ways they have not previously. Finance teams are in the best position to contribute to the success of their organizations and make lasting impacts not only by ensuring high-quality historical financial information but also by increasing the speed-to-market of critical future-focused business information to support leadership decisions.
Wipfli’s professional accountants and technology consultants can help you strengthen your organization’s ability to anticipate situations and respond quickly. Click here to learn more.