Financial Planning and
Analysis—Kicking It Up
a Notch!
A Briefing Paper
by Mary Driscoll
Senior Research Fellow, APQC
Financial Planning and Analysis—Kicking It Up
a Notch!
The Wall Street collapse and Great Recession underscored the need for sound
and sophisticated financial planning and analysis (FP&A). That is good news
for FP&A professionals looking to move up
.
EXECUTIVE SUMMARY
Until recently, the financial planning and analysis professional had a hard time explaining to neighbors what he or she did for a living. But due to the cataclysmic events that shook the global business community in 2008–09, the answer has become simple. “I am a business navigator. I help my organization avoid submerged hazards. And, once in a while, I spot unforeseen opportunities for us to really shine.”
According to a recent survey conducted by APQC (with support from IBM Cognos), the role of the FP&A professional has gained prominence in the past three years. The financial crisis and Great Recession taught CEOs and CFOs that strategic planning—and the day-to-day execution thereof—can be precarious. Senior executives now know they need more than a good plan and competent managers to prosper. They know their organizations need to be agile—that is, able to draw on credible data to sense and respond to fast-moving market forces that can easily decimate plan assumptions. For some, the key is to become what’s called an “analytic
competitor”—a business that is fast, flexible, and precise when it must reallocate resources in line with undulating patterns of demand, cost, and opportunity.
Guess who’s got a clear view of the action? It’s the FP&A professional who has a strong grasp of business operations, marketplace dynamics, and economic value creation.
FP&A professionals are keen to meet the challenge. But preparedness varies. The truly fortunate are armed with effective analytical tools and training in advanced statistical techniques.
Importantly, they are championed by a CEO or CFO who helps to reinforce the need for
coherence between strategy and daily decisions. Meanwhile, the less fortunate have to stumble along with thin resources, yesterday’s tools, and lukewarm backing from the top.
PRESSURE POINTS
APQC’s research suggests that as North American and Western European economies recover, the typical FP&A professional will feel pressure from three corners:
1. CFOs have never had much tolerance for unexpected shortfalls
Going forward, they will have absolutely none. Moreover, they will no longer accept forecasts that are merely updated budgets. They want clear and granular views of performance drivers,
and they want fresh and credible performance predictions. It is not surprising that 96 percent of all survey respondents said their top priority for the next 12 to 18 months will be to achieve true integration of planning, budgeting, and forecasting. That is a
vexing challenge for many reasons, especially the ever-increasing complexity of sizeable businesses and the markets they serve. But analysts who can overcome data and process integration issues can gain access to vital performance indicators (KPIs) that can be scoured for signs of impending trouble. If sudden changes in demand or cost or opportunity occur, those analysts can work with their counterparts on the business side to develop viable and timely response plans.
A vital success factor here is the ability of the FP&A professional to collaborate effectively with business unit heads. The financial analyst will have to develop and nurture those relationships and educate non-finance executives on the granular drivers of gross profit—and how those drivers in turn influence net financial outcomes (and incentive compensation for managers). Ideally, when the analyst spots a looming shortfall, he or she will have trusting and trusted business partners ready and set to confront it with rehearsed remedial action.
2. Risk management is a top agenda for governing boards and C-suite
The era of re-regulation has arrived, and business risk management is now a top agenda item for governing boards and C-suite executives. Shareholders and other constituencies want
reassurances that an enterprise’s risk management systems are appropriate and adequate. This is typical human behavior. After a health crisis, people become highly disciplined about
following the doctor’s orders, and they remain alert to signs of trouble. Sure enough, a strong majority of all survey respondents (58 percent) reported that they will be incorporating business risk. A growing number of large organizations are now building advanced enterprise risk management programs and systems. The FP&A team must observe or even participate in the creation of models for identifying, assessing, predicting, and responding to business risks that can impact financial performance. The FP&A team will also need to look at annual plan targets through the lens of risk tolerance and ask, “Are we taking on too much or too little risk in our pursuit of growth?”
3. FP&A executives have failed to educate operating managers
So far, many FP&A executives have failed to educate operating managers on how their decisions influence overall enterprise profitability. About one-half (47 percent) of financial analysts who took the survey said: “Financial IQ across the enterprise is sorely lacking.”
A majority of all survey respondents (58 percent) reported that they will
be incorporating business risk management into financial performance planning, forecasting,
and management.
The top priority for 96 percent of all survey respondents for the next 12
to 18 months will be to achieve true integration of
planning, budgeting, and forecasting.
Moreover, 43 percent gave the “thumbs down” sign to the quality of communication and collaboration between financial and nonfinancial managers. To cross this chasm, FP&A will have to design and implement effective bridges between operating KPIs and financial metrics and set up a process of regular review and discussion. The best-practice companies go further and link the business unit managers’ incentive compensation to targets for operating performance that were set collaboratively with finance. Finance can enable these efforts by building easy-to-use assessment tools that help operating managers model various scenarios and project the net economic consequences of their investments of capital (for example, increasing or changing the mix of marketing dollars spent in a region that has proved unresponsive to a new product introduction).
RESEARCH METHODOLOGY
In late 2010, APQC conducted a survey that garnered 75 completed questionnaires from senior finance executives globally.
Approximately 50 percent came from organizations with
headquarters in the United States and Canada; 19 percent came from Europe; 16 percent came from the Asia/Pacific region; and 10 percent came from assorted other locales. The breakdown between those who (a) rely primarily on spreadsheets as their planning tool and (b) rely primarily on CPM packaged software was evenly split: 50 percent for each group.
The survey results below involve four distinct views: 1. all participants (a consolidation of all finance titles); 2. financial planners/analysts;
3. senior finance leadership (CFOs, controllers, treasurers, directors of finance); and 4. corporate performance management (CPM) software users versus spreadsheet users. Please note that the data for discrete survey questions presented below compare, in some instances, the views of senior management versus the professional financial analysts. Other views look to compare CPM software users versus spreadsheet users.
NOTABLE RESEARCH FINDINGS
Financial analysts played crucial roles in navigating the economic tempest.
During the recession, three-quarters of finance analysts who took the survey shifted gears and focused primarily on profitability modeling and profit protection (Figure 1). That is not in itself surprising—when top-line growth slackens, large organizations move to cut costs in an effort to protect net operating profits. What is noteworthy, however, is the speed with which many large industrial corporations, particularly those in North America, cut inventory levels, slashed
payrolls, and shuttered operating facilities. Also stunning was how quickly the big public companies raised their cash levels. During the summer and fall of 2010, large U.S. companies
Two out of three financial analysts surveyed
generated “more sophisticated performance
analyses” during the downturn.
were holding close to $2 trillion in cash on their balance sheets. That is about 40 percent more in cash and cash equivalents, relative to revenues, than four years previously.
Beyond profit protection, two out of three participating financial analysts generated what they called “more sophisticated performance analyses” during the downturn. An example is
profitability modeling, which identifies the drivers of revenue and cost at very detailed levels and looks at financial outcomes in light of all resources/activities needed to generate a dollar of gross profit. This type of modeling allows the analyst to predict, with some degree of precision, financial outcomes based on various scenarios.
Overall, one can argue that a number of organizations emerged from the recession without damage because they had effective FP&A teams providing guidance on what activities to start, stop, or continue at what moments. The dramatic gains in quarterly profits seen at many large businesses in 2010 certainly point in that direction.
Profitability Modeling and Profit Protection
Performance analysis and prediction are evolving as the economy turns.
Looking ahead, here are the top analytical priorities for this year and 2012 (as reported by all survey participants in descending order of importance):
integrated planning, budgeting, and forecasting;
product profitability (FP&A professionals also give high marks to customer segment studies); rolling forecasts;
alignment between strategy and execution;
financial risk assessment (note that a larger percentage of senior financial executives have a stronger propensity than analysts do to be concerned about operating risks).
The first item on the list above is noteworthy. Large companies are moving up the maturity curve of performance management. By integrating planning, budgeting, and forecasting, they hope to make resource allocation plans more relevant and dynamic. They clearly want to lessen their dependence on outdated approaches such as formula-driven growth extrapolation and “budget versus actual” views of current performance. The aspiration is more agility in the face of fast-moving marketplace dynamics, such as disruptive technology or rising fuel costs. When this list is constructed using only the responses supplied by the FP&A professionals, we see that they plan to make customer profitability analysis as important as product/service line analyses. In short, organizations want to better understand what drives demand among specific customer sets and learn how to increase profitability by segment with various tactics, perhaps involving pricing, bundling, etc.
Overall, performance management is still a work in process.
The survey found that roughly 50 percent of respondents still rely on spreadsheets as their primary analytical tool, while 50 percent use an established CPM software solution. It is
noteworthy that 72 percent of all respondents agreed with the statement: “The analyst who uses CPM software has a major advantage over the analyst who has to rely on spreadsheet only.” Note, too, that 59 percent of spreadsheet users agree with that statement.
The survey indicates that financial analysts want to be well-equipped with dedicated software that has a built-in modelbuilt-ing engbuilt-ine and can help them make credible arguments to senior management about how growth would be impacted under differing scenarios for demand, cost, pricing, bundling, channels, etc. They want genuine systems integrity and information quality that come from working with an enterprise-wide common data model and data repositories—in fact, this was listed as the most crucial driver of high-quality financial analysis as the economy recovers (Figure 2). They want
Genuine enterprise-wide systems integrity and information quality
was listed as the most crucial driver of high-quality financial analysis as the economy recovers.
Advantage over the analyst who has to rely on spreadsheet only.”
tools that will help them influence fast and agile resource allocation. They are no longer content just to improve the budgeting and reporting processes. They want to move out into operations and work in partnership with business managers and drive value creation. As Gartner Inc. points out1, packaged software today is useful in identifying granular revenue and cost drivers in light of the consumption of resources. And enterprise-wide ERP standardization is a crucial success factor in most cases.
Confidence Levels of FP&A-CPM and Spreadsheet Users
Figure 2
Meanwhile, 50 percent of senior executives surveyed reported to APQC that systems integrity and information quality were sorely lacking at their organizations. So, why do we still see 50 percent of businesses doing their performance analyses with spreadsheets?
1
Chandler, Neil, Nigel Rayner, John Van Decker. “Magic Quadrant for Corporate Performance Management Suites, Gartner RAS Core Research note 600172934.” Gartner, Inc., January 25, 2010:
The survey asked for open-ended comments about the biggest obstacles to improving financial analysis capabilities. Three vexing issues stood out:
lack of enterprise-wide standardization of metrics, definitions, KPIs, business metadata, and decision-making processes;
lack of understanding regarding the business benefits of using basic tools to capture cost at the right level of detail so that meaningful analysis can be performed; and
top management does not see the potential that CPM software holds.
A FINAL WORD
A recent report from a top consultancy has left a chill in the air. As 2011 got under way, Booz & Co. surveyed more than 1,800 CEOs. More than half said their biggest challenges are (a) ensuring that day-to-day decisions are in line with the strategy (56 percent), and (b) allocating resources in a way that really supports the strategy (56 percent). That’s exactly what we’ve been talking about.
The “fix” cannot involve a knee-jerk reaction, such as recruiting analytical hotshots and telling them to go at it. Moving up the performance management maturity curve is hard and long work. It requires a steady commitment to systems standardization, process optimization and
automation, and organizational change. It also requires strong leadership and effective knowledge management. Finally, of course, it requires an effective and lasting partnership between finance and IT. Achieving that is harder than it sounds. But based on wider APQC research, we know that best-practice organizations are deeply committed and showing positive results.
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