To provide the best support to the business leaders, FP&A needs to quickly leverage the accounting information at hand. Especially during hard times, business is hungry for insights from financial results and the pressure on FP&A increases tremendously.
This article covers three critical aspects of telling the business story behind the numbers:
What is the context behind numbers?
Is there a strong collaboration between accounting and finance?
What is the main purpose of the story?
Context is King
Financial results without context not only leave room to interpretation but can also result in poor business decisions. Before providing any recommendations, FP&A leaders are expected to do their homework by analyzing the current business situation i.e. comparing plans and forecasts with the previous year, assessing changes in the accounting regulations, competitive positioning of the organization and etc. This can be done easily with a financial analytics platform.
For example, when a product line has poor top-line performance but promising margins there can be multiple explanations such as:
a deliberate strategy to pull back on a particular product
a new allocation methodology
revised capitalization strategies
the impact of foreign exchange rates on that particular line
the salesforce falling short of its objectives
the system failure
It is also possible to have a combination of several reasons listed above.
The context can be very different and if it is not taken into account, the financial results alone will not be very helpful to the business.
Collaboration with Accounting
Accounting and finance are often described as two different activities. One is backwards-looking while another one is forward-looking. The contextualization of the results is possible only if there is a strong partnership between these two functions.
To become successful business partners, FP&A needs to foster mutual respect and a high level of communication. Some useful methods for enhancing the partnership include:
Be an active rather than a passive participant in the meeting. Come prepared by having already reviewed the results and done research into key variances.
Design and follow highly integrated processes around reporting by making sure both accounting and FP&A team members are developing narratives that support both accounting and FP&A activities. For example, management discussion and analysis (MD&A) and management reporting.
Communicate clearly around swim lanes between accounting and FP&A. This is important even in a collaborative environment. Clear definitions for accounting vs FP&A roles and responsibilities are indispensable when it comes to conflict management.
Communicating Insights
Organizations should strive to not only develop annual operating and long-range plans but also to attempt to operate in alignment with those plans.
With the advent of COVID-19 most 2020 annual operating plans went in the circular file and we all witnessed (i.e. learned) in real-time how to adjust and make new plans quickly.
Here are some ways FP&A communicates important insights in a quickly shifting environment:
Model the worst-case scenario which can include an immediate re-structuring and lay offs. It is crucial for FP&A to offer this type of scenario in conjunction with context around the implications for a return to normal and/or growth.
Design a decision-making methodology by choosing trigger points for operating decisions. Typically, trigger points are sales metrics such as market expansion/contraction, pipeline expansion/contraction, and new sales performance that indicate the direction that things are going.
Contextualize the results. When those metrics fall short it is the responsibility of FP&A to contextualize the results in partnership with accounting and through the framework of management reporting. The richer and more colorful the communication is the better it is.
The above mentioned three steps become a cycle that repeats itself while the economic environment is uncertain.
In summary
FP&A can achieve better results by providing context, collaborating with accounting and creating different scenarios with rich insights.
The COVID-19 crisis has taught us all about the unexpectedness and how to react to unplanned events. We have very quickly moved from theoretically modeling three-year plans based on assumed growth rates and potential investments to completely shifting the paradigm and structure of a given business outlook in the next 18 months.