How implementing FP&A drives growth - and how to get started
Image by Carlos Muza via UnsplashFP&A done well connects the dots between siloed departments and challenges the cross-functional team to grow sustainably with an eye on margins.
FP&A does that through a performance management process that doesn’t just focus on producing many sets of numbers. Great FP&A teams focus on tying together the company's vision, strategies, action plans, and KPIs. That in turn enables discussions and decision-making around making the right trade-offs - because every successful company makes smart trade-offs.
FP&A teams can make that happen when they proactively flag risks and opportunities and use those insights to encourage leaders across the company to think differently. I’ll illustrate this with a concrete example a student shared with me:
For context, I created a course called FP&A Bootcamp. I teach FP&A skills to finance teams and business leaders as a live course via Zoom. In the workshop about planning and forecasting, we cover why it’s so important to prioritize the planning process over just getting a P&L that is hopefully somewhat accurate as a result.
As Former US President Eisenhower famously said, “Plans are nothing, but planning is everything.”
So in my course, we talk about how the goal of planning is taking a step back and reviewing how strategies translate to action plans.
The example my student shared was that their company had to deal with a lot of uncertainty at the beginning of the pandemic.
Before, the company had a super simple forecasting process.
Mostly, it was what executives thought made sense, without much analysis behind it. The FP&A team in that company embraced the challenge and created a driver-based planning process. That means instead of planning at a high-level, such as total revenues or even revenues by customer or region, they created a more detailed model.
The key was to discuss with the business which drivers were most critical to the success of the company. For example, they came up with:
➣ Growth from existing customers
➣ More leads from higher brand investments
➣ And external factors, such as the covid impact, and related changes to competitors.
But what really made a difference was that the FP&A team created a range for each business driver. So, for example, there was a low, medium, and high scenario for growth from existing customers. That allowed the team to become more agile. Because actuals never come in as planned. But if you have a range, you can plan ahead and discuss what you would do if the worst- or best-case scenario happens.
How to get started with implementing FP&A
If your company has never done FP&A before, it can be tough to convince the cross-functional teams that there is value in it.
The challenge is that it doesn’t make sense to invest into building FP&A processes, if it’s just a Finance exercise. That’s because a forecast or a budget process doesn’t add much value if it doesn’t take into account detailed assumptions on business drivers.
I’ve gotten push-back in the past, for example the sales team said all this FP&A work distracts them from selling. So, you need to start with something the other departments immediately see value in. All departments want more flexibility around budgets. I’d recommend you start there. That will then unlock a path to doing more FP&A.
Instead of setting a budget at the beginning of the year and then not allowing changes, allow flexibility as long as two things happen:
1) department tell us early enough about the upcoming change, and
2) they share an estimate of what the impact on results will be.
That allows us then to implement two critical FP&A processes: A forecast that is regularly updated, and an analysis process that takes the inputs from the business and turns it into a financial model with an output like a return on investment or a net present value.
In sum, you give budget flexibility and in turn receive buy-in for a forecast and a financial analysis process that is done in close collaboration between the business teams and Finance.
Do that and the business will quickly start to see the value of FP&A.
If you’d like to learn more about FP&A, I offer help in three ways:
1️⃣ Subscribe to my free newsletter “FP&A Tuesday” here.
2️⃣ Listen to 75 bite-sized mini lessons and get FP&A advice on the go.
3️⃣ Join my live online course FP&A Bootcamp to master FP&A in two weeks.
