FP&A area development is playing an increasingly important role in organizations of all sizes. The transformation process fueled by the recent COVID-19 crisis showed how much companies rely on a well-functioning FP&A department that is similar to a compass or GPS setting the business direction.
In this article, I will share several challenges and dilemmas in building a strong FP&A department and also describe how they can be overcome. I‘ve gone through this process in 3 different companies as a Head of FP&A, so I can give my observation and say what are the crucial conditions to make the FP&A department successful and to minimize the ambiguity.
Why is it challenging to build an FP&A department?
It may be an arguable statement, but it seems to me, most Finance roles are similar across the industries. You can move from one company and industry to another, and use your experience and knowledge with minor adaptations. In case you need help, training or advice, there are plenty of answers on the internet to help you.
Challenge #1. Lack of boundaries and definitions
In FP&A, there are no specific rules on how to plan - like the weather forecast, it depends on the area, conditions, a lot of data and assumptions. Planning practices and methods are different across companies and industries. The scope of roles can vary as well. In some companies an FP&A can be just about the budget and control, in others it can be Income Statement (P&L) planning and forecasting. Only rarely it will include the full cycle.
Challenge #2. Huge amount of time and work involved
A strong FP&A department is not only about the technology you use. To build a successful FP&A department, companies need to go through a long process of organizing the workflows, hierarchies, chart of accounts, data cleanups, and other data quality related issues. Sometimes the company is just not ready yet because it is constantly changing the way it plans, which makes it impossible to build planning rules, data cubes and data measures.
Challenge #3. Never-ending process
Even if you are lucky and someone has already built the whole FP&A structure for/before you, be aware that the next business or organizational change is going to compel you to adjust this structure, sometimes significantly.
Six conditions to becoming a successful FP&A department
1. Building a good reputation
If stakeholders in your company describe FP&A as being a bad guy who doesn’t understand the business and limits their efforts, there is a lot to do on both sides to change this perception. There should be stronger management support for the FP&A team. On the other hand, FP&A needs to provide valuable contributions to the organization by delivering an impartial analysis and defining the effective planning and control processes to improve growth, profitability and liquidity. By working with all the departments, FP&A can also “keep the ship on its course” strategy-wise and prevent duplicated efforts (the same task/expense/project expense counting in multiple departments). FP&A should offload from the departments the burden of estimation and prediction.
2. The FP&A is the CFO’s right hand
It should be a senior position with substantial influence. If you look at the CFO slides in a Board of Director's presentation, there will be a couple of slides on the past financial results and many more FP&A slides on the forecast and the future trends. Also, the CFOs’ surveys show that most of the CFO’s time is spent on budgeting - time that can be freed up by delegation of this task to a strong FP&A. Subordinating FP&A to Finance would be a mistake, setting more focus on the past results rather than on looking forward.
3. Creating trust in FP&A forecasting capabilities
If you keep financial models simple, people say they don’t reflect reality; if you make them complex, people doubt the assumptions or get confused and lose interest or even try to build their own models. The goal of FP&A teams is to build trust in their analyses to prevent the multiple duplicated models practice. It is a long and painful process, but eventually, the CEO and CFO will ask all the departments to validate their models and requests with FP&A to be aligned to the plans and goals.
4. Agility and embracing change
In my experience, EPM planning tools can resolve a big part of FP&A challenges if they are done right and at the right time, once the processes and procedures are in place and are stabilized. However, it is a relatively long project to fulfil. If your organization is not ready yet to accomplish planning and develop details sub-models in a limited time repetitively during crisis, Excel can be a solution until your EPM planning routine is stabilized. Otherwise, your future outlooks will be time-consuming and will not capture the rapidly changing reality.
5. Data quality
There is a lot of ambiguous and incomplete data inputs coming from the business to FP&A, whereas FP&A should present the fully explained mathematical/statistical/financial process from the top to the bottom and vice versa. So the FP&A should figure out how to fill in the gaps, to come up with justifiable and acceptable forecast/plan numbers, and, in parallel, to signal back to the business to improve the inputs’ quality. The excuse “garbage in — garbage out” won’t help to explain the forecast/analysis inaccuracy.
6. Changes in the corporate culture
The FP&A should not get swamped by politics and should give an impartial outlook. Usually, you’ll find the opposite situation to start with. Therefore helping management to change this culture is one of the biggest goals of the FP&A. This process can be fulfilled by the creation of an improved business partnership (periodical meetings to discuss the results, KPIs, planning assumptions), create together unified forms for the data collection and so on. It will increase the FP&A value for the business partners, give them much better results’ visibility and the future plans’ awareness.
Conclusion
An FP&A professional should possess modelling skills, business and financial acumen, great interpersonal soft skills to be a link between the finance department and the business stakeholders (Sales, Services, R&D, Marketing, Administration), to be an impartial trusted advisor for them, to create a high level of transparency, predictability and provide risk assessment tools for the better decision making.
The leadership should encourage the entire organization to maintain a strong cooperation with FP&A to gain the best results. FP&A, in return, can save a lot of effort for the departments by taking accountability on the what-if scenarios, ROI and other analytical ad-hoc tasks and activities.
The sooner the management realizes the need for a strong FP&A representative in the company, the better mindset and planning culture will be established and, respectively, the entire business will grow faster, more efficiently, and will succeed in crushing competitors and attracting investors.