Improving FP&A accuracy

In uncertain economic times, companies are relying on finance to improve the accuracy of financial planning and analysis (FP&A) efforts to help them ward off threats and seize opportunities.

As organisations harness business intelligence and data analysis technologies, a broadening range of techniques can be employed to improve the quality and visibility of planning information.

Many companies are also looking to improve accuracy by integrating FP&A processes with business units. However, they face a wide range of barriers to increasing precision, with one of the most pressing being a dearth of available skills and talent to run new FP&A-related initiatives.

By 2020, at least 25% of large enterprises will increase planning accuracy by integrating operational planning and FP&A efforts, according to research by consultant Gartner in its report The Future of Financial Planning and Analysis. They will also integrate more data and business users into financial planning processes.

Gartner says digital business is providing the opportunity for FP&A to expand beyond traditional areas of financial analysis, budgets, plans, and forecasts. This includes partnering with the business, and results in more sophisticated and detailed financial analytics. Some of the ways organisations can improve FP&A accuracy, according to Gartner, include:

• Integrating operational planning processes, such as aspects of sales or workforce planning data, and line-of-business users into timely financial planning processes;
• Incorporating operational and financial results along with narratives to make management reports more actionable;
• Expanding financial modelling capabilities, for example, with driver-based cost or profitability modelling, using more-detailed data such as stock-keeping unit (SKU) levels;
• Preparing to adopt emerging artificial intelligence (AI)-based analytic technologies by, for example, identifying new data sources.

London-based Ian Pettifor, FCMA, CGMA, group CFO and co-founder of insurance technology startup Azur, said such expansion of FP&A could also include developing mobile-enabled management information, immediately available to and actionable by executives; and using data-enrichment techniques, which combine data sources into a unified view, to better inform decision-making.

"Data enrichment can supplement existing data on clients, risks, and products," he said. "Enrichment provides operating efficiencies — such as less keying and fewer questions necessary to place an order. Plus it informs the AI process, which relies on good data."

Tracking accuracy

Netherlands-based Amrish Shah, FCMA, CGMA, director of FP&A transformation at cosmetics and chemicals group Kao Corporation, said companies want to and need to improve financial forecasting to provide earlier and stronger signals that the organisation can act on. This will also help them mitigate risks and maximise opportunities.

"Many organisations, including the ones that I have worked for, have explored several ways to improve accuracy," Shah said. "A simple one is tracking the accuracy and bias of the planning. That can lead to some eye-opening insights for business leaders.

"Another is linking operational planning, such as sales planning, to financial planning more strongly. The financial review and management sign-off are then treated as critical elements of sales planning, not as separate processes."

Another strategy, Shah said, is shifting the business towards rolling forecasts and away from the traditional fiscal-year focus. "This aligns better to strategy as an ongoing process," he said.

Shah said he is also using business intelligence technology in more integrated ways to improve FP&A accuracy.

"From a financial planning perspective, we are taking a more integrated approach between business units because certain elements that we want to encourage within business units are the same," he said. "These include assessing the risk in a plan; identifying whether numerical assumptions represent risks or opportunities; and developing a common language around financial planning. For example, when we talk about a budget versus a forecast versus a target, [we want] all business units to have the same understanding."

In doing this, it is important to avoid a one-size-fits-all approach, especially regarding the level of detail required and timings, Shah said.

"Business units are different, and it may be less useful for one of them to plan in lots of detail, but make perfect sense for others," he said. "That adaptability and flexibility adds complexity, but it does result in a more impactful planning culture."

Shah is wary of being too flexible. "In the past, flexibility has been abused where suddenly thousands of different reports get created, which risks leading to non-value-adding complexity," he said. "It is a fine balance between focusing on what matters — the essential building blocks of strategy and its financial consequences — and not suppressing creativity and different perspectives."

Real-time forecasting

Pettifor, the group CFO at Azur, is aiming for as close to real-time forecasting as possible.

"The FP&A is critical in helping management to make business decisions," he said. "Like most organisations, we maintain a laser-like scrutiny on our cash holdings. We run a cash forecasting model that updates and flexes continually. So, as we process each transaction, that populates the forecast immediately.

"To achieve this, we have used a model that I've developed myself with an Excel expert over the last ten years, using Excel and Power Pivot, a data analysis add-in. However, that model makes the business too dependent on me and the programmer, so we are moving to a new piece of corporate performance management (CPM) software from Adaptive Insights. The new system can do 95% of what the Excel model can, but it's easier to use and more flexible, for example, allowing us to use interfaces, port data, go into more detail, and, critically, ensures firm-wide visibility of our modelling and forecasting."

While some companies are struggling to integrate business units onto their FP&A systems, Azur's business units are already on the same platform, Pettifor said. This has been possible because the business started in 2016 and had no legacy systems. The new CPM software also enables relatively easy integration, he added.

Pettifor said the biggest challenge to improving FP&A accuracy is finding the right staff to do it.

"We look for people with an entrepreneurial mindset, who want to challenge norms," he said. "Technological solutions are continually changing, so it is critical that our people challenge how we do things. It is extraordinarily difficult to find those people and to find people who can ease the narrative from the plethora of data. That is art more than science."

Pettifor said that, in general, finance functions are still too focused on transaction processing rather than planning and analysis.

"Technology has let the finance function down and not evolved as much as it should have," he said. "I started developing my own program ten years ago, because when I started, there were no other solutions."

Pettifor said that having one data source, to avoid having multiple versions of the truth, is critical to the success of any FP&A integration. This can be a major challenge for those using legacy systems and will be a strong incentive for organisations to move to the new breed of cloud-based digital applications, he said.

Frequent updates

Gordon Grant, FCMA, CGMA, the CFO at multinational manufacturing technology firm DEM Solutions in Edinburgh, Scotland, said improving FP&A accuracy is important regardless of company size or sector. Grant, a past president of CIMA, has a small finance function — five people — but still updates forecasts every month.

"Every July, we agree a formal, three-year budget with institutional investors," he said. "But every month, we revisit and update the budget and compare it against previous forecasts so we can talk to the board about changes in the plans.

"We have two overseas offices and operate in multiple currencies, but this [frequent update] means we are able to [plan] very accurately. It gives us credibility with our investors, that we aren't going to spring any surprises on them — that we will spend the allocated marketing and development budgets to keep generating product and, in turn, sales and to meet our profitability targets. We have found that they get the comfort they need, even though we are constantly updating our plan, and that they in turn retain their confidence in us."

DEM Solutions uses a cloud-based accounting software platform and sales system and Excel for financial forecasting, which also has recently moved to a cloud-based storage provider.

"If it's in the cloud, more people can get a status update any time they like, which is harder to do currently," he said. Previously, users had to request file copies from the master user, which according to Grant, "invited delays as well as logistical problems".

However, attempts at integrating business units and their systems have been difficult, Grant said. "We tried marrying the CRM to the accounting platform with add-ins; it didn't work. They can integrate, but they are not reliable. With financial systems, if the information becomes flaky, you end up ditching it because you always have a doubt in your mind. You need that reliability."

Grant agrees with Pettifor that a shortage of talent is the biggest challenge to improving FP&A accuracy. This also makes it critical to use the right motivational techniques.

"We're looking for early adopters who can try to make the technology work better," he said. "However, we will always come across things that don't work, so rather than beat them down for not delivering, it's better to reward them for trying and move on."

Resources

• "FP&A Meets Artificial Intelligence," FM magazine, June 2018
• Gartner report, The Future of Financial Planning and Analysis, November 2017
• IFAC report, Perspectives on the Finance Function Journey, November 2018

Tim Cooper is a freelance writer based in the UK. To comment on this article or to suggest an idea for another article, contact Neil Amato, an FM magazine senior editor, at Neil.Amato@aicpa-cima.com.

Photo credits (left to right): Patrick Post/AP Images; Ian Pettifor; and Fiona Hanson/AP Images