Best-run companies take advantage of financial planning and analysis

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The best-performing companies tightly integrate various components of financial planning and analysis, focusing on some key metrics to drive their financial results, according to a new report.

The report, released this month by the Institute of Management Accountants and Workiva, describes 12 key FP&A principles or best practices for companies, based on a survey of 734 financial executives and managers.

“We surveyed over 700 financial executives from all over the world, so it was a fairly global response,” said IMA director of research Kip Krumwiede, who co-authored the report. “Of those 700, we divided them into four groups based on their performance. There was the best performing, there was the worst performing, and then two in the middle. We compared the best performing firms with the worst performing firms and found some stark contrasts in the various FP&A practices that we’re discussing in this report, which are what we call best practices.”

The study found that the best performing organizations take a much more rigorous approach to financial planning and analysis. “They really tie together all the different parts,” said Krumwiede. “It’s not just budgeting. It’s reporting, forecasting and modeling. It’s all tightly integrated. They have a model of what really drives the value for their company, and they understand well how operational measures drive their financial results. So many companies, and especially the worst performing firms, treat financial planning and analysis purely as a financial exercise done primarily by the finance department, whereas the best performing companies really integrate operational metrics that they need to do well on to be successful and tie those to financial results, not only in the budget but in their overall plan. Then they set up specific initiatives to do well on those operational metrics and they track those as well. That makes a big difference in having successful FP&A versus not really successful FP&A.”

The report didn’t find much evidence of outsourcing of the FP&A function.

“There really isn’t much successful outsourcing of FP&A because to do it well, it has to be really closely tied to your business strategy, and those operational metrics and targets that need to be hit,” said Krumwiede. “You really can’t effectively outsource that. The best performers tend to invest in some good FP&A-related software to integrate everything and provide much more detailed analysis, both operational metrics as well as financial metrics.”

The report discusses the best practices in a general way, but without identifying what specific companies are doing to preserve the confidentiality of the survey. But many of the companies are using predictive analytics.

“Predictive analytics is definitely part of financial planning and analysis,” said Krumwiede. “You’re not only doing the budget, but you’re planning and trying to predict what will happen under certain scenarios or if you meet your operating initiatives. That’s definitely a part of this and it typically requires good statistical analysis as part of that.”

The study uncovered a big difference between the FP&A strategies used by the most successful companies and their competitors.

“I was fairly impressed by the stark differences between those best performing firms and the worst performing firms for the 12 different principles of best practice that we proposed,” said Krumwiede. “They were all statistically different.”

The researchers polled corporate finance officers, such as CFOs and controllers, as well as operational managers. In many of the best performing companies, the finance department worked closely with the operations side.

“Before you do anything, it’s really important for the accountants to become familiar with the operations itself,” Krumwiede suggested. “Try to let them shadow the operational people to see what they’re doing and what issues they’re dealing with. Maybe even have a rotation program where operations people come into the FP&A process, and finance employees rotate and work in the operations area for a while. It’s really important to become familiar with the overall operating model of the company, and what they’re trying to achieve, and what problems they’re encountering. So often the FP&A process is just divorced from what’s actually happening, and all accountants can say when there’s a variance is something like, ‘Well, we didn’t sell as many units as we had expected.’ But that’s not really helpful. It’s much better if you can say. ‘Well, the Groupon plan took longer than expected to take hold,’ or ‘The website was down for two hours at a critical time,’ or something like that. It’s important to provide actual root causes for variances, and you can only really do that if you’re familiar with the business itself.”

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