Effective Planning May Require Deep Finance Changes

Three out of four CFOs now have process improvement initiatives underway.
Mary DriscollAugust 24, 2016

Now more than ever, companies are asking their CFOs to provide sound advice on strategy: how to attract customers with the right blend of pricing, choice, channel, service, and margin.

Operating leaders also want finance’s help with plan execution. They want finance chiefs to forecast and track the flow of current revenue and profit streams with a high deal of accuracy — and help them to avoid unexpected obstacles that could smash their plans to smithereens. Three out of four senior finance executives out of a total of 154 who took a 2016 survey by APQC, the Houston-based business benchmarking and research firm I work for, now have process improvement initiatives underway. A primary goal is better financial planning and analysis (FP&A). More than half say they are reacting to calls from senior business executives for better performance insights.

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Sounds simple enough: rev up FP&A. But effective financial management may require a deep change in the way finance carries out its mission. And as the budgeting season once again dawns, some CFOs are secretly saying bad words about the status quo. APQC research finds a sharp contrast between (a) what CFOs want to do to make performance management relevant and (b) the hide-bound conventions and staff capabilities they are stuck with. Despite aspirations, more than one-third are tolerating poorly aligned or unacceptable models for FP&A. (See graph, below.)


FP&A not aligned w strategyReasons for Misalignment

There are many reasons for this misalignment. For one thing, CFOs report being hampered by poorly integrated flows of data from financial-transaction systems as well as by poor access to non-financial data such as those controlled by supply and demand planners. Perhaps it’s no surprise that only 50% of a total of 130 finance teams who took APQC’s 2015 survey on planning models are doing rolling forecasting. We also hear about finance staff so overcome by manual data gathering and manipulation that there’s no time left for building analytical skills and talent. Beleaguered staffers have all they can do to close the books and deliver official financial statements in a reasonable amount of time.

Further constraints involve bad habits that some CFOs and controllers allow to dominate periodic business reviews. Let’s assume that a given group of capable managers is sincerely working hard to drive growth. If a set of monthly targets is glowing red, don’t let the meeting get stuck on the budget-versus-variance analysis, which merely says the horses have left the barn.

Make that point and move on to pertinent topics. Spend some time on the underlying assumptions behind the original plan—maybe talk about why forecast inputs were faulty in the first place. Get the business operators to talk without fear of being ignored or shunned about what they can do to get a disappointing performance trend turned around. You can be tough in examining the truth about current conditions without making everybody shut down.

Continuing in the vein of practical collaboration, let’s turn to the annual budgeting process. Chances are that it’ll take too long. Data from APQC’s benchmarking assessments of American companies indicate a wide disparity on this score. The top performers, the top quartile of the 1,100-company data set, can wrap up the budgeting process in 28 days or less. The weakest performers, those in the bottom quartile, need 90 days or more. At the median, the mid-point in the range, the cycle time is 40 days. (See graph, below.)

Cycle Time to Complete Annual Budget (1)

It’s a good bet that a lot of organizations waste hours e-mailing spreadsheets back and forth between the controller’s office and the operating departments. Then there’s the time spent manually entering data into a master plan. That’s the logistical side of budgeting, and software vendors are happy to explain how CFOs can easily replace such antiquated approaches with a cloud-based solution.

But back to those old bad habits. Our research shows that nearly seven out of 10 survey participants use “last year plus x percent growth to generate a y percent profit increase” as the watermark when setting annual budget targets. At the same time, they don’t bother to do much in the way of “what-if” and predictive analysis to inform decision making.

It’s striking that these traditional budgeting and planning methodologies remain paramount when strategy and management gurus across the land are talking about the fast-paced and risk-filled nature of commercial competition. How can this be?

One senior finance executive explained it this way: “You will not get funding to invest in tools to make finance more effective unless you can cite a new compliance requirement.” While it’s true that business leaders today talk enthusiastically about the appeal of predictive business analytics, they remain stingy when it comes to modern performance management.

What’s a CFO to do? Vow to create an atmosphere in which sincere collaboration thrives. Begin to engage profit-and-loss-statement owners in candid conversations about what constraints, risks, and opportunities they see coming up. Sure, people will always want to have furious debates about what’s possible and what’s not. Set your timer for 10 minutes and let them go at it. But spend a lot of time prompting reasonable conversations about the nuances of operating performance long before the first quarter is over.

Mary Driscoll is a senior research fellow in financial management at APQC, a nonprofit business benchmarking and research firm based in Houston.