It wasn’t too long ago that a company with strong investment in and focus on financial planning and analysis (FP&A) was thought to be ahead of the competitive curve. But now, according to one source, companies shouldn’t even be involved in FP&A.
What’s that? No planning? No analysis?
Well, yes, there should still be planning and analysis, KPMG Advisory says, although of different types than traditionally practiced. It’s the “financial” piece that’s the bigger problem.
In a September report titled “The FP&A paradox: It’s more than just finance,” KPMG argues that FP&A should be replaced with BP&A — “business planning and analysis.” The change essentially is meant to downplay finance’s focus on short-term results and shift toward strategies aimed at positioning a company well for a longer-run future.
“Financial planning is focused on budgeting and forecasting within a fiscal year, with an emphasis on meeting the quarterly or year-to-go target,” KPMG writes. “Functional teams aim to cut costs rather than anticipate upcoming business issues. Analysis is primarily focused on historical reporting and standard reports combined with inefficient delivery models. Reports, tools, and information are often outdated and not aligned to key business drivers.”
In contrast, “a business planning approach incorporates activities from functions that are crucial to moving the business forward — such as sales, marketing, and operational planning — all aligned with the company’s strategic vision,” the advisory firm adds. Rather than targeting a pure financial valuation, the company integrates key functional areas that directly influence business results.
To be sure, CFOs are looking for new ways to drive growth while maintaining costs through their company’s business strategy and its performance-planning and management processes, KPMG allows.
“When they examine the financial plan, however, all too often they discover that it reflects the numbers executives want to achieve without considering the reality of the changing business landscape,” write the report’s authors, Sanjay Sehgal and Brett Benner, a partner and a director, respectively, in KPMG Advisory’s financial management practice. “Leaders and staff become resigned to a plan they think they have to achieve but see no way of doing so.”
That mindset can lead to a number of challenges, according to the report.
For one, business leaders may make short-term decisions so the numbers work temporarily but create bigger long-term problems in the process. For example, they may release financial reserves to meet short-term targets rather than develop go-to-market strategies to close the gaps. Or they may offer steep discounts and reduce prices to generate short-term revenue increases but strain their supply chain and commercial organizations.
Or, a business unit leader may take an action to achieve the budget, which creates problems in another part of the business. For example, one business unit might impose travel restrictions to reduce operating expenses, which inhibits sales teams from maintaining their customer relationships. Another might reduce R&D spend, which constricts new product development and opportunities to generate revenue.
Business unit leaders also might go to war with data, creating their own analyses and reports to support a more realistic plan for their area but also creating confusion and multiple versions of the truth along the way.
A desire to avoid those kinds of issues is what’s driving leading companies to take a broader, more integrated approach to business planning. “Finance is uniquely positioned to lead this evolution, thanks to its integral role in challenging and enabling better decision making and providing business insights through the lens of operational and financial performance,” the report notes.
There are obstacles to making such a shift, though. Common ones, according the KMPG, include:
- Business units being incentivized for their own performance and not for the performance of the whole organization, making collaboration difficult
- A web of legacy systems that make it difficult to get to one version of the truth because there are too many data sources
- The lack of resources or capabilities to make truly data-driven decisions
- Employee resistance to collaboration, integrated processes, and new technology
It’s well worth marshaling the effort to overcome such obstacles, as business planning is more effective than cost management, according to KPMG. Finance should focus on four key priorities, the firm advises.
First is developing an integrated vision and integrating planning, budgeting, and forecasting processes across the organization in order to gain alignment. To help ensure that goes smoothly and that strategic plans and financial, sales, and operational forecasts are all fully linked over the long term, companies should establish cross-functional ownership of the planning process and output.
The second priority is to transform forecasting. Eliminating the annual budget may sound radical, but the goal is to shift toward a more strategic and analytical focus. Instead of the typical budget, organizations can employ a rolling forecast, aligned to the business cycle to allow for a continuous focus on the business. They should continually and systematically refine the drivers and models used, based on observed performance and relationships. That will provide the flexibility to adapt and react to the changing environment.
Third, when creating forecasts, companies should concentrate on the business drivers that produce material change to key performance measures (revenue, expenses, and profit) when adjusted. In doing so, the focus shifts toward analyzing and understanding operational processes and market indicators instead of the desired financial outcomes.
Finally, companies should strive to reduce complexity and the details that are subject to planning and forecasting. Historically they spend significant time planning at the lowest level of detail but often miss the significant trends behind the performance of a product or category. Instead, companies should rely on business drivers and historical trends when allocating costs to lower levels of product and customer data hierarchies. Reporting should be equipped with drill-down capabilities to provide access to more granular views of data when needed.