The Power of FP&A: A CFO's Essential Tool for Growth

Elevated economic and financial market uncertainty in the wake of recent banking sector turmoil, along with the Federal Reserve’s ongoing battle against persistent inflation, create a wide array of challenges for CFOs.

To thrive in this environment, CFOs need to reinforce their strategies with FP&A forecasting and scenario planning, examine their portfolios, and ensure the balance sheet is optimized to support the organization’s go-forward strategy. Combined, these three no-regret actions will not only help CFOs transform today’s uncertainty into an opportunity but also help them develop more resilience to face the challenges of tomorrow.

1. Build Resilience and Agility With Scenarios Analysis

The business landscape in the current global economy remains difficult to decipher. Not only are there significant cross-country divergences, but even within each economy, sectors are not evolving at the same pace.

In the U.S., while economic data doesn’t point to a retrenchment in private sector activity, the economy started the year on a soft note with increased evidence of a generalized slowdown in activity.

The combination of persistently elevated inflation, higher interest rates, and stringent credit conditions are dampening private sector spending power. Already, sectors sensitive to interest rates, such as housing and banking, have experienced a significant amount of stress. And, while generally healthy consumer and corporate balance sheets have provided some cushion until now, we can not underestimate the risks from nonlinear spending and investment decisions that could precipitate an economic slump.

CFOs looking to deploy agile strategies amid this environment of elevated uncertainty can look to develop forecasting and scenario analysis frameworks to inform consistent and objective decision-making, supported by data-rich insights. Economic forecasts based on robust models and comprehensive scenario analysis help CFOs make informed strategic decisions to find new growth opportunities, adjust pricing strategies, manage talent costs and advise on the financials for new products or services suited for changing market conditions.

CFOs can place emphasis on a dynamic and adaptable strategy. As such, simply pulling out the playbook from the 2008-09 financial crisis, or the pandemic shock, will not suffice to navigate today’s unique business environment.

By leveraging macroeconomic forecasts and scenario planning, CFOs can manage risks effectively, communicate financial performance to stakeholders and help organizations gain a competitive advantage in a fluid economic and financial market environment.

CFOs can leverage these macroeconomic insights in two distinct ways. 

1. They can build financial strength and resilience by ensuring readiness to rapidly adapt to shifting inflation dynamics, higher and variable costs of capital, fluctuating labor market dynamics, and heightened financial market volatility. 
2. CFOs who have a practical understanding of the risks and opportunities associated with different potential economic developments can more easily manage the strategic narrative for their businesses and communicate it to the broader public.

2. Conduct Regular Portfolio Reviews

Supported by dynamic and pliable scenario examinations, CFOs can rapidly assess the strength and gaps in the current business or product portfolio. Buying or selling is one part of the equation, but the other involves improving, refining, or repositioning the portfolio. Developing objective assessments of the portfolio creates a baseline for decision-making.

While the initial assessment is a critical component, we believe CFOs may want to push beyond it to assess the broader risks to the business and challenge the status quo via an examination of pro forma impacts, stranded cost allocation, financing needs, covenants, performance improvement, stakeholder analysis, talent and the redeployment of proceeds. 

Beyond ideation, planning, and execution, CFOs are increasingly being tasked with helping craft and articulate a clear and efficient communication strategy for internal and external constituents regarding strategic portfolio decisions. By conducting regular and robust portfolio reviews, CFOs can react quickly to drive long-term value creation in this tumultuous environment.

3. Optimize the Balance Sheet to Support the Go-Forward Strategy

CFOs who enhance their balance sheets and establish agile capital allocation strategies can more easily shift capital to address fluid needs, seek attractive financing options, plan early for M&A, and mitigate risk.

Tighter financial pressures and elevated credit standards have led business executives to focus their investments on segments with the strongest growth opportunities. Capital costs and interest rates are unlikely to decline rapidly in the near term. As such, CFOs may need to remain focused on cash preservation and generation.

CFOs may need to regularly review working capital trends, cost containment through process automation and improvement, appropriate and up-to-date tax strategies, and go-to-market tactics. Fresh perspectives need to be introduced, and previous ideas challenged and revisited. With the inherent efficiency of internally generated cash, CFOs can aggressively attack market opportunities to spur growth and drive returns on investment.

Should external capital be needed to support business objectives and growth desires, developing an independent view on financing alternatives is critical in volatile markets. CFOs can ensure the capital structure supports and enhances the strategic objectives rather than inhibiting or restricting them. Equally as important is driving competition among financing providers and maintaining multiple ways to win. Optionality allows for efficient maneuvering should markets move adversely.

Business leaders are still waiting for more reliable signs of recession or recovery, with those signs likely to vary by sector. In this fluid environment, CFOs who prioritize forecasting and scenario analysis, maintain agile capital allocation, and enhance existing portfolios can embrace alternate financing options as needed, reallocate capital efficiently and prepare for inevitable macroeconomic and financial market fluctuations.

Gregory Daco is chief economist at EY-Parthenon, Todd Ulrich is senior managing director at Ernst & Young Capital Advisors, and Greg Hisenberg is EY Americas corporate finance leader. 

The views reflected in this article are the views of the authors and do not necessarily reflect the views of Ernst & Young LLP or other members of the global EY organization.

According to The CFO Alliance’s mid-year CFO checkpoint report, only half (50%) of the 9,000-plus CFO Alliance members remain confident they can meet this year’s top- and bottom-line goals.

Short Staffing, FP&A Function Are Hurdles

Finance teams face workloads that continue to exceed some capabilities. One-third (33%) of those surveyed reported they were working harder than expected, while over a quarter (28%) reported operating at least one person short on their teams. To remedy this, nearly a quarter (24%) allocated funds to internal upskilling, while less than one-fifth (18%) relied on outsourced labor.

“The data demonstrates that the CFO’s steadfast commitment to navigating the currents of change and uncertainty will likely help many of the businesses that they lead and serve to stand up against these challenges and position them to seize current and future opportunities,” Nick Araco Jr., founder of the CFO Alliance, told CFO. “That bodes well for forecasting business and economic performance in 2024.”

A significant hurdle for organizations is the FP&A function. Nearly nine in 10 (87%) said FP&A tasks, including reporting and forecasting, needed improvement. Finance leaders were still confident in their budgets, as 83% of them said they were either balanced or aggressive in their view of budgeting heading into next year.

EBITDA Underperformance

Confidence in hitting year-end profit targets is waning. Barely half (49%) of those surveyed expect year-over-year increases in EBITDA. But, nearly three-quarters (71%) of that group said they are confident they will hit their full-year plan. 

Less than a fifth (15%) of CFOs in organizations predicting EBITDA declines said the same, and half (52%) of all finance execs were confident in reaching EBITDA goals, down from 80% as measured by the CFO Alliance at the start of 2023. According to Araco Jr., many of those with low confidence will find a way to come out in one piece. 

“As business sentiment continues to shift throughout the remainder of 2023, our CFO Alliance members' unwavering dedication and financial stewardship will continue to be instrumental in steering their enterprises toward prosperity, reflecting not only their proficiency but also their collective resilience as a team,” he said. 

One variable CFOs have been prepared for is inflation. Two-thirds (66%) of finance executives indicated the year-to-date impact of inflation on their organization was either expected or better than expected. Eight in 10 expected the full-year impact to align with their estimates.

Can FP&A groups keep up with the rapid, profound changes in many companies?

Consider, for instance, what’s shaking up the media industry. Consumption patterns have changed as traditional television viewing’s share shrinks, digital streaming rises, and content creators can more easily self-publish and distribute their shows. FP&A teams at media companies thus need to assist with insights around the shift in revenue and profit from traditional television viewing to digital streaming models; around more ways to monetize content; and around the investment required to set up direct-to-consumer models.

The COVID-19 pandemic and subsequent lockdowns accelerated some of these trends, compressing several years’ worth of shifts in digital behavior into months, as well as intensifying cost and liquidity pressures on many industries.    

Business leaders and CFOs want their FP&A teams to become stewards of value creation. FP&A should spend less time explaining the numbers, they say, and more time working with the business to manage them. As one finance executive told us, “I need an operating thought partner and not someone that is just keeping score.” 

CFOs have recognized the need to transform FP&A for some time. Yet despite years of hard work redesigning processes and investing in new technology and data, many have not achieved the results they expected. In our experience, they encounter five challenges when trying to transform the FP&A function.

1. Lack of alignment or buy-in

Successful transformations require a strong partnership between finance and the business leaders from the start, rather than finance acting independently and then reporting back to the business on the results. That’s because the business must make the trade-offs on the future sources of value creation and the path and timing to get there.

2. Sticking with the traditional approach to FP&A organization

Traditional FP&A organizations tend to rely on a group of generalists to carry out a broad scope of responsibilities. However, the bar for expertise in FP&A continues to rise as companies enter and exit customer segments, products, countries, business models, and channels. With deeper specialization now at a premium, organizational design can help make this happen, and CFOs are increasingly turning to new organizational models for FP&A, most notably hub-and-spoke configurations and centers of excellence.

One example is Nielsen Global Media. Over several years, Nielsen moved from a highly decentralized to a more centralized organization. In the process, Nielsen created a central FP&A analytics hub that owned the data to create a single source of truth and performed cross-functional analytics used by the entire organization. Teams colocated in the business were smaller and focused more on interacting with the business than on running the analytics. As a result, Nielsen reaped cost savings and also improved the service level of the business — by simplifying forecasting, cutting the budgeting process time in half, and minimizing the time that operational and commercial teams spent on planning.   

3. Persistent gaps in critical skills

FP&A teams composed only of people with a traditional finance or accounting background often lack a deep understanding of the business domain. Partial allocation of staff time between FP&A and other areas also limits the ability of finance professionals to build competence in FP&A.

To build the required skills, it’s critical to first dedicate some group of finance professionals to FP&A work and not split them between FP&A and accounting or other transactional work. The best finance leaders look beyond traditional skillsets for people with backgrounds in business or data science or analytics. They also invest in training and rotational programs.

4. Inability to adopt or scale up new ways of working

This pitfall manifests itself through the failure to adopt innovative practices, or the tendency to make a large number of small bets with scant results. The main remedy is to pick a few areas in which to double down investment, where innovation will have the largest positive effect on the business goals.

As part of a major cost-reduction campaign, one large telecommunications firm took the opportunity for the FP&A function to reinvent itself. FP&A installed better tracking of performance management and initiatives, which improved accountability. It built a budgeting tool that improved key performance indicator (KPI) analysis and general reporting. And a cloud-based, initiative-tracking tool ensured that savings initiatives stayed on course.

5. Inadequate technology and data

As economic volatility grows, the business is increasingly requesting more frequent forecasts from finance. However, FP&A teams preparing the forecast spend half their time on data gathering and preparation, a recent survey by the Association for Financial Professionals found — an unsustainable situation. 

Waiting for a large core system upgrade will take many years and have questionable ROIs. Instead, it pays to take a phased approach using a portfolio of existing and new technology solutions. Cleaning data and addressing other data issues is a good start, after which FP&A can layer on more advanced tools and use of the cloud. 

As companies commit to transforming their FP&A function, choosing the right focus and pace is essential.

Microsoft’s finance organization has been on a transformation journey since the early 2000s, improving the control of data and standards across the company. Finance has fostered a culture that continuously brings innovative technology solutions to its internal customers, particularly in FP&A.  Examples include a business management portal, self-service analytics on a global KPI lake, and machine learning in forecasting processes.  

Many of these innovations were developed and launched quickly — for example, 8 to 10 weeks for machine learning in revenue forecasting and 14 weeks for the global KPI lake adopted by business users. As a result, Microsoft finance has realized a 20% reduction in time spent validating and compiling data and has significantly upgraded the quality of support provided to the business.

As companies commit to transforming their FP&A function, choosing the right focus and pace is essential. They should align with business leaders on the sources of value creation for the future, then work backward to redesign FP&A around them. And they should carefully choose their spots for investment. That will raise the odds of FP&A shifting its role from scorekeeper to true business partner.

Michael Heric is a partner, Steve Beam is an expert partner, and Anup Juneja is a senior manager with Bain & Company. They are based, respectively, in New York, Atlanta, and London.

Many companies stumble in their FP&A analysis. As just one example, consider how Peloton, the exercise equipment and training company, made highly optimistic consumer demand forecasts, assuming that the surge of demand during the COVID-19 pandemic would last. The problem was compounded by a gummed-up supply chain that deterred potential new customers.

Peloton’s planning wasn’t flexible enough to adjust quickly to changes in demand and supply. The result: a large new factory it will never use and has to sell, and a drop in market capitalization from nearly $50 billion in January 2021 to $3.3 billion in June 2022.

Those traditional methods create headaches for financial leaders. In a Bain survey of 240 CFOs in the U.S. and Europe, respondents overwhelmingly cited FP&A as their top priority. A good FP&A team understands where money is made or lost across the business and helps senior leaders see around corners while illuminating the risks and opportunities within the organization and externally.

To Go Beyond Budgeting

Beyond Budgeting, a framework developed as an alternative to traditional annual budgeting, helps companies cultivate dynamic financial planning. Beyond Budgeting originated in Europe in 1998 and has been embraced entirely or partly by a broad range of global companies, including Toyota, Danone, Maersk, and Handelsbanken. Beyond Budgeting consists of six leadership principles and six management processes.

In our survey, the 13% of companies that lead in key financial planning outcomes are twice as likely as other firms to adopt many of the principles and management processes of Beyond Budgeting. The gap between leaders and others is particularly large in a few key areas. To start, the leaders minimize hierarchical control and bureaucracy. Too many companies embed a lot of detail in the process of allocating resources, sometimes down to the department or manager level for operating expenses, or down to the individual project for capital planning. The leaders, by contrast, streamline the level of detail in planning.

Planning leaders also excel in target setting. Many companies take the seemingly easy route of basing the next year’s target as a percentage over the current year. However, internally negotiated, fixed targets don’t work in dynamic situations. Instead, leaders set targets based on benchmarks linked to the business strategy, and they often separate target setting from planning and forecasting. This keeps them focused more on winning in the market than on hitting internal targets, and provides a realistic view of actual business performance.

New Looks for Planning

Companies can streamline the current planning process, augment it with new techniques, or reinvent the process. The first two can be effective in the short term, but for lasting benefits, some companies are pursuing entirely new ways of planning.

Amazon, for instance, has reinvented the budget process by putting customer priorities at the center. It allocates funding to activities, not business units, with each activity evaluated on how it affects customers. For each new activity, the owner creates a planning document that contains a future press release describing the benefits to customers. Unlike traditional management reviews that focus on financial metrics, Amazon’s reviews focus on real-time customer metrics.

Hilti, a Swiss manufacturer of building products for the construction industry, began shifting away from traditional budgets more than 15 years ago. Hilti first made many of its targets relative rather than absolute and linked its bonus system to progress toward these targets. It replaced annual budgeting with three rolling forecasts per year, each with only 100 line items.

Hilti's performance management focused on comparing actual financial performance with a previous period’s performance against established targets. From 2011 to 2021, Hilti was able to adapt its financial planning amid disruption in the power tools industry, a global pandemic, and supply chain shocks, as revenue grew 1.5 times and net income by seven times over the period.

To improve planning, FP&A will need to add people from backgrounds other than accounting and standard MBA programs, such as data analytics and data science. That kind of talent can help extract the key business insights from data, rather than spend time manipulating spreadsheets. Blending the right processes with the right talent and technology to create truly dynamic financial planning will allow companies to adjust quickly and confidently to the shocks coming their way.

Michael Heric is a partner, Steve Beam is an expert partner, and Anup Juneja is an associate partner in Bain & Company’s Performance Improvement practice. Heric also leads the corporate support solution in that practice.

Financial planning and analysis (FP&A) capabilities are essential when the pressure’s on to show results from ambitious transformation and value-creation goals. Rather than risk falling behind amid significant M&A activity, CFOs can use transactions to catalyze change for their companies’ FP&A functions.

Many CFOs have an opportunity and an imperative to invest in bringing their companies’ FP&A capabilities to the next level, with nearly two-thirds (59%) of U.S. CEOs expecting their companies to pursue acquisitions in 2022, according to a recent EY CEO survey.

Driving FP&A improvement can be a logical part of rethinking how to effectively serve the new enterprise that results from a merger or initial public offering (IPO). For example, Kristin Johnson, senior director of global FP&A for Krispy Kreme, faced a tight timetable in preparing for its IPO amid disruption from the pandemic. 

“I joined in May 2000, we went public in July, and we had to release earnings and give guidance for the first time publicly in August. A lot was coming at us, and we had to get comfortable with our forecasting,” said Johnson during a recent EY webcast.    

CFOs can use a transaction event as a lens to focus on driving change in FP&A in three areas: getting the metrics right, investing in technology, and strengthening stakeholder communications.

1. Redefine Metrics

Particularly with big deals, a company won’t be the same after completing the transaction. So, FP&A teams need to re-evaluate business drivers and make sure they’re using the right key performance indicators (KPIs) to inform decision-making.

The enterprise could have new business models, products, markets, geographies, technology, and other assets to manage. Those will require new metrics and a different approach beyond traditional reporting to produce better forecasting, forward-looking insight, and likely some new nonfinancial measures. 

Additionally, as environmental, social, and governance (ESG) factors become increasingly important, the combined company will have to develop nonfinancial metrics to help provide the disclosures investors want. Those metrics might include:

• Customer value – satisfaction, trust and loyalty, and brand value

• People value – engagement, employee loyalty, leadership, diversity and inclusion, and health and wellness

• Societal value – sustainability, total economic impact, carbon footprint, water consumption, and company ethics

Key points for CFOs:

• Prepare to answer different questions from stakeholders on a range of metrics, such as customer demand, supply chain stability, capital allocation, and sustainability. 

• Establish which metrics will help the company achieve M&A synergy goals.

2. Double Down on Technology Enablers

When a company goes public or grows through M&A, finance leaders can invest in advanced technology capabilities to help the FP&A team perform more sophisticated reporting, forecasting, and modeling. That can help CFOs achieve the top three technology priorities named in a recent EY survey: advanced and predictive analytics, cloud-based enterprise planning and forecasting, and artificial intelligence applications.

With enhanced technology, the FP&A team may have more relevant data and time to do better analysis, engage in next-generation planning and deliver more effective communications. 

Key points for CFOs:

• Identify data required to analyze whether the new enterprise is achieving its goals for cost savings, value creation, and other synergies. 

• Develop a plan to overcome fundamental issues regarding efficient data management and governance.

3. Communicate With More Impact 

How do transformative deals change how company leaders talk about the business to the board, shareholders, analysts, and regulators?

Sharpening and shortening the message is critical, especially for executive communications, said David Kirshner, executive vice president, CFO, and chief transformation officer of Lifespan, a New England hospital system.

“When you're in meetings, maybe you can spend five minutes on the right takeaways. If you throw thousands of numbers and charts at [people], the possibility of someone zoning out is high,” said Kirshner. “You want to make sure that your actual takeaway is driven home.” 

Key points for CFOs:

• Use storytelling and one or two impactful graphics and drill down to just a few lines of insights.

• Build trusted partnerships and align messaging closely with investor relations and corporate development leaders.

FP&A transformation is a continuous evolution. By using an M&A or an IPO as a catalyst, a CFO can create a vision for FP&A that fits the future and build capabilities that help the company make smarter business decisions.

Bob Nannini is principal, corporate finance, and Lukas Hoebarth is principal, mergers and acquisitions, at Ernst & Young. The firm’s principal Chris Dente and senior manager Tamara Stebunova contributed. 

The views expressed by the authors are not necessarily those of Ernst & Young LLP or other members of the global EY organization. 

Automated systems for FP&A teams can take repetitive and time and resource-intensive tasks and put them on autopilot, freeing up work hours and bandwidth.

Determining whether automation is the next step for your business may mean you’re already behind. The pandemic has caused workers and businesses to adapt and automation tools can help get firms up to speed.

Automation tools aren’t designed to replace employees, but rather augment them, supercharge their productivity and output, and ultimately lead to better decision-making.

In a new world where workforces are decentralized and processes are scattered, time is an organization’s most valuable resource. Businesses can’t afford to overlook the potential benefits automation offers.

Over the next several years, the new technologies available to finance and accounting teams will do more to advance the field than anything has in decades. We’re on the precipice of a big evolution.

Teams now have payroll, business intelligence, inventory management, and FP&A technology that can employ robotic processing, artificial intelligence, and automation to save businesses significant resources. Since these technologies and tools are often delivered using a Software as a Service (SaaS) model, there’s less hardware to invest in and fewer IT staff to employ.

Many businesses may have tools available to them that can provide tremendous benefits, but they may not yet realize it.

Getting Started

How do you know if your company actually needs or stands to benefit from automation? If your team is over-reliant on spreadsheets, spends hours manually entering data, and has trouble processing and disseminating that data to decision-makers, you could be a prime candidate. 

Luckily, the framework for getting started toward automated solutions can be fairly simple:

1. Identify pain points in your processes and what needs to be fixed.

2. Review the available options, including features and pricing, and see what others in your industry are using.

3. Establish your top choices, create a budget, and get funding for the transition.

4. Select an implementation partner. 

There are myriad options out there for cloud-based automation solutions, no matter the size of your business. 

Automating Accounting

The month-end close process for accounting teams is one area that’s ripe for automation. While teams traditionally rely on Excel to facilitate their processes, new tools are on the market and stand to make a big difference in how effective and efficient they can be. 

While accounting teams are typically slammed at the end of every month, automated solutions can make accounting an ongoing process — booking entries as they occur, smoothing workflows, and minimizing pressure on employees. Tools can automate key elements of the month-end close process to eliminate reliance on spreadsheets, provide management with greater control and visibility, and increase productivity by eliminating tedious or useless steps. These benefits help ensure there is less room for manual error and higher quality financial information. 

Even so, research from Robert Half finds less than half (48%) of companies don’t use automation tools for general ledger reconciliations, potentially impacting bottom lines. As processes such as account reconciliation can eat up tons of time, some teams find that they’re scrambling to get to the analysis and reporting potion of their workflows. This is where new tools and tech can help to standardize and automate journal entries, identify bottlenecks in existing processes, and improve reporting methods. 

Leveraging CPMs

Analysis and reporting, commonly among the last steps of the “record-to-report” assembly line process, is another area where automation tools can provide a productivity boost.

FP&A teams often struggle with the data consolidation processes, data inconsistencies, a lack of data security, and being in a constant state of financial planning. A majority of executives overseeing these systems say these processes are time-draining, labor-intensive, and unintuitive.  

This is where a corporate performance management (CPM) system enters the fray. CPM refers to the metrics and processes used to manage the operational performance of a business and can become a powerful tool for consolidating, planning, and reporting. A CPM tool can bring a disciplined approach to data management and decentralize planning and reporting. 

The basic features of a CPM tool typically include the ability to develop “what-if scenarios” to foresee future issues, standardize financial and operational planning, plan and budget for workforce needs or changes, and create custom reporting tools and dashboards. 

The business world has changed and utilizing a new generation of powerful technologies and tools will be paramount to finding success in a post-pandemic economy.

Michael Poveda is managing director at UHY Advisors. 

When the star Sirius rises at dawn, or so the tradition goes, the summer doldrums and worse set in. However, we see it as a time of hidden possibility. In our experience, FP&A departments are chronically understaffed and have little need for busy work, summer or not. That said, July and August, the vacation-time calm before the looming annual planning storm, offer one of the few opportunities to think about one-off priorities in desperate need of attention. Consider using a bit of downtime to at least frame-out one or more of the opportunities below.

Simplify the Capital Investment Model

Finance should be, in part, about decentralizing some of the basic analysis involved in making investment decisions. This means operators should be able to take a preliminary swing at potential investments. The critical inputs usually come from the business itself and the quality of the information can only improve when the bigger picture is better understood by all. 

We are not talking about a model that tracks a complex real estate transaction or tax play. Focus on decisions that are made on a repeated basis — for example, how much inventory to the warehouse, whether to open a new store or distribution center, or whether to retire an aging or underutilized asset.

If you make it easy to gauge a ballpark sense of net present value on the fly, then more ideas will naturally follow. If more ideas are offered, then better ideas should emerge.

Rather than issuing mandates such as “reduce costs or grow revenues by 10%” during the planning process without support, empower all employees to identify the best opportunities for performance improvement. Finance does this by raising their financial literacy and providing a clear framework for assessing the merits of operational decisions.

How many good ideas fail to see the light of day because “tinkerers” are discouraged from putting pen to paper, or keystroke to laptop, because they cannot easily assess if their idea translates to financial viability?

Commoditizing the most straightforward analyses and placing certain capital models in operators’ hands will eliminate tedious work, empower the field, and let finance experts make good use of their unique analytical skillsets to identify valuable opportunities.

Forecast the Balance Sheet

We have never met an executive that does not see the merit of balance sheet forecasting in conjunction with the P&L. Despite this, many companies forgo it and even develop their forecasts after the plan and budget are agreed upon. Imagine trying to forecast a bank account return without projecting how much is on deposit or a portfolio manager’s return without considering investor funds.

 

 

If we do not bother to forecast the entire capital side of the plan — including not only capital expenditures but other aspects of the balance sheet like net working capital and strategic investments, what signal do we send to business managers? If the businesses see capital as something that we are planning for, might it stimulate ideas that drive better productivity of assets and overall performance?

How many good ideas fail to see the light of day because 'tinkerers' are discouraged from putting pen to paper, or keystroke to laptop, because they cannot easily assess if their idea translates to financial viability?

The separation of capital planning and the budgeting process may have been a necessary reality in the past, but today, businesses now have all the skills and resources on call to build out reliable balance sheet forecasts.

Further, compartmentalizing such critical aspects of the business may lead to actions we characterize as “bad behavior,” where managements are unaccountable for the opportunity costs of deploying investor capital. In truth, such managers are just acting rationally within the silos and incentive systems that company governance has created for them. To encourage better decisions, a more complete decision (and incentive) framework can be of use.

Sanity Check Performance and Forecasts

You don’t need to be an analytics wizard to incorporate basic statistics into more of an organization's performance measurement processes. Building a history of how key performance indicators (KPIs) and other metrics have behaved over time can have a substantial impact on “managing” the business. 

How? Do you have a good sense of what counts as outlier results? How about at more granular operating levels of the business? What part of month-over-month improvement or decline can be attributed to seasonality? Is the business set up to see trends emerging before they become either something to fix (in the case of bad) or a missed opportunity (in the case of good)? Can these reaction times be shortened? 

Building even a modest archive of select KPIs and basic metrics and referencing them as month-to-month results come in will offer greater focus and clarity to performance analysis. It can provide a shortlist of issues to investigate before the boss asks about them and provide peace of mind when you are ready to move on. Finally, a KPI archive can be priceless in stress-testing incoming plans, from the feasibility of the baseline forecast to possible high-risk points therein. 

The archive will not be the final word on anything, but it can better inform nearly all key investment decisions. After all, the KPIs have likely already been chosen; now is the time to follow through. Providing management teams with better information and context should produce the confidence to focus on high-value opportunities. Make sure to drill down deeply enough into the organization that you capture line-of-sight insights for each business and with enough history that a meaningful range of outcomes are included.

Make Intangible Decisions Tangible

This might be your most intriguing project because it can unearth hidden ways to pluck low-hanging fruit. Individuals in both the functional and operating areas of the business often face decisions that are difficult for them to assess quantitatively. We like to call these situations “intangible economics” problems; that is, a problem that includes variables that are a bit unwieldy but when properly solved can offer opportunities to save on costs or grow profit. For those inexperienced in grappling with these issues, sunk costs, erosion, synergy, and even just articulating the correct “base case” may prove difficult or discouraging. 

Establishing and driving expertise in analytics-based solutions can help extract the requisite information to transform an idea into an analysis. Problems like these arise frequently but too often get put aside when they pull folks too far outside their comfort zone. Examples include decisions such as hiring full-time versus temporary staff, offloading unproductive but fully depreciated assets, analyzing the cost-effectiveness of a training or education program, or even prioritizing ESG initiatives.

These might be decisions that in appearance or actuality have a zero or negative net present value (NPV) impact. These are actions that can result in what Fortuna's CEO, Greg Milano, refers to as acts of ownership: behaviors that create shareholder value, despite conflicting with management’s existing goals or incentives. They can emerge at all levels of the company. Articulating some logical frameworks can help employees get started.

The projects above only scratch the surface of good business habits that FP&A and other finance-related functions can help spread within the organization. Sadly, they may be too small or too ambiguous to merit the resources of an implementation or an initiative but too imposing to tackle on a quiet summer week. We are deep enough into the year that things that don’t get planned now often won’t happen. But don’t let these opportunities get pushed for another year. Carve out some time and ask for resources if you need them. These initiatives can pay for themselves many times over.

Marwaan Karame is a partner and Kal Vadasz is a vice president of advisory firm Fortuna Advisors.