The future is difficult to predict. This is true in normal times but even more so following the events of 2020, including the wide-ranging impacts of a global pandemic. These conditions are a stark reminder that the span of business predictability is becoming shorter and that organizations must be ready to respond to new market opportunities and threats more quickly than ever before. As a result, the focus of the FP&A function has been forced to quickly shift from the traditional model of planning and analyzing financial results to playing a pivotal role in driving key business decisions. This shift in focus brought by the increasing pace of change presents new challenges for FP&A organizations, requiring more sophisticated tools, agility and strategic collaboration.
This new reality was the subject of Protiviti’s latest survey, “Finance Priorities in the COVID Era: Digital Dominance and Flexible Labor Models,” which explored the strategic priorities of global CFOs and finance leaders. FP&A was the fourth top concern for 72% of finance leaders, after data security and privacy, advanced data analytics, and meeting the changing demands of internal customers. In fact, FP&A informs and gives meaning to the risks preceding it, highlighting the critical role that FP&A functions are now playing in the decision-making process, as well as the enhanced tools necessary to deliver timely and meaningful insights supporting such decisions.
FP&A’s Central Role in Business Decisions
Prior to COVID-19, FP&A functions were already shifting focus from tactical activities, such as producing reports and routine forecasts, to a more collaborative mindset, providing enhanced analytics and insights to business partners to support critical business decisions in line with strategic objectives and to drive performance. The pandemic has accelerated this trend in many organizations out of necessity, as many FP&A functions were forced to innovate beyond static budgeting and forecasting cycles and focus on more impactful analysis of business drivers to inform operational plans that directly impact financial performance. Scenario planning has emerged as a critical mechanism enabling organizations to plan under uncertainty and develop actionable responses in anticipation of uncertainties that may occur.
Keys to Performance
With FP&A becoming a central player in providing insights throughout organizations, CFOs have had to ensure their functions are well-positioned to address the changing demands and expectations of internal customers, as well as external challenges. To excel in its evolving role, FP&A must have the right support mechanisms in place. Here are a few that we think are most critical:
Business Intelligence and Data Analytics
The FP&A function’s ability to analyze large volumes of data is critical in providing relevant and actionable information, enabling leadership to act in a timely fashion. Many organizations continue to utilize Excel spreadsheets, which restricts flexibility and inhibits FP&A’s ability to produce timely and high-quality data analysis. On the other hand, automated solutions, such as machine-learning capabilities, facilitate the function’s ability to understand data and the business more deeply to derive insights about products, markets, competition and the economic factors impacting the business.
Some CFOs are augmenting their FP&A functions with business intelligence roles to design and implement processes to ingest, organize, analyze and present large sums of data to the business and are collaborating with the FP&A function to architect and automate financial dashboards, modeling and KPIs through data visualization software.
Unfortunately, many FP&A functions still lack these capabilities, and organizations are likely missing opportunities to improve operational efficiencies across business units. When considering if they have the tools necessary to attain a “data-centric future,” for example, 62% of FP&A professionals still feel unequipped, according to the Association for Financial Professionals.
Business Partnership Role
The timeliness and accuracy of financial projections have become even more important as organizations are forced to make critical business decisions that may have long-lasting impacts beyond the current year. Given that many forecasts are based on key assumptions related to the business, FP&A’s role as the finance business partner is critical to ensuring such assumptions are aligned with the business strategy. In addition, it is the finance business partner’s role to not only understand the business but to also provide relevant insight into business performance, thereby creating the necessary feedback loop to better inform future forecasts.
Having a finger on the pulse of what is happening within an organization has always been a fundamental element of the FP&A function, especially when building integrated planning models. If anything, COVID-19 has only heightened the importance of having and maintaining solid partnerships with cross-functional business partners across sales, marketing, operations, facilities, human resources and other business units. Effective integrated planning is achieved by harmonizing strategic business planning with the FP&A function and operational planning.
At many companies, the rapid deterioration of market conditions in the early days of the pandemic threw standard operating procedures into disarray. This forced the FP&A function to quickly understand the resulting impacts, relying on inputs from their cross-functional business partners to inform new assumptions driving forecast expectations. Likewise, cross-functional business partners relied more heavily on available data and analytics prepared by FP&A functions to better inform swift business decisions.
With a shift in business partners relying more heavily on data analytics in a time of significant uncertainty, scenario planning emerged as a trend. While scenario planning is not a new mechanism for planning in uncertainty, it has become a more impactful tool in the decision-making process. Scenario planning provides organizations with alternatives based on potential changes in key factors impacting the outcomes.
FP&A organizations have employed scenario planning to provide business partners with an understanding of projected outcomes or implications of critical business decisions based on potential changes in factors with a high degree of uncertainty. Often, scenario planning is utilized to make decisions around the existing business, such as discontinuing a product. However, scenario planning may also be used as a tool to make future decisions based on deep insights into the market and/or the competitive landscape, such as launching a new product or entering into a new market when certain circumstances arise. Scenario planning provides organizations with the ability and agility to make more informed decisions to drive results.
The shift in FP&A focus in the past year, from near future to a longer horizon, is a “sign of the times.” As business is beginning to return to some level of normalcy, that new normal will be nothing like the old normal. Customers’ and internal stakeholders’ expectations have changed permanently, and the analytics and business intelligence tools for making better, faster and more informed decisions are already being used by the leading organizations to pull ahead of uncertainty. FP&A functions as key partners in decision-making need the support of their leaders and business partners and every resource to help them perform their important function.