Today’s fast-paced IPO market requires financial planning and analysis (FP&A) teams to deliver top-notch budgeting, forecasting and analytical expertise within a shorter period of time. While building out the FP&A function has always been a key aspect of the infrastructure development and preparation for portfolio companies going public, it is even more crucial to develop these capabilities thoroughly and quickly in the current high-stakes market environment, in which missed projections and any semblance of uncertainty are heavily penalized.
The U.S. IPO market in particular is booming, and private equity owners who held off during last year’s pandemonium are back in pursuit of exit strategies. As of June 23, 2021, there have been 538 IPOs on the U.S. stock market this year. That is 511.4% more than during the same time in 2020, which had 88 IPOs by this date. The new figures also show that, as the economy rebounds, private equity-owned companies are being taken public at the fastest rate in years.
These trends underscore the need to establish a strong FP&A function well in advance of any exit event. For private equity-owned companies, the build-out of the FP&A function should begin soon after acquisition given the need to drive results, including optimizing revenues and managing costs.
Initial key considerations and areas of focus
Establishing an effective FP&A function requires specific focus and investment in people, data, technology and processes. As the function matures over time, its ability to accurately forecast the business and develop analytics to provide meaningful business insights are dependent on successfully optimizing each of these components, as summarized below.
People — In determining the appropriate operating model for an FP&A function, the delineation between corporate FP&A and divisional finance should be properly understood. Early-stage companies generally combine these two focuses into one role as they begin to develop the function. However, as the function grows and matures alongside the business, responsibilities and focus should be more clearly established.
The corporate FP&A function is generally responsible for establishing, overseeing, and consolidating enterprisewide budgeting, forecasting and reporting processes, aligned with the overall company strategies. This includes developing and maintaining a top-down, long-range financial plan and effectively communicating drivers of consolidated financial performance relative to the plan. The corporate FP&A function also plays a critical role in the IPO process, particularly in the development of IPO-specific financial models and presentations. Once public, the corporate FP&A team typically provides financial analysis supporting externally focused communications and reporting.
The divisional or business unit FP&A function is generally governed by targets and guidance provided by the corporate FP&A. It collaborates directly with cross-functional business partners to prepare business unit budgets and forecasts in line with such targets. The divisional FP&A function also serves as a finance business partner, providing decision support through data analytics and scenario planning. Strong finance business partners are generally good communicators who can demonstrate solid business acumen and financial knowledge, and are capable of constructively challenging and influencing their business partners.
Divisional FP&A often develops and maintains detailed financial models used to forecast the business, assess performance relative to plan, and quantify business risks and opportunities. In addition to the divisional FP&A’s important role of assisting leadership with managing the business in alignment with overall strategies, it plays a crucial role as a company prepares to go public, as the ability to project financial performance of the business routinely and accurately, and in a timely manner, becomes even more critical.
Data — The availability of clean, consistent and reliable data enables the FP&A function to prepare accurate financial projections and support key business decisions. Lack of effective data governance, including data quality assurance and master data management, may result in unresolved inconsistencies across disparate systems utilized by an organization. The resulting data integrity issues could negatively impact the timeliness and accuracy of analytics produced to support business outcomes and enterprisewide financial reporting. Robust data governance across all levels of the organization is therefore essential to ensure a solid basis for data-driven business decisions.
Additionally, the ability to analyze large volumes of data for actionable insights enables timely decision-making and business execution across the organization. This explains why data analytics functions have become more prevalent in supporting or complementing FP&A teams. The data analytics experts can help FP&A teams build algorithms and identify patterns in the data to provide advanced analytics or insights about markets, products, competition and economics impacting the business. These insights help form the story that bridges the gap between the financial results and data analytics. Also, advanced analytics can be used for various external communications and reporting requirements, including management discussion and analysis in a public company.
Technology — A solid data governance framework includes policies, procedures and rules, as well as adequate technologies, to be effective. Implementing new technologies alone without considering the need for data governance, process and/or organizational structure is not enough to achieve the desired automation objectives.
Generally, early-stage FP&A functions initially rely on Excel-based financial modeling, reporting and analysis. However, as the FP&A function matures, implementing a more advanced planning and reporting tool becomes more important. Several factors that should be considered when selecting and implementing an appropriate planning tool are:
- Ensuring that the planning tool is robust enough to handle future business growth and complexities, as well as the maturity of driver-based financial modeling and workforce planning capabilities.
- Ability to prepare multiple scenarios or what-if analysis within the planning tool to enable decision-making flexibility. This capability will provide the FP&A function with a mechanism to manage evaluation of various strategies, tactics and plans under a range of variables with greater speed and confidence.
- Clearly defining data hierarchy structures aligned to how the business is managed and mapping such hierarchies to the chart of accounts in the general ledger. This includes developing a change management process to ensure adequate controls over future changes or modifications.
- Ability to integrate the planning tool with the general ledger and the customer relationship management system to enhance the FP&A team’s ability to analyze performance results in a timelier manner and to achieve public company reporting timeline requirements.
- Use of cloud-based applications and/or bolt-on visualization tools to develop robust self-service dashboards, enabling others to access and utilize data without placing the burden on FP&A functions.
Process — Budgeting, forecasting and consolidated financial reporting are the basic FP&A processes that should be built out and enhanced as the function is established and continues to mature. The key objectives for these processes include:
- Developing overall financial targets focused on achievement of the company’s long-term strategic objectives
- Ensuring that such targets have been clearly communicated across the organization
- Developing a detailed financial plan linking the company’s overall strategic planning objectives and financial targets
- Providing a mechanism to track and analyze performance relative to plan
- Adjusting future financial projections for changes in strategies, tactics or actions taken, external factors, and any other new information impacting business performance.
The manner in which FP&A deliverables are developed depends on the methodology utilized. Many financial forecast models are initially built from a top-down perspective. These models generally rely on a combination of historical data, a keen understanding of critical key business drivers and forward-looking assumptions related to such business drivers aligned with strategic objectives. As forecast assumptions are continuously refined and financial models evolve, FP&A may shift to a bottom-up or zero-based budgeting approach to provide a more holistic view of how each business initiative or strategy impacts outcomes across the organization. Building robust and accurate financial models is an important component leading up to the IPO, as it is necessary for companies to demonstrate their ability to routinely project business performance in a timely and accurate manner.
Given the momentum around IPOs is expected to persist throughout the remainder of 2021 and beyond, private equity owners should ensure that the management teams of their portfolio companies have the right level of FP&A expertise to build a sound FP&A function. The FP&A function build-out should not be sporadic or executed as an afterthought; rather, it must begin early and be strategically executed to be effective in the IPO process. A mature FP&A function, supported by a skilled team, clean and accessible data, adequate technologies, and robust processes, will inspire confidence in potential investors throughout the IPO process and will also ensure that the organization has the expertise it needs to succeed in a public company environment.