What is Wrong with my FP&A Process?
Do you find yourself frustrated with reporting from your finance team? Do you ask simple questions, only to receive incoherent snippets of financial data? If you get reporting that looks anything like the image here, then this article is for you.
In the below, I outline the key roles of an FP&A team, as well as roles and responsibilities of each member of the team. I provide some of the key elements of success, as well as common pitfalls in financial reporting.
The Role of the FP&A Team
Financial Planning and Analysis (FP&A) teams provide actionable insight to support executive decisions. An effective FP&A function drives business performance by providing the following services:
- Reveal the key drivers of business outcomes
- Illustrate business impact in a clear narrative that enables quick action
- Adopt a consistent approach in both methodology and presentation
How Does an Effective FP&A Team Function?
Think of Financial Planning and Analysis as a production process: raw data leads to analysis, which then supports a simple narrative to describe business activity. An effective financial planning and analysis team follows this simple regimen to consistently deliver clear business insights. Below I describe how this process is executed within each role on the team.
The Financial Analyst: Owns the Facts
The analyst’s role is to gather data and generate meaningful conclusions using financial modeling. The analyst should be doing more than just a simple extract of an income statement or cash flow statement from a financial system: It is his/her role to identify meaningful data elements to tell a meaningful story.
For instance, if the analyst is charged with reporting monthly sales trends, he/she would likely perform a variance analysis to identify which markets were growing faster/slower versus their historical trend. With this analysis complete, they may reach out to the sales teams in the affected markets to better understand the market conditions that impacted results. They ask questions that may not be easily answered with a simple analysis of data: Were sales impacted by a loss to a competitor? Did a delayed product innovation impact sales of a specific product line? The analyst asks lots of questions, especially if they are new in their role.
A good financial analyst is aware of all relevant facts, including both financial and qualitative data. With data gathering complete, they develop meaningful figures that illustrate the key drivers.
Finance Manager: Validates the Conclusion
The role of the finance manager is to validate the results of their analyst. They should not be checking every data point, but instead should be capable of identifying material errors with a cursory review of the analysis. Does the analysis seem reasonable given what else they know about the business? Does anything in the analysis make the manager suspicious of an error in the analyst’s work product?
The finance manager should have more experience in corporate finance, and is therefore capable of providing financial modeling guidance to his/her analyst. Often the analysts create highly complex figures that are hard to explain at the executive level. An effective Financial Planning & Analysis team employs strong managers who are able to leverage their team to develop simple analysis.
Finance Director: Develops the Big Picture
The director manages a broad pool of finance talent, and is able to connect the dots with other functions within his/her Financial Planning and Analysis team. For example, they likely manage both the forecasting and planning teams. Does the conclusion from the analyst on the forecasting team align with the issues predicted by the planning team earlier in the year?
The director is also far along his/her career path in corporate finance, and is well-versed in presenting to a variety of audiences, including senior leadership and investors or even investment bankers. A successful FP&A director can eloquently present an analysis in a manner that informs leadership and drives executive action.
What Prevents Your FP&A Team From Being Effective?
To be clear, the Financial Planning and Analysis function is an incredibly challenging role. This team is responsible for transforming potentially millions of data points into actionable views, upon which senior leaders will make decisions that directly impact both cash flow and net income.
Problem #1: Insufficient Investments in Personnel
Above, I laid out the typical hierarchy within an FP&A team (Analyst, Manager, Director), as well as the typical job responsibilities for each role. Frequently, organizations are simply not willing to invest in the talent necessary to build out the finance function.
Business leaders often view finance as an overhead cost, and simply don’t realize the value of strong analytics and decision support. At the extreme end, I see organizations that employ one ‘numbers guy’, who is the poor soul charged with owning every piece of financial data in the organization. There is no one to double-check analysis, and his hurried financial figures don’t inform.
Solution: Design a Cost-Effective Finance Team
Not every business is large enough to accommodate three levels of finance personnel for every FP&A function. Given the size of the enterprise, frequently the analyst and manager can be combined into one role. Alternatively, given the skillsets of in-house talent, the manager and director roles may be combined.
How I Can Help:
I can identify the necessary skills and optimal team structure for your organization, given your size and business needs. I will map out the sources of detailed financial data, and identify a simple process flow from which we create roles and responsibilities.
Problem #2: Insufficient Training in Creating Business Views
Our business schools are fabulous at teaching accounting and financial modeling, but it’s most likely the college graduate you just hired has zero knowledge of creating business views. I earned a combined 190 credit hours of college credits over the course of my undergraduate and MBA programs. Throughout this time, I was never even offered a course on how to develop views for decision support, nor was it a topic of my other classes. Our finance programs simply don’t focus on this.
Most others would be surprised how much upfront time my team invests to make sure each figure is a compelling and attractive view. In the end, we actually save time – Our executives get the message clearly on the first time, and we don’t have to go back and re-work our figures. Further, once we develop an established view for a concept, I continue to use it in monthly/quarterly updates going forward. Our leadership gets accustomed to seeing the views, and they aren’t required to relearn something new each month/quarter.
Unless your organization has developed consistent principles for business intelligence, it’s likely each team generates ad-hoc reports that are barely readable. Financial analysts are not taught the discipline of translating raw data into meaningful figures upon which to make decisions. I have viewed hundreds of executive presentations in which the finance team simply cut and paste an excel spreadsheet containing a variance analysis or income statement into a PowerPoint slide. If you can get past the tiny print, the figure does not lead to a distinct conclusion, and the executive team leaves the presentation confused and dissatisfied.
Solution: Align on Core Reporting Principles
Some principles are simple to implement (i.e. presenting financial results via standard templates for bar charts, etc). However, some reporting principles are harder to teach – For instance, your finance team needs to learn how to develop abstract views based on detailed data.
A well-functioning financial planning & analysis team gathers all relevant facts and present just enough data to provide compelling evidence of a business driver, and not overwhelm the viewer with irrelevant data. This latter skill cannot be overcome with a piece of software. Your finance teams need to learn to think and develop abstract concepts intuitively.
How I Can Help:
I coach your team on the elements to put on the page, and what detail to have available to answer questions. I help them think about the audience – The General Manager / CEO will have different goals than the CFO. The CFO will have a different lens compared to the sales leaders. I teach decision support as a critical function, and will ensure your team is prepared to address concerns raised from all executive audiences.
Problem #3: Spreadsheets are a Mess
I have held over a dozen different finance roles in my career – Without fail, I am shocked at the level of disorganization when you get into the inner workings of the analysts.
- Random Excel spreadsheets are emailed between teams, many of them with external links to someone’s hard drive or unreachable data sources
- Some data with unknown source is pasted into the spreadsheet, and no one knows where it came from
- Inconsistency yields formula errors throughout the workbook
- No consistent location to store the analyses, and no way to archive old analysis
The above just makes everyone’s job harder and less efficient – The entire finance team is working especially hard, but the re-work and errors just create additional workload. Efficiency is driven to near zero.
Solution: Enforce Discipline in Data Management
Each time I began a new role in my organization, I always initiated the below activities:
- I instructed our IT team to set up a distinct, secure location that is dedicated to my finance team
- I worked with my finance reports to develop a directory structure in which we place all our reporting and archives of prior analyses
- We reviewed every single workbook and ensure we understand the data sources and may even re-structure the workbook to make it more reliable and consistent
Going forward, we were careful about allowing new workbooks into our ‘engine room’; we only allowed work product that is vetted and secure, and didn’t allow ourselves to get caught up in the confusion that governed other finance teams.
How I Help: I can apply my expertise with data management to your financial planning and analysis team. In a few short steps, I promise we can increase both productivity and morale among your finance staff.
Problem #4: Leadership Believes New Software Can Replace Analysis
New software can be great. Many companies successfully deploy business intelligence solutions (such as Tableau) to aid in reporting. SAP is capable of extensive reporting, and there are myriad tools that can extract data from nearly any ERP platform.
While systematic tools can be helpful to extract net income and transactional data, it is never a replacement for true financial planning and analysis. You never fully automate financial modeling, and you need analysts to pull in qualitative data that doesn’t reside in financial systems.
The problem with new tools is that teams often believe the myth that software can solve all their reporting woes. I was on a team before in which the answer to any problem was “when our implementation of xxx is complete, it will do that job for us. We shouldn’t waste our time worrying about a manual solution.” Guess what? The tool took us five years to deploy, and most of what we needed was not in scope for the tool anyhow. I spent the better part of my time explaining to the team why we needed to invest the effort to develop reporting views.
Solution: Invest in people and processes first, and make tactical investments in tools to support these processes. Don’t allow your team to become focused on an upcoming investment as a ‘way out’ of hard work. Software will always take longer (and require more input) than you ever imagine. Figure out your processes and reporting first, and then consider automation.
Solution: Invest First in People and Processes
Focus on your people and processes, and make tactical investments in tools to support these processes. Don’t allow your team to become focused on an upcoming investment as a ‘way out’ of hard work. Software will always take longer (and require more input) than you ever imagine. Figure out your processes and reporting first, and then consider automation.
How I Help: I have led finance teams for a number of years, and am comfortable building processes that satisfy reporting needs while staying aligned with existing talent.