How to Build an FP&A Function
How to Build an FP&A Function
If the last few years have taught us anything, it's to expect the unexpected. Up is down, left is right, toilet paper and used cars are the new Pokémon cards and PS5s – nothing makes sense anymore. And to state the obvious, such upheaval and uncertainty don't make life easier for a company's decision-makers.
It all makes you wish you had a crystal ball lying around, right? And maybe an organizational MRI machine to identify issues lurking in the operational shadows? Well, that's precisely what a modern, dynamic, data-driven financial planning & analysis (FP&A) function provides to your leadership. And we're about to show you how to build the ideal FP&A practice for your needs, goals, and vision. So let's dig in.
Today's FP&A Challenges
Since we need to walk before we run, let’s start by identifying the hurdles standing between your current state and your FP&A-driven promised land. Aside from the once-in-a-century external forces we've already alluded to, today's business environment has its own repertoire of lightning-fast jabs, uppercuts, and roundhouse kicks, all presenting significant challenges to your FP&A aspirations.
Globalization and Ever-Moving Goalposts
Finance organizations must now deal with a never-ending economic butterfly effect. From global pandemics and new technologies to chicken sandwich wars and Twitter beefs, companies need to keep their head on a perpetual swivel for unwelcome variables. Sure, sometimes these external forces are positive, other times they're negative. Sometimes they're massive enough to impact strategic planning, other times they amount to a pesky fly that won't stop buzzing around the room.
The point is, in this complex and digital world, there really aren't boundaries anymore, and something that might seem trivial and inconsequential – i.e., the aforementioned Twitter beefs – can go from slight annoyance to pounding migraine in no-time-flat. Obviously, this only adds to the scope and complexities FP&A must account for and report on to finance leaders and other stakeholders. Otherwise, senior management and the board are navigating crowded, complicated waters while blindfolded.
Digital tools and data analytics have leveled the playing field for companies. Now, start-ups can go nose to nose with industry titans by using the right tools in the right ways. Have a finicky customer base with enormous expectations and an undying need for personalized attention? Well, there are solutions for that, and no shortage of bright, motivated competitors ready, willing, and able to integrate them into their operations.
An FP&A team must accurately gauge how well an organization can compete with such aggressive and savvy competitors, both in today's market and according to any number of possible variables in future scenarios.
Rapid Change, Evolving Expectations
Blink and you'll miss it. That's essentially the pace of technology these days, where new solutions seem to revolutionize some component of operations on a daily basis. From automation tools to machine learning, dynamic data repositories to handheld data dashboards, innovation rests for no one, capable of rattling corporate cages and disrupting entire industries without breaking a sweat.
A forward-looking chief financial officer relies on FP&A to sort through such rapid change, identifying areas where an organization isn't keeping pace and, just as importantly, how a business model should flex to ensure future viability. Unfortunately, without a solid foundation and the right tools at its disposal, such a task can make a corporate FP&A team feel like it's herding a rough and tough gang of feral cats.
Beyond Big Data
It's a data-driven world, and those that fail to distill those countless barrels of business information into high-octane, 100-proof business intelligence simply won't be able to compete. However, given the oceans of inputs and outputs sitting out there, waiting for their moment in the sun, FP&A first has to figure out what data is critical and what can sit on a shelf.
Therefore, it's not enough for FP&A to integrate data and analytics into their set of tools. They must also become data whispers of sorts, able to filter through all of that information, identify what's important, analyze it, and provide reports to leadership. Moreover, they have to do all of this quickly and accurately since time is money and decision-making doesn't have the option of taking a breather.
We could continue listing challenges facing a modern FP&A function and how the role of FP&A is constantly evolving, but you get where we're going with this – it's tough out there, and getting tougher by the day. Thankfully, for every challenge you face building the ideal FP&A function, there are even more powerful benefits waiting at the end of the transformational rainbow.
Benefits of a Modern, Capable FP&A Function
Just like the previous section on challenges, we're going to stay pretty high level with our list of benefits since, as you might guess, it could also go on ad infinitum.
Fast-forward a bit in the process and assume you've identified and implemented technologies that will help your people become those data whisperers we mentioned. Now, rather than being strictly descriptive or diagnostic – in other words, reactive – you can focus on more predictive or even prescriptive financial modeling.
In other words, since you can now harness the power of the data that's always been sitting right there, under your nose, your forecasting models can be far more complex. Of course, with so many uncertainties still in the marketplace, scenario planning for a spectrum of what ifs means FP&A can provide for more nuanced business insights. In the end, the entire organization is more flexible and capable of traversing even the rockiest of terrain.
Not only can technology and processes significantly expand what FP&A can analyze, but they also provide an octane boost to the flow of information, not to mention better decision support. Instead of waiting for data to trickle through your different sources and systems, automated processes unlock the power of real-time management and financial reporting, which, in turn, gives business leaders the most relevant, accurate, and timely business information possible.
Genuine Business Partners
The finance function has always been destined for greatness, at least on paper. Unfortunately, there's just never been a way for finance professionals to collect, analyze, and report on information that generates difference-making business intelligence. Until now, that is.
This means CFOs and their finance organizations can finally become genuine business partners to the other departments and stakeholders within an enterprise. HR, IT, marketing, and logistics – they all benefit when FP&A becomes faster, more accurate and far-reaching.
With the right tools and FP&A processes in place – more on those in a minute – collaboration flourishes between different business units, launching efficiency, operational KPIs, and general business performance into the stratosphere. And that's a feel-good story if there ever was one.
The Foundation: Developing an FP&A Strategy
Now that we've discussed what a modern FP&A function brings to the table – as well as the dangers of staying on the sidelines – let's roll up our sleeves and start getting to work, shall we? And we're going to begin by developing an overarching strategy for your soon-to-be world-class FP&A.
Figure Out Your 'Why'
What is your primary motivation for building a modern FP&A function? Is it simply a matter of one – or all – of the benefits we discussed? There's obviously no right or wrong answer to this question since, for example, becoming a genuine business partner to other units in your organization is something every FP&A practice should strive for.
But is there anything else driving your thought process? This information will help shape the strategy you utilize to build your FP&A function. For instance, while it's a pipe dream to become the world's largest online retailer overnight, is there a certain number of sales you want to use as a short-term goal?
Basically, we’re asking you to figure out what your ‘why’ is. Once you have this answer, you can start building the infrastructure that will ultimately help you reach the FP&A-based strategic goals you set.
In fact, once you're up and running, your infrastructure and strategy will feed off of one another, where insights from your infrastructure will help expand your strategy, and an expanded strategy will prompt you to further strengthen your FP&A infrastructure.
Therefore, once you know what your 'why' is and start putting the pieces together, your FP&A infrastructure and strategy become a chicken and the egg scenario, where the two form a never-ending cycle of evolution and improvement.
Include the Stakeholders
After you've identified your 'why,' it's time to fine-tune your strategy a bit more. To that point, you want to start with your final state in mind, then reverse engineer a pathway to get there. In this case, it helps to begin with your stakeholders. More specifically, who will be using the information your FP&A generates, and what should that information include?
Naturally, your CFO and other executives within the company will be a part of this group. Therefore, before putting anything official into place, you want to ask those stakeholders – possibly even investors and external parties, depending on the circumstances – what metrics they want to see. From there, you can start building your FP&A infrastructure.
People, Process & Technology: Your FP&A Building Blocks
Just like any finance transformation initiative you undertake, your people, processes, and technology serve as building blocks. However, since technology will form the backbone of your FP&A infrastructure, we're going to discuss these building blocks in reverse order – technology, processes, and people. Or maybe we just want to keep you on your toes.
Rome wasn't built in a day, and neither will your sleek, modern FP&A function. Thus, depending on the solutions you already have in place, our particular advice to you might vary from what we would recommend to another organization.
Still, for the vast majority of our FP&A-based projects, we recommend employing a middle layer strategy to avoid taking on too much at once. Specifically, if all of your business data currently sits in a massive warehouse of Excel spreadsheets – the end scene of Raiders of the Lost Ark comes to mind – then a transitional solution like Power BI, Tableau, or Alteryx would be a sound technology footing to build from.
Once that transitional point becomes more of a norm for you, you’ll want to start looking towards a more holistic, robust FP&A tool like Planful, one of our favorite FP&A solutions. Thus, as your FP&A function scales upward, so will your budgeting, forecasting, and consolidation capabilities.
Remember, just because you implement new and shiny FP&A tools doesn't mean you suddenly become a master financial soothsayer. This is an area where too few companies devote sufficient time, attention, and resources, forgetting that even the most powerful, prescient tools are limited by the quality of data feeding into them.
For example, if your budgeting workflow and data are a tangled, messy web of inefficiencies, redundancies, and bottlenecks, there isn’t a lot technology can do for you. That's why process improvement must work in conjunction with your technology rollout, an area where third-party specialists are often money extremely well spent.
The same notion applies to your data infrastructure. Although we won't completely rehash this thought since we've discussed it in the past, the effectiveness of your FP&A will rely on your data integrity and infrastructure. Obviously, this is yet another area where an outside specialist could quickly become your best friend. Using third-party expertise allows your IT and finance teams to focus on their everyday responsibilities while the specialists handle the technical heavy lifting.
Finding the Right People
The last building block is, of course, the people that will make up your FP&A practice. And just like the other building blocks, we recommend starting with your ideal endpoint and working backward.
Thus, your search for your dream team of FP&A professionals begins by identifying what skill sets you're looking for. Sure, you’ll need a solid foundation in accounting and a finance-focused mindset to understand the financial data and reporting. However, finding individuals with both accounting and finance knowledge as well as keen technical data skills is akin to uncovering a golden unicorn with sapphire eyes and a rainbow disposition. So, yes, it's pretty rare.
In fact, that combination is so rare, it's usually not worth the time and effort to even look for them. Thus, you want to build your team with someone that can dig into the data, along with a person that understands the story behind the data and can make recommendations based on it.
Putting the FP&A Pieces Together
Now that the building blocks are in place, it's time to kick the tires and make sure everything you've done thus far on the infrastructure side drives your FP&A strategy forward. Once again, one of the primary goals of any FP&A function is to foster collaboration between business units and stakeholders across your organization.
So, if your information and workflows are still disjointed by the time you've put the initial building blocks in place, something went sideways in your journey from point A to point B, but that's not the end of the world. This FP&A initiative is a major undertaking so, just like any significant project, there are bound to be some kinks along the way.
Still, this only further demonstrates the importance of a meticulous, organized approach to building out your new and/or improved FP&A practice. Thankfully, everything will become more intuitive with time and practice. At some point, you’ll be able to expand your capabilities and maybe even build subgroups within your FP&A practice that concentrate on the supply chain, P&L or profitability issues, budget, capital allocation, or areas specific to your industry or company.
As you go, just make sure every team member understands their role in the bigger picture, establishing clear guidelines that will keep everyone and everything on track. And as always, if you need guidance along the way, Embark's experts are ready to jump in and help you build the modern FP&A function of your dreams. Forward-looking, reliable forecasts and better business decisions are just a quick contact form away.