The most efficient FP&A end-to-end work process design is well-synchronised and closely coordinated between the organisations doing the work, the system supporting it and the policy guiding it. The end result delivers best-in-class performance against a company’s key competitors. More importantly, it ensures that a company meets long-term financial commitments to key stakeholders.
A Definition of FP&A Work Process
Before delving deeper into FP&A work process, it is necessary to get grounded on the definition, ownership and scope of the FP&A organisation.
SynFiny Advisors defines the FP&A work process as:
“The critical value creation processes, which require a deep understanding of business fluency, finance, modelling, data systems and processes, and accounting. This typically combines financial and nonfinancial data as required to create strategic and operational financial plans. When done well, these processes are a clear competitive advantage and enable the delivery of long-term financial commitments, thus are viewed as critical to C-level leadership.”
The Importance of FP&A Work Process
The two areas of FP&A design requiring the greatest focus are company culture and work process.
The rationale for highlighting these areas is that both tend to create the majority of financial planning issues when done incorrectly. Below is one example of many potential issues from each area:
- Company Culture: In many companies, there is a tendency to manage to a target (basis for gaining management commitment to financial expectations) versus providing a realistic update to a forecast (basis for understanding current state of the business and related approved investment plans). This cultural tendency leads to managing against a single number forecast – and creates the need to “plug the forecast”, to ensure what is communicated to senior management is the ‘right number’. Often this tendency to deliver a specific “right number” versus updating the forecast based on business realities creates catastrophic forecast misses for a company. Separating the target and forecast is typically one of the first changes required to improve overall FP&A.
- Work Process: For work process, C-level and senior finance leaders tend to think of FP&A work processes as a simplistic start and end date. The forecast, budget or analysis begins on any day of the month and ends sometime in the future, without regard for the critical steps in between. This overly simplified two-step work process is part of the reason FP&A data tends to be seen as a ‘black hole’ since there is little transparency to the detailed steps required to transform ‘data in the raw used by accounting’ into ‘data fit for use by the business.’ The data is then further transformed or penetrated to provide deeper insights into the status of the business. These insights may then be used to drive improved business decisions and can result in greater levels of sales growth or cost reductions.
Unfortunately instead of focusing on the real issues most companies immediately look to replace costly systems when a financial planning issue arises, versus focusing on the root causes. The root cause typically owes little to the systems and more to a work process, organisation design or company culture.
Figure 1 – FPA End-to-End Design, Current to Future State:
There is a common belief in finance organisations that work process does not apply to their work, with justifications such as: “A detailed work process may be fine for accounting or manufacturing but finance work is much more of an intellectual, flexible and mostly unplanned activity. There is no need to develop work processes around FP&A since it will only reduce intellectual freedom and management flexibility.” This attitude usually runs from the chief financial officer (CFO) down to the organisation’s lowest levels.
To be fair there is merit to the arguments made by finance leaders, since the forecasting, budgeting and analysis processes are mostly art and some science. The intent of the FP&A work process redesign effort is to keep the best parts of the current finance planning process but add to it the rigour of a structured, better planned end-to-end work process.
Some major companies have little more than a word-of-mouth process for budgeting or forecasting. This does not imply forecast or budget controls are not in place, although at times this may expose a company to stewardship issues. Yet there is clearly an opportunity to drive efficiency and effectiveness in the financial planning process by driving more structured FP&A process planning.
Figure 2 – Pre-FP&A Work Process Redesign:
This is a relatively simplistic example of a work process related to requesting, approving and managing of a marketing budget. Only nine steps are involved, so it seems impossible to make this more efficient or effective. However, at least four of these nine steps should be challenged and potentially eliminated or redesigned.
Figure 3 – Post-FP&A Work Process Redesign:
After a deeper exploration and understanding of this work process, there are several step changes and improvements to the current process. These changes eliminate one third of the steps, making the process significantly more efficient.
The following changes can be made to this work process:
- Approval of internal orders: The internal orders are master data fields in SAP that are used to collect event level spending in SAP. For some reason, finance approved the creation of internal orders. Finance leaders approved these orders because “they always did it this way.” If management does not know why they are doing something, it is easy to eliminate the step.
- Finance sent actuals to marketing: The roles and responsibilities are unclear between finance and marketing. Finance was playing a report generation function versus providing marketing return on investment analysis to the business. An automated report tool could be developed to send the actual data to marketing.
- Marketing sent budgets to finance and finance requesting more funding: Finance believed their role was to both collect the budget updates and communicate the new budget requests during budget meetings. This work could be best done by the marketing function.
There was incremental work added to finance. The finance team was asked to provide more comprehensive marketing event return on investment (ROI) analysis. However, the benefit of greater marketing event analysis far outweighs the additional effort (and the organisation was more motivated).
Benefits of Redesigning FP&A Work Processes
The following chart shows the most mentioned FP&A work process issues mentioned by senior finance leaders in an American Productivity and Quality Center (APQC) survey from March 2012.
Figure 4-Common FP&A Work Process Issues:
The redesign of the FP&A work process creates several key benefits:
- Stewardship: The combination of reduced cycle time and increasing visibility of the financial plans will inevitably drive improved stewardship. This needs to be combined with the creation of policy, which is synchronised with the work process.
- Spend Less or Avoid Overspending on Projects: When work process is combined with tool and organisation design, the project has a much greater chance of success. Thus, projects will not overspend.
- Deliver Higher Productivity: The elimination of unneeded work process steps will drive increased productivity or – when combined with organisational redesign – can create a centre of expertise capability in the technical financial planning creation. This can enable productivity in excess of industry standards from 1% to 3%.
- Deliver Higher Quality: By creating more visibility to the work process, the providers of the key inputs will have better understanding of the use of their data. This will drive a higher level of quality in the data – or at least provide more visibility to steps in the future. This increased visibility to the process will allow for data-based discussions with those functions providing low-quality inputs to the process.
- Improved Business Decisions: The elimination of unneeded steps in the process, causing greater visibility to input and output of data, and creation of expertise within all functions data will be easier to understand and utilise. Instead of simply sharing data, it allows for sharing insights about the data, which provides improved business decision-making.
These benefits are a direct result of focusing on broader and deeper end-to-end FP&A work process redesign efforts. For most companies, the benefits will by far outweigh the cost and efforts of the FP&A process redesign.