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Reinventing FP&A: From Measurement to Management

Posted by  Michael Coveney

In this series of blogs I’m looking at a number of areas that FP&A departments must address if they are to add value to the organisations they serve in this technology driven age.  In this blog I look at the reports being produced.

In transforming the role of FP&A, reports and analyses need to move from being purely measurement systems to those that can be used to manage.  This means providing data in context in which decisions can be made.  Now this may sound obvious but it’s surprising just many reports fail in this respect.  Quite often reports are produced because they are easy to do and look impressive.  I’ve been involved with organisations producing monthly report packs where most of the information was never read.  Why?  Because they were not that useful.

Take a typical departmental budget report that compares actual with plan.  These provide managers with a financial perspective of ‘performance’ that, for example, shows customer support expense as being 40% over budget.  The real question is whether this overspend is ‘good’ or ‘bad’ so that we can assess the right response. In practice this variance is probably highlighted in ‘red’ and so an assumption has already been made.

In the above it’s pretty obvious that we don’t have enough information to make a decision - so what should that supporting information be?  Being able to ‘drill down’ to more detailed levels of data may help but the chances are that even this will not be enough.

The key to the usefulness of any report is to first establish its purpose.  Why it is needed and what decisions must it be able to support.   Importantly, those decisions must be aligned with corporate strategy or there may be unintended consequences.  For example, we could deem that sticking to the budget is very important and so it’s easy to make the decision to cut back on expenses in order to bring the department back in line with the budget.  However, that may result in poor customer support that in turn will eventually affect sales and hence profitability in the future.

So, let’s go back to our example - in fact for any typical departmental report that shows actual performance against budget.  What’s its real purpose?  I doubt if it is to keep a department from spending too much in which case it’s too late.  The trouble is that most budget reports are entirely focused on finance along with supporting data showing even more levels of financial detail.  The reason for this is the general ledger from which these reports are produced. These tend to only hold financial transactions, which isn’t enough for most management purposes.

For any report and its key measures to be of real value, i.e. to achieve its purpose, then it must always be presented in the context of the decisions it was designed to support.  That context will typically come in the form of other measures.   So in the above example let’s set the following purpose:

To ensure the customer support department can manage the level of sales being forecast, at the lowest possible cost.

With this in mind we can categorise the context measures under the following headings.

Supporting detail:

  • What level of activity was involved in generating the actual expense?
  • Was that activity in line with the sales generated? 
  • Have any of the assumptions in terms of the level of activity and associated cost made when setting the budget, changed?

Strategic Outcomes: 

  • What impact does this level of activity have on strategic objectives?
  • If the activity was to be put back in line with the budget, how would our strategic objectives be affected in the future?

Financial implications:

  • Is this expense directly related to the revenue generated?
  • What impact does this expense have on profitability and our other financial goals?

Competitor / market view:

  • How does this level of expense compare with competitors?

Trends:
For each of the above we need to know:

  • In terms of finances, is this variance an exception or are things getting better or worse?
  • What will be the impact on finances if this trend on expense continues?

Risk:

  • What level of risk as we running if we were to ignore this variance?

Not all the data that answers these questions will exist or be easy to access, but that doesn’t mean it can be ignored.  In these cases, estimates will need to be made.

Once all this data has been assessed, ideas can be generated as to the decisions that should be made.   This could include using more experienced staff to support sales; additional training; adopting technologies that could help; outsourcing the whole department; or just realising that the level is the right one and budgets may need to be reset.

The chances are that unless you are a very small organisation, you will need to use a modern FP&A analytic system to bring this data together and present it in a form that can be easily understood and from which decisions can be made.  Similarly, the potential solutions will need to be modelled to assess whether a change will help in both the short and long-term.

The point of this particular blog is to get organisations to carefully consider the reports they produce.  Reports are never free - it takes time to check the data that goes into them and for users to read them.  And if they are misleading, or worse still are not being read when they may contain something vital, then the cost can be enormous.

If what I’ve said makes sense, then a good next step is to revisit the reports currently produced by FP&A and see if you can define their purpose and check that the measures on the report satisfy the decisions they need to support.

Michael Coveney

Michael Coveney spent 40+ years in the software analytic business with a focus on transforming the planning, budgeting, forecasting and reporting processes. He has considerable experience in the design and implementation of Business Analytic systems with major organisations throughout the world. He is a gifted conference speaker and author where his latest book ‘Budgeting, Forecasting and Planning In Uncertain Times’is published by J Wiley. His articles have also appeared on www.fpa-trends.com, that encourages innovation in FP&A departments.