Financial Planning: Sources of Soft Data
Posted by Richard E. Reinderhoff
The financial numbers only show one side of the story. When professionals in Financial Planning & Analysis (FP&A) are presenting the complete story behind the numbers, soft data needs to be collected and incorporated. The big question is, what and where is that data? The answer can be found by classifying and layering information which would normally be available for businesses.
Hard data and soft data
Financial records provide a lot of data, accounting data. These are facts related to past and future obligations which are called hard data (e.g. 10.000 cars were sold in January). Soft data, on the other hand, is information derived from hard data (e.g. car sales have been steadily growing in the past 5 years). Essentially, soft data is based on the analysis of hard data. It appears through research and is often compiled by experts or key opinion leaders. Company related soft data is often in the hands of internal stakeholders, however some data can be available in the public domain. For example, on the internet, in research papers or in analyst reports.
The following overview provides directions on where to look for relevant business information, beyond accounting.
The finance department processes all the accounting information from general ledger to financial statements and financial ratios. They are responsible for the integrity of the data.
The organisation in numbers.
This level contains the information necessary to understand the economic efficiency and operational effectiveness of the value chain for each product or market combination. Accounting information is matched with organisational data, like headcount or full-time equivalents (FTEs) for each of the functional departments to analysis efficiency. Assets can also be evaluated by looking at their (residual) value, productivity and time to substitute. Supply chain analysis involves ranking the key clients, points-of-sale and separate distribution channels by volume, quality and frequency.
Short-term and long-term risks.
Risks are different for each business; however, the impact is not. This is because FP&A professionals will look at where each risk hits the balance sheet. In general, short-term risks originate from side-agreements, supplier product quality, client complaints, labour laws and production lines. These sources of risks are therefore directors, management, suppliers and clients. Long-term risks often impact the business indirectly. For example, investment in new technology, loan payments, covenants and credit ratings will impact the future performance of the organisation. Other potential risks are lawsuits, market regulations, tax or budget regulation changes and also environmental issues. In the end, it is the person who ‘owns’ the risk, in other words is responsible for the risk, that will have the relevant insight into the inside information or soft data.
Business culture. Today, stakeholders group together forming ‘communities’ of mutual support. These can extend to external parties with a broad scope. Each type of stakeholder will hold specific views and information which can potentially re-direct the company’s strategy. Here is a list of questions for company stakeholders that will help unravel why certain strategic choices were made.