Financial Planning & Analysis (FP&A): Strong Positioning in Rapidly Growing Companies.

Challenges and dilemmas: my personal observation on how to build a strong FP&A department.

In this article I’m going to give my perspective on FP&A area development in small/mid size companies, if unicorn companies evaluated above $1B can be considered as such. Those companies are going through a very quick transformation process from being start-up companies moving towards IPO or an exit. While the company is running this marathon, there is a strong focus on FP&A, similar to a compass or GPS, indicating how well the business is doing. The FP&A should not get swamped by politics, and should give an impartial outlook based on high quality data and systems. Usually, you’ll find the opposite situation to start with. Therefore helping management to change this culture is one of the biggest goals of the FP&A.

Why is FP&A different than other Finance roles?

It may be an arguable statement, but it seems to me, most Finance roles are similar across the industries. You can move from one company and industry to another, and use your experience and knowledge with minor adaptations.

In case you need help, training or advice, there are plenty of answers on the internet to help you.

For the roles in Accounting, there are the generally accepted principles telling us how to operate and how to manage the financial processes and procedures. External audit teams will be happy to advise and find a solution for you as well. 

The FP&A area, though, stands separately due to the lack of boundaries and definitions. There are no specific rules on how to plan - like the weather forecast, it depends on the area, conditions, a lot of data and assumptions. Planning practices and methods are different across the companies and industries.

The scope of roles can vary as well. In some companies an FP&A can be just about the budget and control, in others it can be Income Statement (P&L) planning and forecasting. Only rarely it will include the full cycle: planning of the sales bookings, invoicing; labor/operational expenses/capital expenses planning and control; P&L GAAP/Non-GAAP, Cash Flow and maybe Balance Sheet plan. And it will be in terms of one-year, multi-year, rolling process, with many scenarios and iterations, top-down and bottom-up. All that with the tailor made Key Performance Indicators (KPIs), metrics and analyses, in order to make it clear for the non-finance managers, to help them make data driven decisions.

If you are lucky and someone has already built the whole FP&A structure for/before you, be aware that the next business or organizational change is going to compel you to adjust this structure, sometimes significantly.

If you are looking for the FP&A best practice answers on the internet, mostly you’ll find sales and marketing people selling planning tools (EPM), telling you that their tools will replace Excel spreadsheets and solve all your problems. 

However, they obviously will not, until you’ve gone through and successfully completed the relatively long process to organize the workflows, hierarchies, chart of accounts, data cleanups, and other master data quality related issues. Sometimes the company is just not ready yet, because it is constantly changing the way it plans, which makes it impossible to build planning rules, data cubes and data measures.

If you are looking for a model template, what you will find on the web will be too simple and sometimes just wrong.

You’ll also find confusingly many metrics with the same name, but with different calculation methods. All because it is a Non-GAAP measure and can be adjusted to better explain the business.

For example, Rule of 40, can be a growth in ARR, or, in some other definitions, in Revenue plus EBITDA%, or Cash burn% of Revenue. Some call ARR (annualized recurring revenue) just Revenue and so on so forth…

So how do you cope and how do you develop FP&A at your company? 

I think the best way is to share various observations, experiences, successes and failures, to allow the reader to sense the situations and dilemmas and the ways to tackle them.

I‘ve gone through this process in 3 different companies as a Head of FP&A, so I can give my observation, from my own experience, and say what are the crucial conditions to make the FP&A department successful and to minimize the ambiguity. 

Conditions to becoming a successful FP&A department.

1. Building a good reputation. If you ask the stakeholders in your company their opinion on FP&A and they describe it as FP&A being a bad guy who doesn’t understand the business, limits their efforts and tells them “they can do better” when they are already overloaded with too much work, there is a lot to do on the both sides to change this perception. Definitely, there should be a stronger management support for the FP&A team. FP&A delivers an impartial analysis and defines the effective planning and control processes to improve growth, profitability and liquidity. FP&A works with all the departments to sync and evaluate their plans, to “keep the ship on its course” strategy wise, and to prevent duplicated efforts (the same task/expense/project expense counting in multiple departments), different goals’ interpretation and keeping ineffective buffers. This is a very valuable contribution to management, so if the general opinion about FP&A is not good, efficiency won’t be in the focus and it will obviously harm the results of the company. FP&A, on the other hand, should consistently improve the business partnership and offload from the departments the burden of estimation and prediction through return on investment (ROI) modelling, running what-if High/Low scenarios and savings projects justification.
2. The FP&A is the CFO’s right hand. It should be a senior position with substantial influence. If you look at the CFO slides in a Board of Directors presentation, there will be a couple of slides on the past financial results and many more FP&A slides on the forecast and the future trends. Also, the CFOs’ surveys show that most of the CFO’s time is spent on budgeting - time that can be freed up by delegation of this task to a strong FP&A. Subordinating FP&A to Finance would be a mistake, setting more focus on the past results rather than on looking forward.
3. Overcoming Catch 22. In regards to the financial modeling process - if you keep it simple, people say it doesn’t reflect reality; if you make it complex, people doubt the assumptions or get confused and lose interest. They might create their own very partial and limited models to show a different outcome. Often there will be holes and discrepancies in their models, but who has time to review the models scrupulously to find the errors? Therefore, the goal of FP&A teams is to build a trust in their analyses to prevent the multiple duplicated models practice. It is a long and painful process to create the trust in FP&A forecasting capabilities, but eventually the CEO and CFO will ask all the departments to validate their models and requests with FP&A to be aligned to the plans and goals.
4. Agility and embracing change I have implemented EPM planning tools. In my experience, these tools work very well. I definitely think they can resolve a big part of FP&A challenges if they are done right and at the right time, once the processes and procedures are in place and are stabilized. However, as I already mentioned in the beginning of this article, it is a relatively long project to fulfill. Until that time, Excel is king. The recent example of Excel efficient modeling from my experience is COVID 2020–2021 re-planning (tough times, tough measures). We had to revise the company’s plan, to run multiple scenarios, to completely change the logic of the planning, to freeze processes. We had to accomplish COVID planning in a very short limited time. Sometimes we needed to develop detailed sub-models and sometimes to make just high level rough assumptions. We were able to do it with MS Excel and we did it repetitively in April, July, and October 2020. Back in August I participated in FP&A meetups with my European FP&A colleagues and many of them were still struggling with developing the models to reflect COVID situation in their systems without the new plans or updated future outlooks getting prepared half a year since reality has changed..
5. Show me the numbers! Show me the bottom line! There is a lot of ambiguous and incomplete data inputs coming from the business to FP&A, whereas FP&A should present the fully explained mathematical/statistical/financial process from the top to the bottom and vice versa. So the FP&A should figure out how to fill in the gaps, to come up with a justifiable and acceptable forecast/plan numbers, and, in parallel, to signal back to the business to improve the inputs’ quality. The excuse “garbage in — garbage out” won’t help to explain the forecast / analysis inaccuracy.

This process can be fulfilled by creation of an improved business partnership (periodical meetings to discuss the results, KPIs, planning assumptions), create together unified forms for the data collection and so on. It will increase the FP&A value for the business partners, give them much better results’ visibility and the future plans’ awareness. This is about changing the organization’s culture and the mindset of the stakeholders, to link their plans and activities to the strategic goals of the company.

Conclusion

An FP&A professional should possess modelling skills, business and financial acumen, great interpersonal soft skills to be a link between the finance department and the business stakeholders (Sales, Services, R&D, Marketing, Administration), to be an impartial trusted advisor for them, to create high level of transparency, predictability and provide risk assessment tools for the better decision making.

The leadership should encourage the entire organization to maintain a strong cooperation with FP&A to gain the best results. FP&A, in return, can save a lot of effort for the departments by taking accountability on the what-if scenarios, ROI and other analytical ad-hoc tasks and activities.

The sooner the management realizes the need for a strong FP&A representative in the company, the better mindset and planning culture will be established and, respectively, the entire business will grow faster, more efficiently, and will succeed in crushing competitors and attracting investors.