Today’s Chief Financial Officers (CFOs) find themselves under increasing pressure to execute Financial Planning and Analysis (FP&A) processes faster in order to discover insights that would augment the company’s future results. Many finance departments find themselves tasked with faster closing times, real-time consolidation and elimination of manual tasks, in the interest of overall business agility.
While financial planning is essentially the process of drawing up a budget based on expenses and income, and includes not only the implementation of the budget but also tracking its progress and outcome, financial analysis, on the other hand, uses the output from such planning to assess the profitability and the stability of the enterprise. In this process, companies also use various benchmarks to help them take business decisions.
So the role of the FP&A professional is not only under more focus but also changing. He is expected to help decision-makers within his company optimize strategic performance and resource utilization.
The spreadsheet gets sophisticated
As his profile evolves, so does the FP&A toolkit. The traditional instrument so far has been the spreadsheet. Many companies are still continuing with the static process used for decades for budgeting, forecasting and reporting. Most fix the time frame of a year for such purposes.
Although arguably still in its early stages, modern Business Intelligence (BI) and Analytics are however, beginning to replace the spreadsheet or work alongside. Advanced techniques such as ‘rolling forecast’ are also slowly being implemented. Unlike traditional methods where predictions are forecast over a fixed period of say a quarter for a period of one year, the rolling forecast technique requires that the number of periods in the forecast remain the same. For example: If the periods of your forecast are monthly over a period of one year, then as each month passes, another gets added at the end of the forecast. So a company is essentially regularly forecasting 12 monthly periods in the future.
The outcome? The rolling forecast method provides businesses with a periodically rejuvenated view of opportunities with built-in alerts at different points in time.
While a handful of organizations are incorporating such modern techniques in their budgeting process, the number is still small. The use of Predictive Analytics or demand planning are at very early stages of adoption.
Almost 60 per cent of the respondents surveyed by a research team sponsored by Grant Thornton on how data was utilized to assist in an organization’s decision-making said it was used for “simple aggregation of loss and exposures”. Only 24 per cent had revealed that data was used for Predictive Analysis techniques to project their company’s future outcomes. Which means even companies are literally “wasting” all that big data.
But on the brighter side, one of the many conclusions reached by this research was that a growing number of CFOs and controllers were actively encouraging their teams to increase their analytical skills and business knowledge. There was also growing interest in analytical approaches such as driver-based planning and rolling forecasting, it found.
Indeed, like the conclusions drawn by the Grant Thornton study, industry experts feel that the ever-increasing pressure of shoring up a company’s bottom line will make them turn to advanced analytical techniques to drive financial performance.
As and when they do, they will be better aligned with their businesses strategies, will derive more value from their budgeting processes, and in turn, have more reliable forecasts compared to those companies who do not implement such techniques.