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Make Your FP&A Future-Ready:In With the New – Five Critical Updates to The Old Budget Cycle

By Ron Baden, chief product officer at Host Analytics.

Financial planning and analysis (FP&A) is supposed to help a business prepare for future success. But too often, financial planners spend their time piecing together spreadsheets, reconciling inconsistent data, and trying to extrapolate future events from outdated information.

The problem is rooted in the old-fashioned, annual budget cycle that most companies still follow. While the annual budgeting and planning cycle may have worked fine for 1980s businesses, it can’t keep pace with the rapid shifts and complex variables that businesses will face in 2018.

Organizations need more dynamic and real-time practices, according to Steve Player, managing director of Live Future Ready of Addison, TX, a consultancy focused on planning, forecasting and performance management.  In his October 25th webcast, 5 Ways to Ensure FP&A is Future Ready, he explained how CFOs can modernize the traditional planning processes.

Specifically, Player advised financial planners to implement five key changes:

  • Separate targets from forecasts. The target is a goal, sometimes an overly ambitious one, whereas the forecast is a carefully calculated estimate of what will happen if other assumptions are met.

“I want my target to be relative and aspirational, but I want my forecast to be realistic and tell me exactly where we’re going,” explained Player. “I don’t want a ‘trust-me’ forecast.”

  • Leverage KPIs and business drivers to create predictive results.  Instead of guessing the future by staring at the tea leaves of last year’s budget data, identify the performance metrics and business drivers that can be accurately tied to financial outcomes—things such as conversion rates, the number of leads in the pipeline, how qualified the leads are, or size of sales staff. Then create a flow-chart to determine what combination of factors will produce desired outcomes.
  • Reduce costs through cloud computing and automation. Moving financial planning tasks to the cloud eliminates costs such as IT maintenance, capital expenses, and staff time.

“The cloud has been one of the most powerful shifts in technology,” noted Player. “It gives you greater freedom to try things out, the upgrades are much less painful, and you don’t have your IT working all weekend if anything bad happens.”

It’s also an opportunity to automate more tasks, assuming you are moving off an older set of financial applications to a new, purpose-built planning and forecasting cloud solution.

  • Move to an integrated platform. Integration of data and processes has become a critical aspect of financial planning and analysis. The days when it was OK to assemble reports from disparate spreadsheets and data sources are long gone.  To make continuous and rapid decisions, CFOs must have visibility into all the financial data and be able to slice, dice, and analyze that data in one place. That requires an integrated financial planning platform using a consolidated pool of data.

“We need to be looking at our capabilities, our rate of improvement, and our rate of ability to serve customers and cost structures to service customers,” said Player. “Using an integrated platform such as enterprise performance management (EPM) gives planners the ability to view and manipulate all of the financial and operational data available to make rapid predictions and more accurate decisions.

  • Use scenario planning to manage uncertainty.Uncertain outcomes can be bad, or they can be good, noted Player, and the best way to manage uncertainty is the create plans to deal with it.

He suggests starting with a few best, and worst-case scenarios. For instance, imagine your new distribution channel exceeds sales expectations by 20 percent. Second, imagine that your chief competitor inks a deal that effectively closes that distribution channel to your goods.

Then start jotting down the things you could do to take advantage of the best case, and ones you can do to counteract the effects of the worst case. If the distribution channel is a big hit, what could you do with the extra revenue to capitalize on the success? If you lose the channel, what other channels could you open? What costs could you trim? Or what sales tactics might help boost revenues in other areas? Do enough of these and you’ll have a “playbook” for handling risk in a range of areas.

“Once you’ve done four to seven scenarios, you’ll find that there are only so many plays that your company can run, so you’ll be prepared even if a different scenario happens.  Anytime you can do a brief refresh and extend into additional scenarios,” he explained. “That will make you much more future ready.”

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