Planning keeps the Organization moving in the Right Direction
An efficient and effective Financial Planning & Analysis (FP&A) team needs to be both independent and collaborative. An independent team allows for focused objectivity. A collaborative team strategically integrates the organization and keeps it moving in the right direction. When is starts straying off path, the Finance team analyzes the variance and determines what actions need to be taken to maintain course.
Financial Planning & Analysis is the backbone to effective decision-making. Without it, you can count on your competitors excelling and your organization gradually becoming irrelevant. There are plenty of companies that have gone this route - don't be one of them. Integrate a top-tier Financial Planning & Analysis team to collaborate across disciplines and answer those pressing questions.
Planning is dynamic and requires multiple processes. First, a Strategic Plan needs to identify the focus and goals of the organization. This plan is then quantified into a 5-Year Plan (3-Year and 10-Year may be beneficial in some situations). Never let the plan solidify like concrete. Instead, it needs to be made of clay so that it may continually be molded and revised based on new information (new regulations, competitor moves, technological innovations, economic environment, etc.).
"There is nothing quite so useless, as doing with great efficiency, something which should not be done at all." Peter F. Drucker
The Annual Plan is both independent and collaborative, both top-down and bottom-up, both historically-based and strategically estimated. It starts with Annual Goals. The Strategic Plan identifies the path and the timing. It must be communicated throughout the organization: by division, multi-unit locations, SBU's (strategic business units) and departments.
To initiate the Annual Plan, management must establish revenue goals. Revenue steams must be identified and evaluated. Which streams are most critical to the organization, which new streams are rising, which ones are being eliminated. Eliminated? Yes, some revenue streams are utilizing resources that may be better utilized elsewhere. In the words of Peter Drucker: "If you want to start something new, you have to stop doing something old", and "There is nothing quite so useless, as doing with great efficiency, something which should not be done at all." After the Sales Plan has been completed, the budgeting process begins.
The Budget process isolates the resources and associated costs required to sustain a given level of business. Each line item needs to be reviewed for relevance. Does this expense contribute to the successful attainment of the stated goal? Is the level of expenditure optimum? Most likely, it is not. With most budgeting processes designed to add a small percentage increase over the prior year, budgets become bloated. Over time, these excesses no longer contribute to the stated goal, but rather rob valuable resources from more profitable ventures.
Under certain circumstances, Zero-Based Budgeting may be the best course of action. This process is effectively used when there is a significant change within the organization, or a strong need to control costs. Each line item must be justified before being approved. There is no simply adding a percentage increase over last year's results - over time, this just leads to bloated budgets. It can be a tedious task, but it often yields cost savings with resources that can then be allocated to fund key objectives, or simply drop to the bottom line.
A Capital Plan is often ignored. But if a company is to achieve its long term goals, it needs to know what physical assets will be required to produce a given level of sales. As years pass, equipment becomes inefficient, or new technology makes it obsolete. Capital assets need to be reviewed, evaluated and prioritized - there is never enough capital to satisfy all requests. As such, a financial analysis of the investment needs to be assessed. Will the expenditure yield profitable returns? Does it exceed the investment threshold? Once all the projects are analyzed for financial returns, they are prioritized and capital is allocated based on ranking and fund availability. If the company identifies more projects than it has money available, it then becomes an issue of securing additional funds.
An integral component of the Planning and Budgeting process is Forecasting. Does the company have accurate detailed data from which to develop a forecast? If not, maybe it is time to update its computing systems to a data warehousing / big data analytics system. Data analysis assists in better understanding your customers and what promotions yield the desired results. Trend analysis defines the path that the organization is heading toward. Are your sales trends on target, or are you moving away from the goal? The sooner this can be discovered, the quicker management can make corrections.
It is critical to understand the underlying trends in sales, operations, the industry and the economy. Is the general market in a downturn, or just your company? How far down is your company compared to the market? Is it significantly down more / less /or about the same as the market? These are just some of the questions that need to be answered before changes are made.
To further enhance the budgeting process, Rolling Forecasts can be utilized to replace a static budget with a dynamic budget. Each quarter's results are analyzed against the budget, and the budget is reviewed for relevance. As new information is obtained, the budget is revised into a rolling forecast for the remaining months, but often for an additional 12-18 months forward.
Another vital component of Financial Analysis is Performance Improvement. What Metrics / Benchmarks does your company utilize? Are they the correct parameters to track and evaluate? Are they actionable? In order to improve performance, a company needs to know what drives the business and how well those drivers are performing. The sooner an issue can be identified, the quicker corrective action can be undertaken to get the business back on track.
Variance analysis is more than just "this line item varied from the budget by $X, or by X%". Why did it occur? Was it not budgeted? Was it a timing issue? Was it due to the variation in sales (i.e., directly variable with sales)? Was it controllable? Do you know what your flow-through rates are? Are you achieving them? There are many questions, but only a Top-Tier Financial team can answer them.
Do you have a plan? Do you have timely, accurate reporting systems? Do you have detailed data analysis? Maybe it is time for Focused Strategic Integration!