Financial planning embraces digital future
Accelerating change is a major headache for finance teams. It means values in financial systems are never constant and how they influence business performance requires real-time analysis. At the same time, business demands are growing, with the need to translate the vast amounts of revenue-related information scattered across organisations into indicators of business opportunities or potholes to be avoided.
This requires both a comprehensive picture of all financial data and the ability to go granular to dig into specific information affecting business units and teams. But how granular does this analysis need to go? What information is valuable to the business and what isn’t?
Identify your mission
In the finance team, everyone recognises the opportunity to embrace the digital future of finance, to address the growing demands from the business. It has the potential to dramatically shift the finance role to that of business storyteller, showing how financial data analytics influences business performance.
Financial planning, forecasting and ultimately storytelling starts with strategic financial planning and analysis (FP&A). It all begins with the simple question — who are we and what do we want to achieve? What is our mission? These very high-level ambitions are then broken down as part of the strategic process into objectives and key performance indicators (KPIs).
These goals then need to be put into operation as part of the planning process; they will always be the ‘north star’ for all following planning and forecasting activities. All budgeting and forecasting activities should have a clear reference to these KPIs.
As a next step, the organisation needs to define on what level the planning and forecasting should be executed. A typical granularity for the P&L could be business units or regions and products. Sales targets are planned and forecast on this granularity with a value-driver logic that is specific to the organisation.
When planning revenues at this level of granularity, certain assumptions need to be made. To achieve X million of revenues with a certain product in a region, what investments in sales staff and marketing will need to be made? This all becomes part of the plan/budget (BUD) and forecast (FC). In an integrated financial planning system, these areas are fully interlinked and finally lead to a P&L per region/business unit and product.
These plan/forecast figures will then be compared to the actuals (ACT) figures that are automatically loaded from the enterprise resource planning (ERP) system.
Steering by numbers
Now the storytelling starts. Obviously, some assumptions that were made during the BUD/FC process will have been correct; others will be wrong. The storytellers need to comment on the classic finance reports that consist of ACT/BUD/FC columns with deviations.
There will always be a big learning curve. Positive deviations will surface ideas that could be replicated in other regions or products. Issues that caused negative deviations will need to be fixed to get back on track. This is the concept of steering by numbers.
Get it right and finance will be able to help steer the business by numbers, but it does require the right foundations to be in place. To do this effectively requires an interconnected set of data analytics tools to automatically compare actuals with forecast to identify any deviations.
The tools should enable the finance team to comment on and explain the deviations, so that wrong assumptions in the forecast can be challenged. They should enable the finance team to come up with actions, which can be assigned at a granular level to business units and teams.
These tools also allow the business to interrogate the data in a way they understand, which will enable the finance team to work in partnership with their colleagues. Furthermore, being able to interrogate the data in this way makes it possible to respond to ad hoc requests for updates, spot trends in real time and be more predictive about impacts on business performance.
Create data interoperability
To get to the point where data analytics is empowering the finance team to steer the business by numbers, the top priority is data interoperability. Historically, data entry has been a source of inaccuracy in reporting and forecasting. With financial data being collated in a variety of applications across a business, this challenge has become harder and can only be overcome with a very diligent approach to integration.
This means the organisation must ensure the quality of its master data across all systems such as supplier and customer master files, accounting and organisational structures. It is also critical to avoid issues around shifting data between systems, as this can lead to data errors. Ultimately, your FP&A system should be the single source of truth that holds actuals data from the ERP as well as the forecast and budget data.
So, every finance team needs to be careful to address every aspect of data integration. Interoperability needs to be seamless to enable this new approach to financial planning and analysis.
Dynamic response
Technology such as application programming interfaces (APIs) make interoperability easier as they are a key component for data exchanges in the cloud world. If this is combined with the latest approach to application development — called in the IT industry lowcode/nocode — changes and improvements to functionality in financial applications and the way data is analysed can be done in a much more agile, dynamic way responding to changing market conditions.
Such changes can also be made by end users in finance teams, requiring little technical or coding skills, as this model is designed to simplify the implementation of new applications.
If finance teams address the data interoperability question, they should be in a position to help businesses to identify more value in financial reporting by conducting more sophisticated data analysis. The expectation from business leaders should be that finance can use data analytics to:
• Deliver constant, rolling forecasting. Finance teams should be constantly keeping track of what is happening — checking the pulse of the business. Modern FP&A systems should be open at all times, rather than delivering the old-fashioned three months/six months/12 months forecasting and reporting. The business should be able to add updates at any time, and then the finance team decides when to report.
• Ensure status control. Finance teams need to control who has access to the FP&A system and qualify who has not added up-to-date information. This will also give the business transparency around who has authorised decisions and ensure that it has the most complete picture.
• Create reports and be storytellers. With the right changes in place, financial reporting should feel like reading a newspaper. The executive team should log in to the system and instantly see a digestible summary, which is based on the FP&A team reading through all the financial reports and comments from the business to generate a standardised report.
Cautious climb
Trying to achieve all these goals at once is a hefty task. Sometimes, focusing on smaller projects first works better, solving interoperability problems related to a specific financial process or business unit, then looking to add analytics for more sophisticated interrogation of financial information.
Taking this approach is more sensible, as we all know the importance of caution when climbing a ladder. With the right strategy in place and disciplined execution, it will make it possible to reach the top.
Author: Michael Lengenfelder, head of FP&A product management, Unit4