FP&A models need to adapt and change as your business grows. In the current economic environment, change is inevitable and no business can expect to remain static. Finance leaders need to create intelligent, error-free models that are flexible and adaptable to both internal and external changes and market conditions. Similarly, FP&A models need to maintain their integrity as a productivity and decision-making tool, meaning they need to apply to real-world scenarios.
Step 1. Start with the end vision in mind
When working with our clients to build a new FP&A model, we begin with the end in mind. That is, we assess in detail the purpose of the model we are building. Specifically, we consider:
Who are the end-users?
First, we identify who will be using the model, how often, as well as what the end-user needs the model to deliver. We consider the maturity level of the end-users, their degree of confidence in adjusting models, and whether they require a solution that is simple to navigate.
How much detail is required?
The granularity of a model helps us to determine the time it will take to build. For example, if the FP&A model is used as a key decision-making tool for financial measurements, the degree of accuracy and detail need to be high. The detail may need to include a Daily View which can roll up to a Weekly and a Monthly View.
How much flexibility is required?
Assess whether the model you are building will be applied to one use-case or multiple. Get involvement from all stakeholders, to determine what is required now and what is required in 12-24 months’. Keeping internal communication channels open will help with forward planning.
Ultimately, if internal stakeholders specify multiple use cases for the model, we then consider if the end-user will need to make structural modifications. This may influence us to opt for building a template – where flexibility is paramount.
How sensitive does the model need to be?
Consider the sensitivities that need to be built into the model, this includes the range and scope of scenarios, and possible data outcomes. These are critical components of financial modelling, as they help end-users with decision analysis. You can assess the impact of each course of action when you have incorporated a range of scenarios.
Once you have evaluated these core components and understand the desired output for the FP&A model, you can begin building the structure.
Step 2. Build the Model’s structure
The availability of the right data, in the right structure, will impact the effectiveness of the FP&A process. Spending time on a well-thought-out blueprint will speed up the development process. It is important to consult data owners in this process. This may involve more departments, and teams, however data owners and administrators can highlight data restrictions early on. Save time and enlist administrators to highlight existing restrictions, security issues, and formats. Similarly, administrators can advise on how current transactions register in the database.
At a high-level, your model should include three distinct sections:
- Inputs / Drivers
- Calculations
- Outputs
By dividing your model into these three sections, you will make it easier to amend and adjust the model, as well as minimise errors.
The model also needs consistent formatting. That is, you need to decide on a layout for included worksheets, formulas, rows, and columns. The main priority here is to make sure formatting is easily identifiable, and to consider any existing ‘best practices’ that your organisation would like to maintain.
Lastly, at this stage of the process we also look at integrating error and integrity checks.
Step 3. Is the Model Auditable?
When building an FP&A model, it must be easily auditable. Formatting will help, however, there are other things you can do to improve its auditability.
Try to avoid the use of ‘short-cuts’ or ‘hacks’ when you build your model. You forget ‘hacks’ over time and unknown errors will start appearing.
Similarly, incorporate ‘best practices’, such as, no hard-coded numbers within formulas, one row – one formula, and minimise complexity. By creating simple formulas and data structures, you will find it easier to build, deploy, operate, and evolve your model.
Step 4. Comparability of data over time
Changes internally and externally will impact your business. Change is inevitable, however, it’s important that you can track, measure, and compare reports over time.
If you change structures within your organisation, this can impact the comparability of your data. Data analysts and internal planners need access to data that allows them to compare their current and future performance with prior results. This means, the models that you build need to include a large degree of flexibility and adaptability.
Step 5. Leverage Advanced Integrated Business Planning
We’ve talked a lot about the need for flexibility in the designs of your FP&A models. We can’t properly address this topic, without referencing the fact that technology is spearheading the way in advanced integrated business planning.
At Minerva, we work with Jedox, a leading enterprise performance management software, whose virtual dimensions make it easier (and faster) for model builders to design data models with flexibility.
Their multidimensional data cubes allow you to organise and visualise huge amounts of data for improved forecasts, predictions, and analysis.
Summary
When developing an FP&A model, we recommend starting with your end vision in mind. By considering, end-users, granularity, flexibility, and sensitivity you can create a blueprint to guide you throughout the development. Lastly, always maintain the models integrity as a decision-making tool.
We are a management consultancy laser-focused on business transformation. We help CFOs & FP&A teams with budgeting, forecasting, and planning, and Data & Analytics professionals deploy high-performing digital ecosystems. Our goal is to give you more time and resources to focus on profitable business growth and data-driven insights.
