Every business today focuses on improving the way we conduct Financial Planning and Analysis (FP&A).
The more effectively a business gathers accurate data and uses it to make smart decisions, the better the overall strategic direction can be.
All of this data that fuels Financial Planning and Analysis comes directly from operational processes across the business. For example, how a business goes from acquiring the raw materials needed to build their products, to the production process, distribution of products and so on feed into FP&A systems to track progress and plan trajectories.
This means that understanding the intricacies of operational processes is a critical part of collecting the right data to make the right decisions.
However, this is where a huge problem often exists.
Unfortunately, a lot of senior managers don’t fully understand their business’ processes.
This is a costly mistake that can cripple FP&A systems and lead to incorrect decision-making.
In this article, we’ll discuss the importance of understanding internal processes to improve your FP&A systems in order to make more educated and accurate business decisions.
What is Financial Planning and Analysis (FP&A)?
Financial Planning and Analysis (or FP&A) is a comprehensive practise of data gathering and reviewing to enhance a company’s ability to manage business functions by incorporating corporate strategy and execution.
Typically, FP&A involves four main activities to support the financial health of the organisation:
- planning and budgeting
- integrated financial planning
- management and performance reporting
- forecasting and modelling
Through FP&A, organisations can understand their financial performance and forecast future performances based on the available data. Based on these forecasts, business owners and executives can make decisions that will optimise the processes within the business and maximise the profits of the organisation.
Why is Financial Planning and Analysis (FP&A) crucial?
The main purpose of FP&A is to:
- evaluate the outcomes of financial activities
- reduce financial risks and increase revenue
- support business owners and managers in making decisions
- help improve overall business performance
As such, an efficient FP&A model is necessary to support and grow the business with data-backed decisions – data that comes from the processes and operations within an organisation.
How do business operational processes affect FP&A systems?
Typically, in business, the decisions are made by upper management and these instructions are sent down to middle management. The employees and staff then act in response.
However, there’s a crucial factor business owners and managers often miss:
The accuracy and strength of FP&A models come from understanding the processes where the data was gathered.
When you understand the process, you can gather the right information and make the right assumptions to make better business decisions.
Here’s an example
Say you’re managing a car manufacturing business and you want 100 cars built. This target will be communicated to middle management who then tell you that 300 semiconductors are needed to build these cars.
From there, you will plan for the acquisition of 300 semiconductors and expect to see 100 cars by the end of the timeline for the project. You then predict that every month, at least 100 cars can be made over the next year and set revenue targets accordingly.
However, one step was missed.
The actual engineers at the factory weren’t consulted. They know that there are actually 5 different types of semiconductors needed and there are 5 different suppliers for each of these semiconductors.
This was not accounted for in the decision-making because the process was not viewed in its entirety – all the way down to the bottom. Now, all of your FP&A information is inaccurate and unreliable.
What happens when the entire process is not considered in FP&A?
In the example above, what will happen to that 100-car target? Will this still be met on time and within the budget?
The answer is most likely no – and that is where we understand the value of looking at the whole picture and understanding the entire operational process.
Unfortunately, this oversight is a reality for many businesses across all industries.
The disconnect happens because upper management and executives are the ones who decide to use FP&A systems to make better decisions, but the processes that these systems are based on are conducted by other people in the business such as middle management, workers and employees.
Hence, the key is to develop a more holistic understanding of these operational processes to build better FP&A data. More accurate FP&A data can then fuel decisions that will help you scale and grow the business more effectively.
How to improve your understanding of processes to empower your FP&A system
To improve your understanding of the process and back your FP&A systems with more accurate data, start with these 4 simple steps:
- First, take note of the various levels of your value chain. Are your plans going to affect the top level, middle management or the ground level?
- Then, identify the key components, drivers and people involved in the level that the plans will be used for.
- Now, get input from the people who are directly responsible and knowledgeable about this part of the process.
- Finally, utilise forecasting technology that can accurately collate and interpret the data you have gathered with respect to the entire business process.
This will give you an overall view and provide you with more reasonable input and accurate assumptions. Understanding the complete process also gives you a lot more flexibility because you’re not stuck at a certain level which then makes the entire process exponentially faster.
As a bonus, you are also empowering your staff to be more involved and giving them a sense of ownership over the process and the plan.
This may seem complicated at first and you might need to spend time on this, but when you get it right, you will gain the ability to plan, forecast and make better decisions for the business.
We can help you leverage the true power of your business’ processes
At Minerva, we provide you with the data analytics capabilities you need to be an agile data-driven business and shift your decision-making from reactive to proactive.
With Minerva’s business and technology expertise, you’ll get access to tools and solutions needed to effectively execute scenario planning and stay prepared for whatever the future may bring.
We can work together with your organisation to understand your goals and requirements, before providing you with the right data systems and procedures that you need to get the most out of your data. As always, we help you make better business decisions and become truly better at what you do.
If you’d like to learn more about how Minerva can help your business, contact us on 1800 646 378 or email info@minerva.com.au.
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