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How Companies can Reinvent Financial Planning & Analysis (FP&A) for the Pandemic and Beyond
Originally Posted: Nasscom
The Covid-19 pandemic has made it clear that enterprises need to adopt a digital-first approach and build resilience into their operations in order to thrive in a new business environment. One of the most critical factors for competitive advantage is to constantly adapt the business and pivot quickly as per the evolving market conditions. The pandemic has thrust the need for a digital transformative approach for Financial Planning & Analysis (FP&A) as well.
Organisations - be it small, medium or large, have always relied on FP&A to perform financial budgeting, forecasting, planning, reporting and analysis in order to support key corporate decision making. FP&A teams evaluate key market trends, review past company performance and anticipate future obstacles all with an eye toward forecasting a company’s future financial health, and improve profitability.
Challenges with Traditional FP&A
Traditionally, the use of spreadsheets became an essential part of evaluating a company’s financial information. However, traditional financial planning is riddled with loopholes posing tremendous challenges to an organisations’ business health. Performing FP&A requires a great deal of data collection, consolidation and reporting. A lot of the work involving examining the financial data, metrics, sales volumes, turnover, etc. thus far operates in silos, resulting in critical questions around effectiveness, collaboration and agility.
Further, traditional FP&A is riddled with issues such as manual tasks which are time-consuming, lack of holistic business insights, inaccurate reporting and forecasting, lack of collaboration and lag in providing real-time information. Having said that, organisations need to pivot their strategies, and move towards incorporating cross-departmental insights into agile planning processes. In this age of Black Swan events the traditional approach to FP&A is no longer effective.
Gartner estimates that by 2024, 70% of new FP&A projects will become extended planning and analysis projects, extending their scope beyond the finance domain into other areas of enterprise planning and analysis as well as corporate management.
Adopting a modern approach to FP&A
Business leaders are now turning to their FP&A teams to help navigate the ongoing crisis to gain meaningful insights and forecasts. The significant role of FP&A needs a cultural shift towards digital transformation and a complete overhaul of management techniques.
A modern approach to FP&A provides the ability to analyse data with real-time accuracy, be flexible and collaborative and perform scenario-analysis to test alternative assumptions and what-ifs. In addition, there are so many more benefits such as predictive forecasting, reporting and analysis, financial consolidation, ad hoc reporting, analysis of deviations, etc.
Take for example, a leader in the automotive industry implements a modern FP&A approach to help them analyse vast amounts of data on inventory movement, sales and retail behaviour. Upon doing so, the company gains detailed actionable insights into the current company performance which ties all the information back to its current financial health enabling them to produce pricing and inventory recommendations. With a modern FP&A, the organisation can analyse historical sales to discern their impact on sales. This information can be used to help finance continuous forecasts and in turn a more accurate financial outlook.
Organisations need to adopt a flexible, collaborative and dynamic approach to planning processes. Collaborative planning is helpful to managers to share alternative scenarios and forecasts which are essential given today’s economic climate.
However, adoption of a modern FP&A is a big obstacle. Going forward, the familiarity of spreadsheets, combined with the automation of basic features can help increase the confidence of users who are new to adopting a modern FP&A approach.
Moving towards xP&A
The future of planning and analysis solutions lies with expanding into Extended Planning & Analysis or xP&A. Gartner has identified xP&A as an emerging trend. ‘x’ represents principles beyond finance such as marketing, supply chain, workforce, sales, etc. which means that xP&A is capable of transforming organisations financially as well as operationally by integrating plans, forecasts, data, etc. into one single platform.
For example, when it comes to inventory management, xP&A allows financial planning teams to use sales and marketing data, not just demand and supply data, to understand fluctuations in price, patterns and demand shifts to create more accurate forecasts. Right from out-of-stock inventory, to excess inventory, an integrated planning platform can enable the financial planning team to manage expenses, update revenue and provide an accurate forecast of the financial health of the business.
Essentially, xP&A refers to that enterprise performance management (EPM) strategy that helps do away with traditional silos creating collaborations between different business units, ensuring scenario-based planning, what-if analysis, and fostering transparency as well as alignment across the organisation. Modern xP&A also empowers the office of finance to drive business transformation and become key drivers of strategic decision-making by providing a bird’s eye view of the overall financial health of an organisation. For example, with xP&A sales leaders can set targets, link up with the revenue targets from the finance teams and enable strategic and connected planning.
We live in an era of constant digital transformation and the undeniable reality that we are living in turbulent times. By being open to disruption, and adopting dynamic solutions such as xP&A companies can create flexible and agile planning, reveal trends/ patterns and pivot quickly - one of the critical ways in which companies can stay ahead of the curve given the evolving market conditions.