FP&A and change lag

By definition, financial planning and analysis should be a future-focused function.

The primary concern ought to be delivering the insights required to power planning and drive profitable decision making.

But….

When things change, is FP&A able to keep up?

Outdated assumptions

Many FP&A functions feature a heavy reliance on models and assumptions. These models are derived from an understanding of the drivers of business performance.

The assumptions are made to smooth out the complexity of multiple factors which must be considered – transportation costs (where true rates may vary); supplier; currency; local conditions; fuel costs etc. Where spreadsheets are involved, these assumptions are required to facilitate modelling in the first place thanks to the number of factors involved.

2020 was a year which saw drivers change. Businesses were disrupted by new bottlenecks and had to temporarily adapt. The question is: Has that temporary change become embedded? Are the models and assumptions being used by FP&A evolving at the same time as the organisational approach?

A focus on forecasting

Global benchmarking organisation APQC have taken a look at the frequency and accuracy of forecasting across almost 250 businesses.

Their findings indicate that 45% of organisations forecast cashflow less frequently than monthly. Fewer than half can claim an accuracy of 75% or more.

The same report shows that 83% of companies define planning, budgeting and forecasting as their key area of focus.

Barriers to agility exist for all organisations, with manual processes and non-integrated systems appearing as the most significant.

Time-consuming process

The challenge is put into sharp focus by additional APQC research shared by CFO:

The typical finance function is taking 12 calendar days to complete period-end reporting (i.e. the updating of historical reports and updates to the forecast) every month.

With the remaining resource available, how much time do they have for the value adding tasks? Are they reviewing accuracy; checking that models are reflective of the current/possible future reality; or taking the time to derive a greater understanding of their current business model? It’s unlikely.

Help is at hand

IBM’s Planning Analytics directly addresses this challenge:

• Reducing reporting cycle time
• Automating repetitive processes
• Creating greater flexibility

There’s a reason that improvements in planning, budgeting and forecasting processes are a primary objective for finance functions in 2021. The ability to ride out ongoing volatility requires leadership and decisive action, these are both driven by clarity and powerful insights.

We don’t know what additional bottlenecks might crop up this year but whatever is on the horizon, your FP&A cannot afford to lag behind. With IBM’s Planning Analytics on Demand, businesses of all sizes can ensure that their FP&A activities keep pace with what’s going on in the world. Get in touch today to see the difference Planning Analytics could be making to your finance function.

Read the full APQC report.