FP&A is just a finance function (and other related myths)

We talk a lot about the importance of FP&A and the role it has to play across the wider organisation.

Time then to gather a few of the most common misconceptions around this topic together and knock them on the head.

Myth 1: FP&A is just a finance function

For too long, the finance function has been siloed, FP&A activity restricted to number crunching for budget creation and forecast updates. For any business to move forward with agility, actionable insight is required – you cannot drive performance and profitable decision making without it.

A fundamental baseline for the journey to profitability is consolidating FP&A activities to allow your finance team to direct their attention to the value-added tasks that will have a positive impact on the rest of the business. These tasks can be classed as xFP&A (extended), involving engagement with the wider business on broader planning and performance management initiatives. This way of working is an extension into any area of the organisation which produces business plans, including sales, marketing and HR.

With FP&A driving conversations across the whole business, planning becomes more purposeful. You can start to identify more opportunities, with your finance function facilitating engagement with FP&A from other business units.

Myth 2: The aim of the forecast is to be as accurate as possible

“There are two kinds of forecasters: those who don’t know, and those who don’t know they don’t know.”

JK Galbraith

Of course a forecast that is accurate is the ideal, but it’s important to remember that it is a tool, a guide to what is happening. Arguably, interrogating the drivers and reasoning behind the numbers and developing insight around any margin for error is more valuable than having a constantly accurate forecast. Asking ‘why’ gives you access to a broader picture around your performance and can drive better planning.

Myth 3: You can’t run a business without a budget

There’s no question that budgets are extremely valuable. But they are not everything. Just look at 2020 for a reminder of how quickly they can become wildly inaccurate.

A static budget set ahead of the year is not going to be enough. Being able to maintain an up-to-date forecast that reflects current company-specific and macroeconomic intelligence is crucial for guiding planning – particularly when facing rapidly evolving circumstances, as in the current situation.

Live financial models, or rolling forecasts, allow decisions to be made in real-time based on the latest information, providing insight unavailable from a fixed budget.

Myth 4: Compensation should be based on targets derived from budgets

Compensation and rewards should undoubtedly be incentives having a positive impact on the business.

But if, as we mentioned above, the budget can quickly become out of date, is using it to set targets going to motivate the right behaviour? Aspiring to objectives based on outdated information rather misses the point of rewarding positive results.

Similarly, given the budgeting process is relatively academic, there’s always the possibility of people ‘gaming’ their approach in order to achieve their desired bonus. Positive behaviour isn’t being promoted so much as a canny take on the figures.

There is a wider debate about the use of balanced scorecards, and linking behaviour and rewards to drivers that have a positive impact on the budget. Regardless of your view, the fundamental element remains that business outcomes are the end goal and compensation should be directly linked to the reality of those results.

Myth 5: Automating FP&A is expensive

There are always expensive ways of doing things but automating FP&A doesn’t have to be out of your price range. IBM’s Planning Analytics on Demand is the ideal starting point for businesses for whom an enterprise package is unnecessary. This self-service solution can be tailored entirely to your needs and scaled up as required.

The ability to take an incremental approach to automation allows for agile experimentation, addressing particular elements of your FP&A processes with well-defined limitations and impact. You can tackle the worst of your pain points for immediate relief and then expand your use of the solution as suits your business needs.

Take your first steps to busting these myths within your own business, get in touch today to discover the difference Planning Analytics can make.