How can FP&A teams better support the business in 2023? And, is it really time to leave Excel in the past, or have you been looking at it all wrong?
Christian Wattig, Managing Director at FP&A Prep, recently answered the Finance Alliance Slack Community’s burning questions about how to best prepare for 2023.
Here’s what he had to say.👇
- Two key ways to make areas of financial planning less overwhelming
- How to make a convincing argument for a standard budget process
- How to stay ahead of accelerating change in 2023
- Why you don’t need to leave Excel behind in 2023
- The importance of automating data consolidation
- How FP&A teams can better support the business
- Why driver-based financial models don’t have to be complicated
- Scenario planning & analysis is vital for budgeting
Two key ways to make financial planning less overwhelming
Q: What’s your advice for making financial planning a year-round process without it being so overwhelming?
A: I have two pieces of advice for this.
Number one is that your annual plan needs to be at a level of detail that makes it possible to learn from your variances throughout the year. If your annual plan was done at too high a level of detail, you won't be able to look at those variances.
And for sure, you’ll have variances and say, “Okay, this tells me that that strategy probably didn't work as planned,” or, “This tells me that this driver or input to my business didn't have the ROI that we expected originally.” So that's number one, you need to make sure that your annual plan is detailed enough.
Number two is using rolling forecasts. A traditional forecast always tries to predict the remainder of the year.
So, let's say your fiscal year ends in December. If you were at the beginning of December already, you’d only have one month to forecast.
But in a rolling forecast, you're always trying to predict a certain number of months. Most companies use 12 months. In other words, when you're at the beginning of July, you don't just predict six months, you're always looking at 12 months in the future no matter which month you're at.
The big advantage of that is that it makes the annual planning process a lot less overwhelming because you don't start from zero. You have your rolling forecast as a base, which you can use to go deeper and set yourself up for success in the next year.
How FP&A teams can make a convincing argument for a standard budget process
Q: How do you convince a CEO who likes to make top-down decisions shortly before a board meeting that a standard budget process makes more sense?
A: This all comes down to winning your CEO's trust, essentially.
What I would recommend is to start putting together a rough outline of what a budget process would look like, ideally with some inputs you’ve already collected from the different teams.
Then, you can walk your CEO through that leading up to the board meeting and highlight how the thoughts of the subject matter experts can be great inputs for their final budget model.
I wouldn't try to convince them to stop doing what they were doing at this stage. Rather, I’d share information that can make their top-down budget more effective, accurate, and insightful. Then, hopefully, they’ll realize during this process that with more lead-up and more involvement from the other teams, having a proper bottom-up that can be compared to their top-down is the best way to go.
The argument they usually give people when they’re unsure whether a top-down is enough is if you do a bottom-up and a top-down, you can compare them to each other and use them to iterate, and critically, they’re a great conversation starter.
Often, your top-down budget will be more aggressive than your bottom-up budget, and you can use the difference between the two to talk to the team and say, “Okay, you're telling me you’re bottom-up and we can hit that revenue number. What do you need to get there? What’s missing? What changes do we need to make to the business and what risks and opportunities do you see?”
So, that's a good argument for a standard budget process that includes both a top-down and a bottom-up.
How to stay ahead of accelerating change in 2023
Q: What are the primary concerns that FP&A professionals should acknowledge and prepare for in 2023?
A: Most likely change. The rate of change will continue to accelerate in the next year. We may or may not have a deeper recession and other things will happen, so you need to prepare for that.
How you prepare for that is to make sure that your processes are as automated as possible. Ideally, you need to be able to get real-time data as quickly as possible to stay ahead of the change and be able to respond to changes in trends before the end of the month or the end of the quarter, and before it's too late. That’s number one.
The other one is that you need to meet more frequently with your cross-functional business partners as a finance leader. If you currently meet on a monthly or even just a quarterly basis, that's not enough.
I strongly recommend having weekly check-ins with your main business partners. It doesn't mean you need to reforecast or prepare a big deck of what you see going on in the business every week. But you can make your KPIs show how you're trending on a weekly basis just by doing math. This allows you to hear about risks that your business partners may see coming much sooner.
Also, the more frequent interactions give you more opportunities to show your cross-functional business partners that you can do more than cutting budgets or updating forecasts. That will then build trust and a relationship and they’ll be more likely to share doubts or concerns with you before it's too late.
That's how you can stay ahead of the accelerating change that we'll likely see next year.
Why you don’t need to leave Excel behind
Q: Do you have any suggestions for a making gradual shift from Excel to a new FP&A solution when some team members are reluctant to leave Excel behind?
A: What's important to know is that there are two philosophies when it comes to an FP&A solution. Some companies make software that gets people out of Excel because they say it’s old and lacks features, so it's better if they learn their software and stop using Excel.
However, there are other companies that make FP&A software that builds on top of Excel. That software doesn't encourage people to leave Excel behind and argues that Excel has been around for decades.
The reason that Excel’s still going strong is mainly for two reasons:
- It's very easy to use. There are fantastic resources, even free ones on YouTube to help you learn Excel.
- It's incredibly flexible. You can do basically anything you’d like with Excel.
Those two reasons are why Excel is so popular, and also because people are used to it and learned it in school.
So, I would definitely look at those solutions as well. I'm a bit biased of course because I work at Datarails. Datarails is an FP&A software company and they make a tool that sits on top of Excel, brings it into the cloud, and adds sophisticated database and automation features on top of it.
But that's just one of the solutions. There are others out there as well that help with allowing you to keep using Excel, and keep using the flexibility and ease of use while adding automation into the mix.
The importance of automating data consolidation
Q: Do you have any advice for efficient and effective data consolidation?
A: I call data consolidation a non-value-adding task. What I mean by that is that it doesn't add value, because spending more time on data validation doesn't drive your business forward. You want to spend time on value-adding tasks like business partnering, financial analysis, separating raw data from insights, and making recommendations.
The goal has to be to fully automate your consolidation. It should be a click of the button and all your sources come together and output the report in the layout you want.
You may be able to do that through Excel, but you need to be mindful that there are many tools out there that can help you with automating your consolidation.
You have a setup period with most of them, and you set them up once. And with most software services, you don't have a large upfront cost. Once they're up and running, it’s as easy as clicking a button and your consolidation process runs in the background. A few seconds later, you’ll have your consolidated report and you can spend the time you saved on those value-adding, higher-level finance tasks.
So, in 2023, I would strongly recommend that if you're still spending more than 10 minutes consolidating your data, stop and look for a tool that can help you with that.
How FP&A teams can better support the business
Q: Do you have any financial planning tips or advice on how FP&A teams can better support the business?
A: My number one piece of advice is to go and ask them more questions.
The response I sometimes get when I suggest that is, “If I go and ask them a lot of questions, isn't that a bit selfish? Doesn't that take away their time when they're already busy? Do they have time to listen to my questions?”
But if you ask the questions the right way and at the right time, you're actually helping the business because you’re encouraging them to think outside of the box and look at new ways to approach the business.
Specifically, the question I recommend you ask is, “In an ideal world, what do you like to know about your business, and when to make better decisions?” Because sometimes people feel that there's certain information we won't be able to get for them or certain analysis we can’t run before a certain date. And that holds people back from making those requests to the FP&A team.
But if you ask the question that way, “What would you like to know and when?” That opens the door for discussions that can lead to you creating new reports, new metrics, and new insights that can really help drive the business forward.
And then as a side effect of that, you're also showing that you’re an effective business partner, that you understand your business partners' goals, and that you want to do more and help them achieve their goals. It's not just about your goals.
And you'll see when you keep doing that, that their relationships will improve, and they’ll be more likely to come to you and share how you can help drive the business forward.
Why driver-based financial models don’t have to be complicated
Q: How can you build a driver-based financial model that isn’t overly complicated?
A: A driver-based financial model predicts revenues by looking at the inputs into the business that have an effect on your revenue. For example, activities of the sales team, marketing activities, upgrades, changes to the product, changes to your pricing, etc.
Yes, those driver-based models can get complicated, but often that's the case because people didn't spend enough time upfront really thinking through what the key drivers are.
It can be easy to just try and list all the drivers that potentially have an impact on the business and then estimate the return on investment. But most likely, that’ll get you worse accuracy than if you approach it from an 80/20 approach, where you say, “Okay, these are the three or four most important drivers that make up 80-90% of the variance that I can expect next year in my revenue.”
If you do that, you can spend more time on each, you can understand it better, and you can ask the business more questions to really improve your understanding of it.
Then the model won't be as complicated. It’ll be easier to explain how the model works to non-finance business partners, and will also be easier to maintain. And on top of that, its accuracy will most likely be better as well.
So, in a nutshell, spend more time before you even start building the model by analyzing the business and talking to different teams to understand what the three or four drivers are that make the most difference to your business right now.
Scenario planning & analysis is vital for budgeting
Q: How do you budget for growth and what risk factors are you considering?
A: To create a budget for a growing company, scenario planning is essential. In other words, don’t just provide a point estimate, forecast a range. Start with the worst-case scenario, then work through what a best-case would look like.
And don’t just do that for revenue at a high level, run the scenario analysis for every major business driver individually. Then you can add up the ranges to get a clear picture of not just your forecast for growth, but also the degree of risk that’s involved.
If your budget doesn’t meet expectations, it’s easy to adjust individual ranges to reflect a scenario closer to the best case. Then you can make a clear statement about how much risk you’re considering by calling out the business drivers that assume a best-case scenario.
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