CFO’s have a busy and never-ending agenda. The finance transformation journey has been on-going for decades. CFO’s always seem to find new ways of looking for increased efficiency and effectiveness from the finance function. However, it is always relevant to consider what is new on the agenda and what are the continued priorities. This will help us shift focus where needed and work on the most important issues.
There are two key issues emerging for CFO’s in 2021 and they are both a result of the pandemic. The first is around improving analytics capabilities. The other is completely unchartered territory for CFO’s and that is to improve finance agility. The Hackett Group defines “finance agility” as…
“The ability to anticipate or sense disruptive business events and changes in business conditions, and to swiftly make and implement effective decisions in response to these changes”
The two issues are intertwined as we cannot become more agile unless we improve our analytics capabilities. We must improve them to a point where we go beyond insight and deliver foresight into the decision-making process.
How can FP&A deliver on this?
There are simple ways and more complex ways that FP&A can deliver on this ask from the CFO. The simple way is to ask WHAT-IF a certain event happened and how would that impact our performance. You can then consider a couple of major black swan-like events and model their impact. Once you have an idea about the impact you can develop action plans to call upon should any of these events start to unfold.
The more complex approach is to start predicting what will happen in the future. In a stable environment, this figures to be relatively easy to build a model that accounts for what we know and what leading indicators show. A company like Microsoft has proved that it is possible to do so. The challenge becomes to predict major uncertainty. You can feed your model with the impacts of events like the financial crisis, the current pandemic, or the European debt crisis yet each event seems to have its own dynamics. Hence, even you use the events as inputs future events might have completely opposite effects.
The question is does it makes sense to try and predict the future? It probably does but rather than expecting we can do it accurately we should treat it as early warning signs. When we start to see trends and patterns in leading indicators that we have not seen before we should re-visit our WHAT-IF modeling. Are we seeing patterns that we have already accounted for or do we need to develop new scenarios? If we have accounted for them it is time to act and if not, we should simulate this new situation and develop a new action plan. This is in a simple a practical way how CFO’s led by FP&A can create finance agility.
What should FP&A start, stop, and continue doing now?
For FP&A to deliver on the need of the hour of CFO’s it is now clearer what they should start, stop, and continue to do.
- START to develop more agility by creating WHAT-IF scenarios about the future
- START to develop more advanced analytics that can provide an early warning for black swan-like events
- CONTINUE to increase their influence to ensure that insight derived from analytics and WHAT-IF modeling are considered in decision-making
- STOP long-winded budget and forecasting processes that are outdated as soon as they are completed
- STOP overdoing reporting on backward-looking financials that cannot be changed anyway
FP&A must develop an opinion about the future and predict what might happen. No one expects the predictions to be completely accurate but rather that they drive a discussion about what actions to take should the prediction hold true. This will lead to much more balanced, yet swift and agile decision-making whenever needed. After all, that is the best anyone can do!
This blog is presented by ValQ in collaboration with Anders Liu-Lindberg, Business Partnering Institute.
ValQ is a server less, multi-purpose application delivering FP&A solutions of budgeting, forecasting , simulations, planning & analyses on Microsoft Power BI, encompassing all the capabilities that you require from your FP&A tool, thus, enabling a faster & a better decision making in a visual and an intuitive manner.
If you have any good cases for ValQ or stories to tell about how such solution can benefit you, please reach out to us.