As businesses become successful they naturally grow, taking on more staff, offering more products and services and opening more locations.
Initially this may seem manageable but as the organisation expands so the firm encounters crises and managers are left feeling that they don’t really know what is going on (see Greiner’s growth model for a great explanation).
Typically the business will begin to search for better reporting and more information but as a result of this it will suddenly find that it has created a cottage industry characterised by many spreadsheets and has trouble finding a single version of the truth. Numbers will constantly appear in this situation and equally be constantly challenged and staff will lose confidence in the data, starting to manage using intuition and guesswork.
Whilst a business may have survived with a small finance function, before long it becomes clear that what they need is a more dedicated analytical ability – step forward the FP&A function.
FP&A or Financial Planning and Analysis is a department designed to take control of the melee that is reporting and turn it into an organised and credible method of running a successful business.
Often run alongside finance, the FP&A function will begin by ensuring that the company has a set of definitions that everybody understands and signs up to. This is a vital step that can often be missed but if reporting is to be credible then metrics need to not only be understood but also must be acceptable to managers otherwise every reporting and budgeting cycle will be met with the same old arguments about the measures rather than the actual results.
Once definitions have been agreed upon then metrics will need to be agreed. It is frequently the case that businesses in growth mode try to measure everything they can to produce some level of understanding. In fact what they need to do is to measure and report just the important things that will make a difference to results and that managers can affect with their actions.
Whilst it is all well and good having fully defined and agreed metrics that the business wishes to report upon, it has to be remembered that the information has to be collected. A great FP&A department will be experts in data mining and analysis, being able to interrogate systems and produce meaningful and accurate data that can be turned into top class reporting.
It’s not enough though to simply collect information. FP&A professionals are experts in being able to present data in a meaningful way that allows managers to understand the situation and act accordingly.
The department will put together an agreed reporting timetable that will ensure that operational parts of the business get frequent information that can be used to improve efficiency. Alongside this the Directors will be seeing higher level strategic data that will enable them to set the direction of the whole organisation.
One important side effect of the reporting effort being centralised in this way is that the business will begin to see only one version of the truth as the data will be standardised and the methods of reporting and presentations will follow agreed standards.
Once the structure of reporting has been set then the company has a framework that it can base its budgeting and forecasting effort upon. The FP&A department will typically organise and coordinate input from across the business and bring these together to produce a coherent and credible plan.
In addition to actually producing the reporting it is quite usual for the FP&A staff to take ownership of systems such as Corporate Performance Management (CPM) and reporting delivery software to guarantee the accuracy of any production and distribution methods.
Above all the chief attribute that the FP&A function brings to the table is that of order. With clear and defined measurement, professional data extraction and insightful presentation that allows the busy company to tell the wood from the trees.
Investing in an FP&A function may seem like a luxury for a growing business but the outlay will be more than returned by greater efficiency and better decision making within the firm. At the same time managers will be freed up from the burden of producing information to allow them time to add insight to the reporting cycle.
If you find your company suffering from a crisis of information management then it may prove to be time that you found your own FP&A department.