FP&A Best Practice Principle 4: Analyze The Variance And Get The Story Behind The Numbers
30 January 2018
This is the fourth of a 12-part blog series appropriately called The 12 Principles of Best Practice FP&A. These Principles are based on global research conducted with more than 700 organizations worldwide.
Principle 4: As a result of building plans based on tangible projects and understanding how they impact the financial results; the best performing companies do a better job of variance analysis and have the ability to get the story behind the numbers.
Variances are often seen as something to avoid, but they can be extraordinarily helpful in understanding what’s happening in the business. What did we expect to happen? What actually happened? What can we learn from the variance? While comparisons of financial results are helpful, they rarely if ever tell the whole story.
Without a real business plan, all Finance can say is “We have a negative 2% variance in Revenue because we didn’t sell as much as we forecasted.” There’s very little business insight offered in that case, nothing that points to what can be done differently next time, nothing to learn from.
Contrast that with what can be gleaned from a real business planning process. Because there was a real plan to grow Revenue by 8%, we can identify what happened from a business perspective. Perhaps a key marketing campaign launch date was delayed, and a Groupon event didn’t draw the response rate we anticipated. We can and should delve much deeper into those issues. What caused the delay in the marketing campaign? If it was an agency issue, maybe we need a new one. If the root cause was the marketing person leading the campaign left the company on short notice, maybe we have a succession planning issue. The point is the analysis can reveal real business issues that we can draw important lessons and insights from, and learn what to do differently next time. In other words, it facilitates continuous improvement in the enterprise.
The challenge is that in many organizations the near exclusive focus is on financial outcomes, rather than how those financial results will be achieved. If you had never seen a budget process before but walked into the middle of one, you’d be forgiven for assuming you’re witnessing a negotiation process, and not business planning. What we see too often is that Senior management comes out with goals and objectives, and the organization explains why they can’t be met. Marketing and sales explain why increased competition has made it unlikely goals will be met, while operations explain why productivity can’t be improved. Eventually, when the Board meeting to review the budget is looming, compromise is struck and the P&L finalized.
The best run companies use FP&A to drive results, not just predict them. They know exactly how they plan on achieving their results. They know the strategies and initiatives they put in place, the actions they’re going to take and who is responsible. The benefit, apart from greatly increasing the likelihood that goals will be achieved, is that they can pinpoint “what happened”. Learn from it, and incorporate lessons learned to be even more competitive. Variances and their explanations provide business insight and value.
The role of Finance in all this is critical. As a Partner in the Business they understand how the business is run and the unique challenges of the department they support. They’re well versed in how their department operates, and what levers drive performance. They also know the language that’s used. For example, if they are supporting logistics they know what a racked warehouse is, when refer truck is used, and what a Peddle Run is. They use this business acumen and combine it with their expert understand of accounting and financial analysis to help define targets and support the process of developing projects and initiatives to achieve them. Then, as the year progresses and actual results roll in, they perform variance analysis that provides true insight into the business.
Things don’t always go to plan of course, and in the next blog post we’ll discuss the ever increasing need for Agility.
- FP&A Best Practice Principle #1: Translate Strategy into Actionable Plans
- FP&A Best Practice Principle #2: Identify and Gain Budget Approval for Required Resources
- FP&A Best Practice Principle #3: Connect Operations and the Financials
- FP&A Best Practice Principle #5: Take Action When you Fall Behind on your Financial or Operational Goals
- FP&A Best Practice Principle #6: Cascade both Financial and Operational Goals down to more Specific Targets
- FP&A Best Practice Principe #7: Hold people accountable to reach better financial results and link them to financial incentives
- FP&A Best Practice Principle #8: Link Financial Incentives to Operational Goals
- FP&A Best Practice Principle #9: Identify what drives success in your business and develop measures for those drivers
- FP&A Best Practice Principle #10: Establish short and longer term targets for business drivers