FP&A Best Practice Principle 5: Take action when you fall behind on your financial or operational goals
28 February 2018
This is the fifth 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 5: The best performing companies are models of agility -- they take action when they fall behind on their financial or operational goals.
One of the major distinguishing features of best performing organizations is that they take action when things aren’t going as planned. Rather than just adjust their expectations downward, they take stock and evaluate what they can do to get back on track. And what’s key here is they aren’t just focused on financial progress but also the progress being made on operational goals as well. In the best run companies financial and operational goals and results are tightly integrated. So when a best practice company falls behind any operational goal, they know the impact it will have on the financials – and they take action to get back on track.
We said the best performing organizations are models of agility, so let’s discuss what that means for Forecasting. In this blog series it may seem like we’ve ignored Forecasting, but we’ve just put it in its proper place. Keep in mind it’s called Financial Planning & Analysis, not Financial Forecasting and Analysis. That’s because planning for success is what drives value, merely forecasting favorable outcomes does not.
Forecasting does serve a vital function as an early warning system and provides an unbiased, clear-eyed projection (at least it should). Gaps between the Forecast and the Plan should prompt a dialog around the underlying business issues behind the gaps. Just as importantly, they should trigger mitigation to get back on track. Executives need to decide if there is a way to keep to their commitments, or if resetting expectations of business results is in order. That decision should be made only after thoughtful consideration of proposed mitigation plans.
Keep in mind that forecasts but should not be focused exclusively on the financials. The progress of the initiatives and project plans should also be assessed. If they’re falling behind, then the expected financial results may also be delayed. This type of analysis requires an understanding of the business and the initiatives, which goes above and beyond the understanding of financial models.
From a technology perspective, scenario planning and the ability to capture risks & opportunities are key enablers. The ability to anticipate what could happen, and more importantly building a mitigation plan to address it, is essential to agility.
In addition, if we want unbiased and realistic forecasts, predictive analytics can be quite helpful. If there is a wide discrepancy between the system generated forecast and what people are predicting, that should prompt a meaningful business conversation.
Lastly, capturing not just financial measures, but operational measures as well is key; along with the ability to store and report initiative information such as project milestones, dates and deliverables to meet operational targets.
Looking forward, the next set of Principles are designed to help foster a culture of accountability. As good as any plan is, it takes people to implement it. People do care if the organization achieves its goals, but they care even more about achieving targets they own, especially if there is economic incentive to do so. In next few posts, we will highlight accountability and discuss how the best performing organizations foster a culture of accountability.
- 12 Best Practices in Financial Planning and Analysis - Teaser post
- 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 #4: Analyze The Variance And Get The Story Behind The Numbers