The Four C's of Financial Planning to Keep an Eye On
Financial planning would be a relatively simple procedure if the world was fairly predictable. You're probably aware of the classic technique of budgeting, in which you move last year's numbers upward by a set percentage, then evaluate the results and make any necessary modifications.
However, today's world is anything but predictable. Major events can emerge out of nowhere to significantly alter business conditions, as business leaders throughout the world have realized, necessitating a level of agility and responsiveness that has never been seen before. For many businesses, financial forecasting or budgeting based on previous year's figures appears to be significantly less prudent than in the past.
Fortunately, some advanced systems are available to make financial planning, forecasting, and budgeting much easier than they were previously. The best financial planning and analysis (FP&A) software interacts with your enterprise resource planning (ERP) system, allowing you to get real-time data on what's going on in your organization. It offers continuous financial forecasting and empowers business managers to see to the company's ability to survive and prosper in the face of turmoil by allowing communication and collaboration across many functions inside the organization.
Finance Plays a Vital Role
Many corporations used to see the finance department as a collection of personnel whose job it was to count the numbers and maintain track of the business. While this is still an important job, it accounts for just a small fraction of what most modern finance departments accomplish.
Finance is no longer simply about processing data and generating reports; it is also about providing strategic insight. Finance is a combination of the dashboard and the pilot's training and expertise if an agile business is like a fighter jet. Finance is responsible for the veracity of the data supplied to management, but financial professionals are also responsible for interpreting, advising, and assisting the rest of the C-suite in comprehending the consequences of that data.
The four C's of financial planning must be well-understood by today's accounting teams: context, cooperation, continuity, and communication. Financial planning and budgeting are more crucial than ever in today's world. Finance teams can ensure that their strategic value is readily recognized and appreciated throughout the organization, especially in the C-suite, by keeping these four disciplines in mind.
Context Matters in Financial Planning
The context in which financial outcomes are interpreted is extremely important. Assume you're the owner of a restaurant chain, and your dine-in revenue suddenly falls 80 percent short of your projections. However, there is some positive news: take-out sales have increased dramatically. You're probably not alone if you guessed the context already. At the start of the second quarter of 2020, most restaurateurs found themselves in this same predicament.
While the relevance of context in that example may seem painfully evident, many other examples demonstrate how context works on a far more subtle level. What does it signify when one of your core product lines has a low sales performance despite having strong margins? Was there a reduction in market demand or a significant shift in foreign currency exchange rates? Was there a significant decline in the pipeline as a result of a change in sales personnel or marketing processes? Or were company resources redirected away from the product in question, resulting in fewer sales?
All of these concerns highlight the significance of context in evaluating data. FP&A processes must be created with the awareness that numbers are only one part of the puzzle, albeit a vital one. The broader context in which those figures are used is essential.
Improving FP&A with Collaboration
The importance of agility and responsiveness has been highlighted by the events of the past year. Many CEOs have turned to driver-based budgeting, continuous forecasting, rolling forecasts, and zero-based budgeting as alternatives to traditional financial forecasting and planning. Those techniques demand cross-functional participation from stakeholders across the organization to be effective.
The best FP&A software allows for comments, trackable modifications, version control, and the exploration of multiple "what if" scenarios. If your organization still uses spreadsheets for planning and budgeting, you'll have to rely on emailing copies from one user to the next, hoping that several users don't accidentally overwrite each other's modifications in separate versions of the same file. That difficulty is solved by good FP&A systems with extensive collaboration features. Perhaps more crucially, they enable the finance team to effectively orchestrate FP&A procedures in their role as orchestrators.
The Key to Accurate Financial Planning Is Continuity
Having a steady stream of reliable, up-to-date financial information is what continuity means in the context of FP&A. It's all about making data available in near-real time so that business executives can make decisions based on the most up-to-date facts. When the world around you is rapidly changing, businesses that can adapt quickly will have a significant advantage over those that cannot.
When financial plans are built on a collection of disconnected spreadsheets with no live links to current information in your ERP system, decision-makers are clueless about what is happening in the organization. When the finance department adopts a proactive approach to streamlining information flow, critical insights are available when they're required most.
Communication is the glue that holds FP&A together
Ultimately, finance department FP&A experts are in a unique position to communicate the meaning behind the data. This could entail creating multiple scenarios, such as the best case, worst case, and most likely case so that executives have a better knowledge of the road ahead. It could also entail advising trigger points for crucial business decisions depending on certain events, as well as advice on how to deal with adversity. Finance is in a unique position to understand the data, bringing context, collaboration, and consistency together, and then delivering that information to the C-suite executives who rely on it to make sound decisions.
If your organization wants to take FP&A processes to the next level keep an eye out for the four C’s of financial planning.