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Planning for the Unknown: Why Integration is the Key to FP&A Today

insightsoftware -
April 29, 2021

insightsoftware is a global provider of reporting, analytics, and performance management solutions, empowering organizations to unlock business data and transform the way finance and data teams operate.

Writing Notes

The traditional financial planning and analysis process (FP&A) is built around a “business as usual” presumption. In other words, most of the variables affecting your business will stay more or less the same, and to the extent that anything changes, those variables are fairly well known and fluctuate within some expected range of reasonable values.

If the economy slows down, demand for your product might decline to some extent. If a competitor closes up shop, then you might have an influx of new customers. For the most part, though, this is a paradigm in which most things are fairly predictable.

Once in a while, though, something truly unexpected happens. When the COVID-19 crisis arrived on the scene in early 2020, it came as a dramatic and unexpected shock for virtually every business on the planet. Demand shifted abruptly. Much of the workforce was sidelined over health concerns, school closures, and a new reality in which some services were no longer required and others were in high demand.

These two scenarios fall at opposite ends of a spectrum. In the first case, you can rely on financial plans as being fairly static and predictable. In the latter case, change seems to be constant, dramatic, and highly unpredictable. For business leaders, these two extremes call for very different approaches to financial planning and analysis (FP&A).

As you look back over the past year or more, the traditional approach to FP&A seems utterly inadequate to the current business environment. It calls for a fixed annual budget with rigid forecasts and sales targets, well-defined capital investment and cash flow plans, and very little variation. The COVID-19 crisis has awakened business executives around the world to the need for a different approach to FP&A. As we re-examine and reinvent those processes, the need for more effective financial forecasting methods and financial forecasting tools is clearer than ever.

Let’s look at some of the key trends around financial planning and analysis that have increased the popularity of an integrated approach over the past year.

Trend #1: Continuous Planning

In the context of a traditional financial planning paradigm, budgets and forecasts are created annually and remain fixed for the most part. In an effort to build some flexibility into the process, many organizations have introduced a quarterly adjustment cycle, allowing for greater responsiveness throughout the course of the year. Even that can be too rigid, though, because it simply doesn’t provide the kind of agility and rapid responsiveness that businesses need in today’s unpredictable business environment.

Continuous planning changes all of that by revisiting financial planning on much shorter intervals. This allows business leaders to adjust their forecasts using the most up-to-date information, and then take action to address any potential issues or concerns. Continuous planning requires real-time visibility into what is happening in the business. It also calls for streamlining and optimizing the organization’s reporting and analysis capabilities. With a unified set of FP&A tools, you can collect, manage, and analyze information far more efficiently than with the traditional off-the-shelf tools familiar to most users of ERP and CRM software.

Continuous financial planning is a new paradigm, so it calls for a cultural change as well. The organization as a whole must adjust to a new way of doing business—monitoring and adjusting constantly in pursuit of better business results. The best FP&A tools provide an integrated framework in which you can assess real-time business performance alongside current plans, and make adjustments to account for current conditions and expectations. If management is supportive of a continuous planning approach, then the right FP&A tools provide the practical mechanisms necessary to make that shift happen successfully.

Trend #2: Scenario Planning (“What if…?”)

With the right FP&A tools in place, organizations can also develop multiple plans in parallel. This allows for side-by-side comparison of “best case,” “worst case,” and “likely case” scenarios based upon more or less optimistic assumptions. Automation makes it possible to create financial forecasts based on different potential outcomes, without necessarily rebuilding an entire financial model from scratch and maintaining parallel versions.

Scenario planning has gained popularity as business volatility has increased. Amid the uncertainty arising from the COVID-19 crisis, many business leaders sought to understand the potential impact of customer credit defaults and limited liquidity on their future cash flows. In other words, how might a rapid decline in sales, slower customer payments, and potential bankruptcies among customers impact midterm and long-term cash flow? What would be the impact if the company’s lines of credit were also tightened?

In a highly volatile business climate, these kinds of “what if?” questions are coming up more frequently than ever before. With the traditional spreadsheet-intensive manual processes that most businesses use for FP&A, it can be difficult to develop meaningful models quickly, easily, and accurately. While you might know very well how to create a financial forecast based on multiple scenarios, the effort to do that with manual tools is limiting. An integrated FP&A toolset makes it possible to do that efficiently.

Trend #3: Collaborative Planning: A More Inclusive Process

Many companies are also doing more to extend the FP&A process further beyond the office of the CFO. In most organizations, the budget process is largely driven from department leads, whose input flows up to a finance team that consolidates that information and coordinates the overall process. With traditional tools and manual procedures, the scope of the planning process is often subject to practical limitations; as the number of people involved increases, so too does the complexity of the communication and collaboration process.

The best financial planning software adds collaborative capabilities, opening up new possibilities for bottom-up, top-down, and lateral communication across the organization. This enables a more inclusive process in which people throughout the company can engage more deeply in planning and budgeting. This builds a stronger foundation for trust and a sense of shared ownership in business planning.

Many companies are incorporating more non-financial data into the planning process as well. Truly collaborative planning requires visibility to sales pipeline information in CRM, and operational data that might not typically be integrated into an overall FP&A process. With the right FP&A tools, finance teams can gain real-time visibility into multiple systems that provide detailed support for more accurate planning and budgeting. This has the potential to break down silos and eliminate much of the manual effort required to bring together data from multiple sources.

Trend #4: Near-Real-Time Access to Information

The real key to an effective FP&A process is an integrated platform that incorporates near-real-time access to information from ERP, CRM, and other business applications with budgets and forecasts. The combined result is a vision for the organization’s performance targets, with the flexibility to adjust to changing conditions, and a means of monitoring business performance against those targets in near real time.

Unfortunately, the traditional reports that come with most ERP software packages usually fail to deliver information in a format that is truly useful. In most cases, they do a poor job of incorporating forecasts and budgets. Although most ERP software provides some basic budgeting capabilities and can report against budget targets in standard financial statement formats, the budget functionality is typically somewhat rigid and difficult to work with, requiring manual adjustments to each detail line item in an overall budget.

You can produce much better results with an integrated financial planning and analysis toolkit built around real-time reporting, collaborative budgeting and planning, executive dashboards, and analysis tools. When everyone throughout the organization is working from the same page, with access to information about the business as it happens in real time, teams can be fully aligned, functioning optimally, and poised to adjust to changing conditions as they happen.

The Need for Integrated FP&A

Historically, finance teams have developed budgets and forecasts in spreadsheets, and then imported or manually keyed the resulting information into their ERP software, where it provides a basis for generating financial statements that include budget to actual comparisons. Unfortunately, the budgeting planning capabilities of most ERP software is fairly restricted, often consisting simply of a budget amount that can be associated with each general ledger account.

ERP systems lack many of the common methods for developing financial plans, including the ability to add formulas or build baseline budgets with variable uplifts to different departments or line items. By bringing those capabilities into a single toolkit and integrating it with ERP and reporting, finance teams can have the best of all worlds. They get flexibility and ease of use when building budgets and “what if” scenarios, without sacrificing the direct link to the live data stored within their ERP software. The best FP&A tools allow for collaborative planning, secure report distribution, and sharing of information among colleagues across the organization.

As business agility continues to garner attention, the trend toward collaborative, integrated FP&A processes will only grow stronger. Today’s business environment calls for automation, collaboration, and a willingness to deploy technology to enable teams to work smarter.

At insightsoftware, we have been helping businesses with best-in-class planning, budgeting, and reporting tools since 1973. To learn more about how insightsoftware can help your organization, contact us for a free demo, or download our free ebook,

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