FP&A: Why being wrong will help a company to do what’s right
Credit: Anthony Tori
First, what is FP&A?
Financial planning and analysis (FP&A) professionals are responsible for the forecasting, planning, and analytical processes that support an organization’s financial health and future. Going beyond the record-keeping of an accountant, FP&A provides critical support to the executive team and often reports directly to the Director of Finance or CFO.
Surprising to many, while the tasks of FP&A exist in almost all companies, rarely do small businesses establish a formal FP&A function. The Controller, VP or Director of Finance, or CFO may be responsible for these duties, but there is no dedicated financial planning group or set of FP&A processes. In larger organizations or even mid-market companies, FP&A will be a designated function complete with dedicated planning platforms and supporting infrastructure.
Why are FP&A teams critical? These financial professionals carefully juxtapose factual data from a company’s past with today’s economic and business trends to offer the leadership and the board sound recommendations used to make crucial decisions. Careful analysis, forecasting, planning and reporting -- each play a role in providing reliable information in a company.
It’s an FP&A team’s job to confidently ask and answer: Where were we? Where are we today? What's the future? How do we get to where we want to go?
What happens when we’re wrong? What if something happens that no one planned for?
Even as a seasoned FP&A, my forecasts are often wrong. That’s just the nature of trying to predict the future — I can’t — and neither can you. Most companies couldn’t possibly have planned effectively for a pandemic but that doesn’t mean that they haven’t successfully navigated throughout this time.
Here’s another example of being wrong: Back in 2007, I regularly relied upon the Congressional Budget Office’s (CBO) reports as a key part of my business planning and valuations. These federal reports were and still are devised by world renowned PhDs and economists. They are solid. Still, they didn’t forecast the impending recession. As such, I was wrong because they were wrong.
So we have to ask ourselves: just because forecasts are inherently wrong, does it lessen the impact of meaningful reporting? Has COVID made planning less reliable?
I don’t think so. Being wrong is just part of planning — a vital part of planning.
In fact, I hope we’re sometimes confronted with mistakes because being wrong isn’t always the result of something negative throttling us, like a recession or a pandemic. Being wrong can mean reassessing our assumptions which were unsubstantiated to begin with, or challenging our over-confidence, or growing in ways we couldn’t have imagined.
It’s not always a case of being directly wrong, rather it’s simply the result of not being able to envision something so unimaginable and how we’d respond. In forecasting — and in life — it’s important to try to imagine a world that you can’t... well... imagine.
A hundred years ago, many doctors believed illness struck randomly. A thousand years ago, many people believed illness struck those who disobeyed deities. Neither doctors nor our ancestors could have fathomed the current understanding we have of genetics and DNA. Now, such understanding, combined with billions of dollars of research, allows us to predict and prevent disease decades before they become chronic or fatal. What was once unimaginable is now a regular part of our lives. But just because we better understand disease and genetics doesn’t mean we’ll conquer the next challenges that come our way -- we might be more prepared for some challenges but will be completely bashed by others. Mastery of what’s already been solved doesn’t evolve into mastery of what hasn’t yet happened.
Even in the markets, consumer behavior and customers’ demands change. While I predicted years ago that we’d eventually be working more remotely, I never would have predicted that it would become so globally prevalent practically overnight. While most of us knew ecommerce was the future, few of us would have predicted individual creators (not companies) could make their living selling independently through Etsy and Amazon. While many of us knew the attractiveness of online merchant exchanges like PayPal and Stripe, we didn’t think about keeping large sums of money with them, transacting in moneyless payments and cryptocurrency. Forecasting isn’t just about planning for the future -- it’s about imagining what it could look like.
How do you imagine the unimaginable? How can you plan for that?
So, how do you plan for the uncertainty of a world that throws life-altering pandemics, devastating natural disasters, and market transformations at us? A world where progress is moving at warp speed and no one can really know what’s next?
Scenario planning.
Whether in life or in business, scenario planning means considering various avenues of progress and planning for them accordingly. In financial planning and analysis, it means imagining “what-if”, identifying a future state of existence and deploying resources to support that reality.
Rather than relying on one set of forecast figures, companies can employ a varied approach. They can bring the possibility of both optimistic futures and negative realities to the table, assigning a probability to both. This approach gives an organization the ability to remain forward-thinking and agile for change, regardless of the outcome. Then, as the company sees how it is faring in reality and new data comes into play, it can consciously pivot and refresh the scenarios.
The exciting part....a company employing capable planners that utilize scenario planning can recalibrate their reports in real-time when circumstances change.
Thorough scenario planning helps companies grasp how to best plan for identified projects and how growth will affect financial metrics like liquidity and return on investment/assets. Any company can benefit from that better understanding.
The trick — and the lesson from a pandemic — is knowing which and how many forecasts need to be incorporated in planning. I don’t have the answer unfortunately. But my recommendation is to employ enough to capture material variables that could have substantial impact but not so many that focus is lost within the noise. This allows companies to visualize what’s next and make wiser decisions. Business aside, we can benefit personally from this mindset as well.
It’s not that a planner needs to have a high batting average, being right most of the time. What’s perhaps more important is being able to provide a number of possibilities, pessimistic to optimistic, with defensible assumptions. When I speak with leadership, I know my forecasts won’t hit with 100% accuracy; while they’ll generally be solid, it’s the assumptions I make about an imagined future, translated into figures, which is perhaps most meaningful.
If I’m going to trust a corporate financial planner and analyst, the only one I’d trust is the one who understands WHY they were right and wrong and who takes ownership of the numbers, even when they miss.
