Why Should Your FP&A Care About Budgeting?
by: Patrick | The Constant Analyst
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If you’re in the Financial Planning and Analysis (FP&A) department, it’s likely you wear many hats. The nature of the job requires it. FP&A attempts to catch a glimpse of an ever-shifting future before it arrives, and respond in a timely manner to changes that can affect an organization for years to come. Somewhere in there, budgeting comes in, because everyone needs to know where the money is going.
FP&A has been a fundamental part of the CFO’s offices for a long time now, but times are changing, and changing rapidly. Changing times means changing functions for the FP&A professional. When the passage of just two years can mean a vastly changed economic landscape, FP&A is needed more than ever to help business avoid sometimes fatal pitfalls. It is perhaps one of the most important functions of a corporation that no one outside the business really understands.
Ever Looking Forward
First, FP&A teams are something like the company oracle. While it’s nothing so mystical as the ancient Greek example, it is the job of the FP&A professional to sort of peek into the future and develop strategies to deal with whatever might come next. All companies want to earn money in the future — in fact, they cannot survive without doing so. FP&A provides the vital lifeline that helps make potential earnings into actual profit.
Everyone on the financial team of a given company depends completely on the findings of their FP&A team. Thanks to the increasing pace of today’s innovations, management has to rely more deeply on the FP&A professional than ever before. This not only applies to the CFO, but every other chief in the corporate structure. The FP&A professional doesn’t just see the future — they help others to see it, as well.
Accounting for the Accountants
The future can’t be accounted for, however, without a firm grasp of the present. FP&A is not accounting or money management. What the FP&A professional handles has not even yet been realized. Sometimes that leads to the belief that there’s no time for dealing with the more now-centered work of learning budgeting and forecasting software.
Likewise, a number of accountants feel they have no time for FP&A prognostication. 62% of finance executives stated the divide between the accounting and the FP&A departments was a big hurdle to jump when it came to utilizing FP&A reports to their fullest capacity.
The lack of understanding of the true work of the FP&A professional makes for a lot of roadblocks and bottlenecks in allowing optimal service. Almost a third of the financial executives surveyed claim insufficient access to the basic data which drives financial planning. More than a quarter said their financial staff did not completely understand business strategy and dynamics. 36% rated their FPA&A models as poorly aligned or unacceptable. There was also a tendency for certain facets of the budget regarding FP&A to be overlooked or limited.
Less than half of financial professionals find value in the budgeting process. Yet, that does not remove the necessity of budgets, which are vital not just to the financial and accounting teams, but to the company as a whole. Budgets are still the best way to allocate limited resources. Budgets usually do a poor job of accounting for the future (one reason FP&A teams are often skeptics), but they provide a rough map of where the company would like to go over the next quarter or year.
Meeting in the Middle
Certain experts have called for a different approach to budgeting, one that might better incorporate the efforts and skills of the FP&A team and make them feel more a part of the company as a whole. This new approach calls for more flexibility, where the budget is not necessarily fixed on a yearly basis. Continuous budgeting gives the financial portion of the business room to change direction much more readily, even as the market changes.
Changes suggested by the FP&A department can be acted upon nearly immediately. If a given project is not progressing as it should, it can have its funding cut, without waiting until the period is over. Shortening the budget scale from the usual six-month period to as short as several weeks can make a huge difference in the way the FP&A and accounting teams work together to create a firm foundation in the present and a blueprint for sound financial standing in the future.
In this model, the FP&A can make their predictions on a shorter time scale, creating the opportunity for much greater accuracy and less ambiguity. They can also work hand-in-hand with the budgeting and accounting department, guiding each other in the direction the company’s finances will flow.
Sometimes, it may feel as if the budgeting process has little to do with analyzing what’s to come, but understanding the present is an important part of analyzing the future. It’s one very good reason for FP&A professionals to find ways to better integrate themselves and their work into the company as a whole. Transparency and understanding are powerful tools when it comes to propelling a company forward.
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