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What must FP&A do differently to make planning a success?

Your CEO needs access to different data than the manager of HR. Yet there’s also a good chance that they may be interested in some of the same information. And even within the same departments, managers may seek different information. Managers have varying requirements and goals; some prefer a very high-level overview, while others want specific information and a lot of granular details.

FP&A is obviously concerned with financials; however FP&A can no longer take a narrow view of its own role. FP&A must go way beyond the financials to where the business happens to succeed in making planning a success!

We discussed in my previous post the notion of active planning and made it concrete using a specific example. Now we’ll take it one step further and discuss how you can only realize active planning if you integrate your planning process with business operations.

In the end we’ll tie it all together by explaining how you can now build a driver-based planning process that ties your strategic intent together with your daily execution. I know that’s a stretch to most FP&A professionals, but with active planning it doesn’t make sense any other way than to make your planning driver-based.

External factor to business drivers to financial drivers

I think we can all agree that business doesn’t start with financials. In fact, it ends with financials, when every transaction eventually gets recorded through debit/credit. So how could we ever start our planning process with the financials or think that by extrapolating current financials with a growth factor or similar that we would get a decent picture of what will happen in the future? No, we must flip our thoughts on planning around. Here’s how:

  • We must look at the external factors that impact our business and are documented as critical assumptions as part of our strategy
  • Next, we must look at the key business drivers that determine if we’re successful or not
  • Only then do we start to look at the financials, because they’re the most lagging indicator we have

In short, external factors are leading indicators to business drivers, which in turn are leading indicators to financial drivers. Now it’s important that you only select the most critical ones, say six to eight in each category, because otherwise you’ll have a hard time describing how each factor/driver impacts the other. You’ll also have a hard time producing any meaningful monitoring system or planning process.

It’s clear that the more variables you can add to the equation the more precise you’ll likely be; however, to exercise active planning, an 80/20 approach is much better than thinking you need 99% accuracy in everything you do.

Almost real-time driver-based planning

Now let’s connect the dots. You’ve defined six to eight drivers at each level of external, business, and financial. You should now connect these drivers so you have an idea about how a change in one will change the other. You might need to use some machine learning to build a proper model, but once it’s built, you just need to link the financial drivers to your P&L, balance sheet, and cash flow (depending on how much detail you want to plan for).

Now this is real active driver-based planning that essentially gives you an updated view on your business whenever something happens in your critical assumptions that are tied to your strategy. I can imagine an alarm bell going off in every CXO’s office every time any of the drivers moves outside the comfort zone. Luckily for the CFO though, sharing the financial impact of not acting is no longer a headache.

How does this compare to your own vision for creating an active planning process? Have you already started some sort of driver-based planning? How connected is it among the three levels? Now is the time to get this done so we can start to focus on making the right decisions given the change in assumptions. Are you on board with the needed change?

Read Plan to Win—Achieving business agility in the age of urgency, a new book commissioned by Adaptive Insights.

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