FP&A and the budget

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How is your budget coming along?

Hopefully last week’s newsletter scared inspired you to lock in a legit base case forecast before moving along to planning season.

This week’s post is all about the role we play through the rest of the planning process (we = FP&A).

While the planning process isn’t necessarily our baby, we play a unique role in connecting the strategy to the financials.

And like most things I write about, this one has a simple framework you can implement: idea > list > rank > decision > model > track

Sound confusing?

It’s not that bad, let’s jump in:

Where FP&A plays

If there’s one thing I know for sure about budgeting, the connection between the business plan and the financial plan is where FP&A plays a critical role.

And there are a few clear points where we can insert ourselves to drive value. While the business owns the process, we can help organize the execution:

• Idea: business leaders generate ideas for achieving the desired end goal

• List: put all ideas on a single page so that they can be evaluated consistently

• Rank: compare ideas across a number of metrics like cost, benefit, timing, risk, etc.

• Decision: leadership to decide on the best use of the scarce resources

• Model: finance incorporates the decisions into the financial model

• Track: as initiatives roll out, finance tracks them against the plan assumptions

It’s clear where finance owns the process (model and track), but helping to lead from the beginning allows us to add value and ensure strategy is connected to the budget.

And I’ve found that in smaller companies without a strategy team (who typically facilitates this process in bigger companies), FP&A or the CFO become the default leader of this process.

Let’s break down each step of the process:

Idea

As finance business partners, we are lucky enough to be close to the strategy of the business unit we support.

And while I’m a huge advocate of finance not meddling in the operations of the business, I do think we can be helpful in providing our unbiased perspective on the ideas for improving the business.

At this stage in the planning process, listen for ideas that your business partners are throwing out for improving the business - help them to understand the potential timing and impact of those ideas.

Here’s a simple framework to evaluate the ideas consistently:

• Cost

• Benefit

• Timing

• Risks

• Mitigating factors

Work with finance teams in other support functions to understand what initiatives they are hearing about and how they are framing up the cost/benefit of those decisions.

This will help you to guide your business partners to put their best foot forward and ultimately let the ELT make the best possible investment decision.

List

Once you have enough ideas from all over the business, the goal will be to list all ideas in a single place for consideration.

If you are in a centralized FP&A role, this is where you come in.

Not every opportunity will be evaluated on the same framework - some have a 3-year cost/benefit while others leverage an NPV formula.

Work with your finance business partners to come up with a consistent framework and single list of initiatives that can be used to achieve not only the business unit goals but the overall company goals.

Having all ideas in a single place is critical for sniffing out conflicting or competing ideas that would otherwise go unnoticed if evaluated separately.

Rank + Decide

Business leaders will obviously want their idea to win among the others. But as every company has limited resources, it’s either up to the CEO or ELT to determine what ideas win and in what order they should be executed.

I’ve seen CEOs do this where each ELT member ranks investment ideas from 1-10 then the ideas with the most votes get implemented.

This step really depends on the culture of the leadership team, but the idea is that you only have a finite amount of dollars to spend at any given time. So knowing what you are going to invest in and when that will occur will create the operating plan for the organization.

Model

This is the first step that FP&A clearly owns itself. It’s time to build the business plan into your financial model.

Often, this is where the details will get flushed out:

• Exactly when are we hiring those people?

• Do we know what the consulting fee will cost?

• What month do we expect to see a revenue increase?

Track

Before you declare victory on the entire process, think through what core assumptions need to be measured into next year.

And there are 2 ways I like to measure if the plan is working:

• Top down: are we hitting the outcomes we want? (Revenue)

• Bottoms up: are the KPIs moving like we thought? (Conversion Rate)

By measuring both ways, you’ll ensure you don’t falsely attribute success to a failing initiative.

For example, you may see an increase in revenue above plan (yay!) but the driver of it is more leads in a different channel than you invested in - and the channel you invested in is underperforming from what you expected in the plan.

Check out this post where I teach you how to isolate causation with a specific driver.

Key takeaways

Remember, you don’t own the plan (be thankful!).

Your job is to be the scorekeeper and coach.

But your spreadsheet and organizational skills come in handy when it comes to driving a thoughtful and accurate planning process.

And whatever you do, don’t forget to measure the impact of those initiatives next year.

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