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FP&A Done Right: What Type of CFO Are You?

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This is a guest blog post from our partner Workday Adaptive Planning. It is part 1 in a two-part series on the changing role of the CFO.

Finance has gained new perspectives from the impact of COVID-19, which has created the imperative for every business to move forward as a more agile and digitally enabled function.

But it can be tough for finance leaders to rise above day-to-day responsibilities to fill the big-picture role their companies need. Many formerly tactical CFOs have become strategic CFOs by taking one step at a time.

Here are three common hurdles on a CFO’s path to becoming more strategic and transformational—and how to move beyond them.

Hurdle #1: Cumbersome Planning Process

If the budget planning process is an onerous, time-intensive endeavor, it will remain stuck as an annual activity. That means financial insights are relatively static, reactive, and error-prone. To be strategic, CFOs are moving toward more frequent forecasting that needs a streamlined process.

Continuous planning requires financial teams to move beyond mere risk mitigation and financial metrics and to consider operational metrics and opportunity identification. This requires shifting your starting point. Rather than beginning in the past, with last year’s performance, you have to start in the future. Define and establish where you’re headed and the financial resources needed to get there.

Once you have these goals, the next step is to define a schedule for your company to reach those goals. When will strategic reviews take place? How do they translate into operational plans, and how do those plans mesh with your monthly, quarterly, or annual forecasts?

Hurdle #2: Time-intensive Data Management

Creating a streamlined process requires strong financial leadership. CFOs have to not only measure and report on financial and operational metrics, but also effectively communicate to the entire company its progress on financial and strategic goals. This takes time and sustained effort—which means you can’t bury your head in the numbers all day.

This is where leveraging technology comes in. At some organizations, finance departments spend up to two-thirds of their time gathering and managing financial data and ensuring its accuracy. That means there’s little time left for analysis, and the CFO isn’t able to rely on that deeper thinking when the CEO comes seeking advice.

In order to rise above this scenario, you have to make sure your team is using self-service, especially in reporting and analytics, and automation. A simple, powerful self-service platform provides real-time data, which frees up team members to do the deeper work of investigating that data without continually having to request more information.

Hurdle #3: Department Silos

When the finance team is viewed as a separate department on its own little island, everyone loses. Isolation makes it harder to gather accurate, real-time data. That makes budget managers less invested in the budget-planning process, which in turn makes it less likely that departments are held accountable for hitting their budgets and benchmarks. And it happens a lot: Nearly half of respondents in a Workday Adaptive Planning survey of CFOs said their teams could stand to collaborate better.

To avoid this downward spiral, high-performing companies increasingly train their finance teams to be well-rounded leaders from the get-go. By emphasizing general leadership and management skills in addition to quantitative mastery, CFOs ensure their departments are fully invested in the budget process. Put another way: In a world where the future is harder and harder to predict, the best plans must involve everyone in the business. That’s the value of company-wide planning, or extended planning and analysis (xP&A).

For FP&A practitioners, that means working with your team to ensure everyone is communicating clearly and consistently with the rest of the company. And “communicating” doesn’t mean throwing a ton of data at busy colleagues. The information you share has to be relevant and customized to different business units so each team can easily consume it.

This blog post was originally published on the Workday Adaptive Planning blog.

Read more FP&A Done Right posts here:

FP&A Done Right: Predictions of “Extraordinary” Growth This Year

FP&A Done Right: Collaborate More When Planning

FP&A Done Right: Achieve More Reliable Financial Forecasting

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FP&A Done Right: Predictions of “Extraordinary” Growth This Year

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2020 disrupted nearly every industry – some in good ways, some in bad ways. With the pandemic still impacting our daily lives, we might expect this year to be uncertain too. But perhaps not!

The 2021 BDO Middle Market CFO Outlook Survey found some positive and encouraging results, including:

  • 60% of respondents are forecasting economic recovery
  • 56% expect revenue increases
  • The pandemic accelerated digital transformation at 39% of companies
  • 36% of companies found expansion opportunities for products or services
  • 29% plan to seek private equity investment
  • 24% expect to undergo a merger or acquisition
  • 20% plan to pursue an IPO

As CFO Dive reported, “It’s clear the pandemic forced businesses to reflect, and as a result, middle market leaders took action,” Matt Becker, national managing partner of tax at BDO, said. “They refreshed strategy, they prioritized what mattered most, and now they’re aiming to emerge as more resilient and agile companies.”

The report also included findings about the impact of the pandemic. For example,

  • 43% plan to increase or establish permanent remote work options
  • 28% will eliminate or consolidate their real estate holdings and office footprint
  • They also report working towards a “more nimble workforce,” with 38% leveraging automation and 32% using outsourcing

Take a look at the report. What are you predicting for the coming months?

Check out more FP&A Done Right posts here:

FP&A Done Right: The Role of KPIs in Driver-Based Budgets

FP&A Done Right: xP&A and Modern Finance Planning

FP&A Done Right: Rolling Forecasts for More Strategic FP&A

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FP&A Done Right: Collaborate More When Planning

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This is a guest blog post from our partner Workday Adaptive Planning, recommending how to get other departments to collaborate with the Office of Finance.  

When it comes to business, collaboration is vital. After all, no single department can do its job for long without the other departments pulling their own weight. Sales is no good if shipping can’t deliver; marketing falls flat if customer service keeps alienating users; everything grinds to a halt if human resources doesn’t provide the appropriate staffing.

But for some reason, when it comes to the numbers, it can feel like every department is on its own. Data is often stuck in silos, making it difficult or even impossible for other departments to get the information they need to do their jobs well.

Nowhere is this more evident than in the department that makes numbers its business: finance.

But achieving a collaborative finance function can be difficult. That’s because FP&A often lacks the necessary time, direction, or clarity around KPIs to build the cross-functional relationships required to improve forecasting and reporting. So what should be a team effort becomes a finance exercise, and when numbers change, it becomes finance’s fault. In the end, we lose credibility as a business partner.

Make Your Data Everyone’s Data

So how do you get other departments to collaborate with finance? Start by empowering your business partners with more ownership and accountability in the data and your process. For example, many businesses still do most of their forecasting and planning with spreadsheets. Not only is this wildly inefficient (not to mention more likely to include errors), but it keeps all the information bottled up on one person’s screen until they’re ready to share.

We all have seen an Excel spreadsheet named finalV2 or Final V3, only to find out our business partners are using FinalV6. This is a leading cause of number mismatch. Using modern finance tools, a finance team can collect and report on the numbers without needing to send and receive Excel spreadsheets. Everyone is on the same version and making the changes together. This just makes the business partners a part of the overall process, not part of the problem.

The more you can modernize your process and increase visibility into KPIs across the company, the more others will think of “our numbers” instead of “finance’s numbers.” When you create a single source of truth and share it, collaborators will be able to move past arguing about the numbers and start working together to decide on next steps.

A Strategic Bonus to Collaborative Finance

As a bonus, automation and dashboards for self-service collaborative reporting can vastly reduce the amount of transactional work the finance team has to accomplish each day. This frees up our time for both increased collaboration and providing the strategic, high-level analysis that helps move the company forward.

The bottom line: Financial collaboration becomes easier when you stop relying on static spreadsheets. It starts with getting the entire team working with one, trusted set of numbers, and building on a foundation of accurate, up to date data.

This blog post was originally published on the Workday Adaptive Planning blog and appeared here.

Check out more FP&A Done Right posts here:

FP&A Done Right: Five Tips for Budgeting in the Age of COVID

FP&A Done Right: To Recover from Economic Shock, Are CFOs Envisioning Enough Scenarios?

FP&A Done Right: Three Driver-based Budgeting Tips for CFOs when Change is Imminent

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FP&A Done Right: Achieve More Reliable Financial Forecasting

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This is a guest blog post from our partner Workday Adaptive Planning, written by Gary Cokins. Cokins is an internationally recognized expert, speaker and author in enterprise and corporate performance management systems. In this piece Cokins outlines three steps for more reliable forecasting.  

When a company fails to meet its financial targets, business leaders want to know why. Was it the pandemic? Did sales underperform? Did operations overspend? Were their purchases more expensive than expected? Was productivity below established standards? Did finance develop a forecast that was wrong from the start?

Determining the causes of budget variances is an effective way to avoid similar missteps in the future, as well as during times of disruption. But many businesses struggle to understand the causes of variances and to define a process that will turn out accurate forecasts every quarter.

Finance and business teams must work together to identify the activities or data gaps that led to a missed forecast projection and caused price, cost, and efficiency variances. Whether poor decisions were made, the business landscape changed, or customer needs evolved, digging into the root cause starts with building relationships based on trust and transparency.

Companies need to continuously answer these three questions: What? So what? and Then what? Answering the first question—What happened?—requires good reporting with visibility. Answering the second question—So what?—involves separating the signal from the noise and determining what is relevant from the reporting. Arguably, answering the third question—Then what?—is the most important and critical part, because only these decisions impact the future.

Here are three tips that will help your finance team set performance targets and standards that company leaders can be confident in.

Step #1: Bring everyone to the table

Hitting a financial forecast isn’t just about meeting sales goals. Employee turnover, travel expenses, marketing costs, and other operational expenditures must be accurately projected to create a viable financial forecast.

But finance teams can’t analyze all these variables on their own. They need to work closely with sales, HR, marketing, operations, and executive teams to get a clear view of past performance, changes on the horizon, and potential risks and opportunities.

Centralizing financial information in a single shared database reduces the time it takes for finance teams to gather this information, giving them more time to focus on analyzing causes of variances and speculating on potential outcomes. Collaborative financial planning software also helps keep information up-to-date by making reporting easier for other departments.

It may take time to get the whole company on board with a new data collection, integration, and delivery process, but the payoff that comes with more reliable reporting is worth the effort.

Step #2: Plan for multiple outcomes

It’s impossible to know for certain what the future might hold. No one has a crystal ball for this. But there are ways to view the planning horizon. One way is to create multiple projections that account for different scenarios. This can include sensitivity analysis by changing some of the variables, such as the forecast sales volume and mix, to calculate projected profits. This can keep your company running on all cylinders—regardless of what comes its way.

Project for at least two possible outcomes—one optimistic and another cautious—so you can create proactive response plans. Look closely at the assumed factors and variables that are most likely to impact your projections. For instance, a change in the price of raw materials, in labor rates, or the emergence of a new competitor could create pricing pressure, which might lead to a decline in revenues.

Scenario planning can also help companies navigate regulatory changes that come with political transition or turmoil. According to a survey by KPMG, 77% of U.S. CEOs say they are focusing more on scenario planning to manage change in the current political environment.

However, with the increasing responsibilities falling on FP&A teams, many feel they don’t have enough time for this type of proactive planning. Sixty percent of CFOs estimate that ad hoc analysis, such as running a new scenario for the forecast, takes up to five days, according to a survey we published a few years back.

Planning and budgeting software can help FP&A teams speed up the time it takes to outline the financial implications of different scenarios and outcomes. The right tool lets teams run reports with the click of a few buttons, giving them more time to consider the risks, opportunities, and assumptions to create comprehensive response plans.

Step #3: Collect customer data

Understanding changing customer preferences, needs, and demands can also help improve the accuracy of financial projections—and boost a company’s overall financial health. However, a third of U.S. CEOs say the depth of their customer insights is limited by a lack of quality customer data, according to KPMG. So it’s no surprise that nearly two-thirds expect to invest in data analytics technology in the next three years.

“The whole idea of knowing what the customer wants before they want it is sort of the brass ring,” Tom Hayes, president and CEO of Tyson Foods, told KPMG. “We have real-time data from the shelf back to our supply chain. It takes out a lot of waste and helps us to more accurately forecast—a great benefit for products with a short shelf life.”

Taking the right steps to figure out where a missed forecast and associated assumptions went wrong will help keep business performance on target year after year.

This blog post was originally published on the Workday Adaptive Planning blog.

Read more FP&A Done Right posts:

FP&A Done Right: There is Life After December – The Fixed Forecast Dilemma

FP&A Done Right: Rolling Forecasts for More Strategic FP&A

FP&A Done Right: The Role of KPIs in Driver-Based Budgets

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FP&A Done Right: Rolling Forecasts for More Strategic FP&A

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This is a guest blog post from our partner Workday Adaptive Planning, written by Bob Hansen. Hansen makes the case for dynamic planning, which is better suited for complexity.

When it comes to FP&A forecasting, most companies base their long-range forecasts on static planning processes, rather than more relevant, dynamic plans that reflect the complexities of the business.

Relying on a forecast that doesn’t enable continuous monitoring of company performance, instead of implementing a modern, rolling forecast approach, is like using an old-school road map to guide you on a cross-country trip: Why use a paper map when you can get to your destination worry-free with a car GPS system?

Rolling forecasts—forecasts that are updated typically on a quarterly or monthly basis—can be a game changer. Especially today, amid a global pandemic. They allow organizations to better align with their strategy, perform more-effective business analysis, and derive greater ongoing value from their budgeting and planning processes. Rolling forecasts make organizations nimbler, able to seize potential opportunities, or better prepared for upcoming roadblocks.

Rolling toward a more strategic focus for FP&A

There is an increasing expectation that strategic guidance—which can be generated through rolling forecasts—emanates from the FP&A team. A CFO Indicator report affirmed that need. The survey found that CFOs expect that time spent by the FP&A team on strategic tasks will double by 2020—growing from 11-25% today to 25-50%.

Furthermore, CFOs are looking for their teams to develop the technical and strategic capabilities that support executing approaches such as rolling forecasts. According to the CFO Indicator survey, if the FP&A team could improve only one skill, 29% of CFOs want that skill to be dashboard design and report building, 25% want it to be predictive analytics capabilities, and 19% want strategic modeling of what-if scenarios.

Fortunately, with the increasingly user-friendly experience of dashboard technology, the skills gap is narrowing, which allows more FP&A teams to start instituting rolling forecasts.

FP&A … so little time

So rolling forecasts are a no-brainer? In theory, yes. Yet the near-universal challenge lies in freeing up finance teams to move toward this new approach. There is a significant gap between what CFOs want their teams to be doing and how they actually spend their days. Often-cited research by APQC shows that only 40% of 130 finance executives from very large organizations rated their FP&A capabilities as effective.

Further, our research shows that 75% of CFOs want their teams to have a significant and strong impact on their organization, yet only 46% expect that their team will have that kind of impact this year. The chief reason continues to be a lack of time for strategic planning.

The clear benefits of rolling forecasts

Despite these time-crunch challenges, the benefits of getting to rolling forecasts are clear. The APQC survey showed that organizations that use rolling forecasts are better aligned with unfolding business strategy, are more effective at business analysis, derive greater value from their budgeting and planning processes, and have more reliable forecasts than those that do not use them. The survey revealed that 94% of businesses that use rolling forecasts described their business analysis as effective. Only 50% of those that do not use rolling forecasts described their analysis that way.

Finance leaders need to clearly promote the many benefits of rolling forecasts and how they can directly impact business results. For example, you can produce a cash flow forecast at the end of a rolling financial forecast process—resulting in a consolidated balance sheet and an accurate view of cash flow for the entire enterprise. Getting C-suite buy-in helps pave the way to get the resources and time needed to develop relevant and robust rolling forecasts.

Moving to rolling forecasts is possible at organizations that have executive support and invest in new, cloud-based finance software. These solutions offer easy-to-navigate dashboards and scores of time-saving hacks that can free finance pros from transactional busywork and allow them to focus on more strategic activities that improve business performance.

Like a state-of-the-art GPS, rolling forecasts can go a long way toward helping you get where you want to go—and position FP&A to be a driver of the business, not stuck in the back seat.

This blog post was originally published on the Workday Adaptive Planning blog and appeared here.

Read more guest blog posts from Workday Adaptive Planning:

FP&A Done Right: Three Driver-based Budgeting Tips for CFOs When Change is Imminent

FP&A Done Right: Modernize your Budget Process to Anticipate Change

FP&A Done Right: Reforecasting in a COVID-19 World – Best Practices you can Implement Now

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FP&A Done Right: Three Driver-based Budgeting Tips for CFOs when Change is Imminent

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This is a guest blog post from our partner Workday Adaptive Planning, written by Gary Cokins. The blog discusses how uncertainty adds to the arduous and often painful process of budgeting.

Consider these tasks and the problems related to them: budgeting amid great uncertainty about the future (like today during COVID-19); inputting departmental budgets on multiple Excel worksheets; manually reconciling variances and correcting errors; and dealing with broken formulas, misinformation, and inaccuracies. The life of a finance team during budget season is arduous and often frustrating.

It is more frustrating when there is uncertainty about the levels of demand on the organization in the future months.

CFOs tasked with budget presentations often find themselves explaining numbers and assumptions that are far out of date by the time they stand before key stakeholders. Static budgeting simply cannot keep up with today’s lightning-fast economic environment, as so many are now experiencing.

Progressive CFOs using driver-based budgeting, on the other hand, can create a dynamic and agile finance-centered process that helps stakeholders gain insights and make informed decisions tied to strategic and operational goals. This enables CFOs to transition from tactical to strategic leaders. They can align forecasts and projections with external as well as internal drivers (e.g., the impact of unforeseen events; changes to the corporate tax rate or labor contracts). They can expand from “bean counters” to “bean growers.”

This is critical because driver-based budgets not only generate a pro forma income statement and balance sheet for each month into the future but also the cash flow statement derived from them. With this information, the treasury department can plan for investing surplus cash or financing deficit cash. Sadly, bankruptcies occur when organizations run out of money and have exhausted their financing options.

A strategic budget tool for a fast-moving world

Driver-based budgets accomplish more than static budgets, and they do it faster with more validity. In addition to allocating resources based on forecasted demand load to adjust capacity (e.g., number and type of employees, equipment purchases), driver-based budgets enable CFOs to help drive business priorities, respond more quickly to changes in the marketplace and external environment, and create a dynamic, data-driven process, rather than one frozen in countless racked-and-stacked Excel workbooks. Driver-based budgets enable active and continuous budget planning that becomes rolling financial forecasts, rather than annual and fixed planning that culminates in hundreds of unread pages.

Agility is a buzzword for a reason. CFOs hoping to build confidence and credibility in their numbers can no longer rely on static budget tools to get the job done. In a world with increased regulatory volatility, complexity, uncertainty, supply chain mobility, labor market changes, and technological evolution, a CFO must be agile, or generate irrelevant reports and budgets that no one reads or believes in.

Here are there tips to help CFOs get started with driver-based budgeting.

1. Eliminate data silos

Traditionally, CFOs assemble budgets using data from multiple sources throughout the organization. Departments enter their budgets into cost center spreadsheets with little or no idea how their performance ties to larger initiatives. The finance teams are stuck with consolidating the spreadsheets and left guessing how everything fits together. This siloed approach to budgeting keeps stakeholders in the dark about the impacts of revenue and expense projections downstream.

Regardless of company size or industry, CFOs can achieve greater collaboration and eliminate budget silos by identifying a single source of data, generating driver-based rolling forecasts, and creating a centralized and accessible planning resource. Upstream data integration helps operational units view budgets in a larger enterprise-wide context and makes it easier to line up support from key stakeholders.

Ultimately, eliminating silos creates a dynamic budget process that drives rather than reacts to business performance. The budget process is resource-capacity sensitive to projected changes in the sales volume and mix of products and standard service lines. It takes into account which expenses are sunk, fixed, step fixed, or variable. It embraces microeconomic behavior compared to consolidating cost center spreadsheets.

2. Identify KPIs that drive finance and tie to the operational plan

KPIs are measures of operating activities that encompass everything from customers to installations to deliveries to transactions. CFOs might track different KPIs (e.g., bookings versus revenues, sales by geographic location, on-time customer order delivery performance), but more KPIs isn’t always a good thing. All of the measured indicators cannot be a “K”—a key one!

In the case of one healthcare organization, disagreement about KPIs nearly derailed the budget process. Tasked with tracking patient-specific revenue, the budget committee initially identified quality of care metrics as a revenue KPI. The assumption that satisfied patients would return to the facility for care, thereby driving up revenue, ultimately proved less accurate than conducting a demographic analysis. Eventually, the budget committee concluded that indicators like patient age, location, income, race, health status, and utilization histories were more effective KPIs than stand-alone satisfaction metrics. This materially changed the budget and aligned it more closely to organizational goals.

Integrating KPIs into the budget process empowers CFOs to make course corrections, which is particularly relevant now, and to measure overall business performance. It enables CFOs to align the planned expenses with the strategy of the executive team while creating buy-in throughout the organization.

3. Differentiate forecasts from targets

CFOs using driver-based budgeting and rolling financial forecasts must differentiate between forecasts—where the organization is headed—and targets—where the organization hopes to go. Forecasts should be based on a run rate of previous performance with adjustments for increases or decreases of demand on the needed capacity, whereas targets tie to aspirational goals (market expansion, new product and service line launches, etc.).

By separating targets and forecasts, CFOs create a robust budget process that continually course-corrects and adapts to market factors and environmental impacts. They can understand the gap between projected spending and profit levels and the aspirational desires of the executive team. They can then try to identify actions that can narrow the gap.

Investors in a new production facility, for example, would need the finance team to present scenarios based on when the facility would be online, potential construction delays, and other unknown variables. A driver-based budget-oriented CFO would ask important questions like: Do we have a hiring plan in place? What happens if the product components increase from $40 apiece to $50 apiece? She would create best, worst, and likely scenarios against which results would be measured. Targets, on the other hand, relate to where the organization (whether board, leadership, or investors) hopes to go. In the case of a new facility, the revenue target might be 100% production-ready by the next quarter.

Plan and execute

Today’s CFOs are expected to navigate complexity and uncertainty through standardization, automation, and the streamlining of processes, systems, and data. Driver-based budgeting and rolling financial forecasts help report cash flow projections for the treasury department, support growth initiatives, drive profit margin expansion, align with executives’ strategy, and manage business performance through better analytics and reporting.

This blog post was originally published by Workday Adaptive Planning and appeared here.

Read more FP&A Done Right posts:

FP&A Done Right: Planning for What’s Next in Uncertain Times

FP&A Done Right: How CFOs Can Lead in Today’s Challenging Environment

FP&A Done Right:3 Steps to Help You Plan for What’s Coming

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FP&A Done Right: Planning for What’s Next in Uncertain Times

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This is a guest blog post from our partner Workday Adaptive Planning, written by Michael Magaro. The blog post was originally published on FEI Daily.

The COVID-19 pandemic changed our world, almost overnight, and businesses are having to adjust. The unprecedented nature of the pandemic means no one knows how deep the economic downturn will be, or how long it will last, which makes financial planning for businesses especially difficult.

Fitch Ratings’ “Global Economic Outlook” states that global economic activity will decline by 1.9% this year with the U.S., Eurozone and UK GDP down by 3.3%, 4.2% and 3.9%, respectively. Some industries will be more impacted than others, and next to no one has historical experience with pandemic conditions.

Companies are clearly having a hard time planning. A survey from Gartner of 99 CFOs and finance leaders taken April 14-19 revealed that 42% of CFOs have not incorporated a second wave outbreak of COVID-19 in the financial scenarios they are building for the remainder of 2020, a finding dubbed “surprising,” by Alexander Bant, practice vice president, research, for the Gartner Finance.  Many public companies have also withdrawn guidance due to lack of visibility.

So how do companies plan when visibility is so cloudy, and unknowns are so numerous?

For the finance team at Workday, we are embracing scenario planning—basically harnessing the power of “what if”—to respond to COVID-19, and so are many of our customers. Our cloud planning platform is processing up to 30 times more forecasts and build-out scenarios for customers than in a typical, pre-pandemic week. And given the volatility and unpredictability we’ve seen, it’s not likely to ease up soon.

But the reality is that agility starts with planning. Not long before the pandemic hit, we, like many companies, had our plan in hand and were evaluating many different potential outcomes, including whether the long-running economic expansion would begin to show signs of slowing. As the realities of the pandemic came into view, we stepped up scenario planning in order to adapt to changing market conditions–and achieve the level of agility our business demands. And, while we continue to adjust and adapt like all companies, we identified five critical steps for successful scenario planning.

Step One: Assess potential impact to the top line

How will what’s happening impact revenue and the various revenue streams that feed the top line number? For many companies, this will include impacts to new business activity, customer retention, and assumptions that went into the impact of new product launches — if any exist.

Each business faces a different situation. During the pandemic, many hospitality businesses are struggling. Meanwhile, many online retailers are going strong. Each industry’s history can be instructive. During the 2002 Dotcom crash and the 2008 financial crisis, for instance, software companies with a higher percentage of SMB customers took a bigger hit to monthly renewal rates.

Because no one has historical data for a pandemic, it’s important to start off fairly basic with scenario planning. Model some elements from the top line, such as new sales, business renewal activity, and up-sell to existing customers by quarter throughout the year. Consider a range of scenarios possible for your business, perhaps 50%, 65% and 80% of a pre-pandemic plan. This gives a good view into what could happen to the income statement and balance sheet and help businesses understand variances on metrics that matter most to them. For organizations similar to Workday, that’s subscription revenue growth, non-GAAP operating margin, and, ultimately, cash flow.

Step Two: Identify levers on the investment side of the business

What levers do you have to pull? For most companies, people are the biggest cost. Do you hire as planned before the pandemic? What are the differences between hiring as planned, freezing hiring for the rest of the year, and the range of options in between? No business wants to cut job cuts at any time, so it’s important to understand other cost levers at your disposal, and the various outcomes possible when you pull them. To understand your big levers, you have to really understand your business.

Step Three: Align leadership

The finance team alone should not decide steps one and two. Involve all leaders so you get the right picture and analysis, and make sure you’ve identified the right levers. Involving leaders keeps everyone aligned and thinking about the right things. For many companies this may take the form of dashboards shared across the leadership team or creating regular review meetings.

Step Four: Identify a good outcome

Ask what a good outcome looks like for your organization. This will differ for each organization. Is it to retain existing customers? Is it to retain your workforce, or to maintain a customer satisfaction standard? Is it to expand and win market share from distracted competitors? By identifying what matters most to your organization, you’ll better prioritize through steps one, two, and three. And in today’s climate, that desired outcome may change, further elevating the importance of a continuous approach to planning.

Step Five: Dive deeper

Once you have your various scenarios, and have received feedback on them, dive deeper. For some companies, this will mean digging into supply chain issues, for others it may be assessing risk by segment, etc. Third-party research can help you decide how to respond. For instance, if you know a number of your suppliers or customers are feeling a lot of pain, how can you be proactive in supporting them? Align various teams on this topic, too. For instance, sales and customer service hear directly from customers. Their knowledge should inform your analysis and drive your ability to help your customers, partners, and your own top line.

Scenario planning to continuous planning

Even prior to the pandemic, Workday’s finance organization was working toward a continuous planning framework. Our aim is to shift from annual planning and budgeting to continuous planning via more frequent reviews and assessment of how changing conditions impact our product roadmaps, and vice-a-versa. Along the way, we look at such things as margins and cash flow. Whenever conditions change, we anticipate being able to take action and adjust our model. For instance, if product development runs behind schedule, do we adjust by upping investment to get it back up to speed or do we adjust our top line estimates? If we’re operating correctly under the continuous planning framework, planning is not a point in time—it is continuous.

Embracing flexibility

The pandemic is challenging us as humans, as companies, and as business partners in all kinds of new ways. When any crisis hits, finance teams need to be able to seamlessly navigate the kinks that come with uncertainty. Scenario planning—and eventually continuous planning—enables us to embrace flexibility and to use it our advantage.

This blog post was also published by Workday Adaptive Planning and appeared here.

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FP&A Done Right: What Must FP&A Do Differently to Make Planning a Success

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This is a guest blog post from our partner Adaptive Insights, written by Anders Liu-Lindberg. Lui-Lindberg explains why FP&A can no longer take a narrow view of its own role.

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?

Anders Liu-Lindberg is a senior finance business partner at Maersk and the co-founder of the Business Partnering Institute. He is also the co-author of the book Create Value as a Finance Business Partner and a longtime finance blogger with more than 33,000 followers.

This blog post was originally published by Adaptive Insights.

Read more guest posts from our partner, Adaptive Insights:

FP&A Done Right: Are you Dying by the Hands of Analysis?

FP&A Done Right: The Importance of Including FP&A Early and Often in your Strategic Planning Process

FP&A Done Right: Modernize your Budget Process to Anticipate Change

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FP&A Done Right: 3 Words for a COVID-19 World – “Flexible Budget Variance”

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This is a guest blog post from our partner Adaptive Insights, written by Bob Hansen. It is part of a series of blogs from Adaptive Insights designed to help customers weather the storm brought by the COVID-19 pandemic.

With the COVID-19 pandemic shredding budget forecasts and presenting FP&A professionals with actuals that are nowhere close to original expectations, now is the perfect time to get acquainted with a certain term: “Flexible budget variance.”

Sure, flexible budget variance might sound wonky. But now more than ever, it’s an essential tool for modern FP&A teams. Here’s why.

Flexible budgeting not only helps you stay current with the challenges and opportunities that surface throughout the year, but it can be a lifeline when your business is rocked by revenue shocks, drops in demand, workforce shifts, and whatever else a global event can toss your way. By updating budgets to reflect those changes, you can quickly course correct to improve efficiency or enhance performance.

What is a flexible budget variance?

Flexible budget variances are the differences between line items on actual financial statements and those that are on flexible budgets. Since the actual activity level is not available before the accounting period closes, flexible budgets can only be prepared at the end of the period. At that point, flexible budget variances can be useful in identifying any shortcomings or deviations in actual performance during a given period.

Though powerful anytime, you can imagine how useful this capability would be now, with so much disruption to normal course of business activity. And it’s a safe bet that business planning and budgeting overall will be subject to rapid and ongoing course correction for months to come.

Flexible budget variance is also beneficial during the planning stage at the beginning of the accounting period. By adjusting project budgets to a series of possible activity levels, Finance creates data that helps anticipate the impact of changes in activity levels on revenues and costs. This helps you make more informed decisions if (or when) adjustments are needed.

Taking a flexible approach to budgeting typically doesn’t mean you get a free pass when it comes to more traditional, static budgeting. In fact, the static budget is essential for establishing a baseline to measure performance and results and ultimately for calculating the variances that do occur throughout the year.

Save time by using the tools you have

The task of calculating, analyzing, and then clearly communicating budget variances and their implications can be a time-consuming task under any circumstances, and particularly stressful in times of disruption. But certain capabilities in Workday Adaptive Planning make it easier.

For instance, Workday Adaptive Planning’s data visualization software can speed much of that process. And when conditions change quickly, speed is a distinct advantage.

Even so, it’s important to keep in mind that not all line items in a budget can be flexible. For example, your company has many expenses that are likely fixed for the entire year, such as rent or contractual obligations.

Yet other expenses have considerable chance of varying to one degree or another. For instance, staffing projections may be dependent on an expected long-term contract being finalized, or economic stresses cause you to extend payment deadlines or loosen return policies. No matter what, flexibility serves you at the moment you need it—and pays dividends down the line.

Gain meaningful insights

Meanwhile, flexible budget variance analysis offers the ability to derive meaningful insights throughout the year, allowing for improved planning and budgeting for the future. The power and potential of flexible budgets are further fueled by technology platforms such as those offered by Workday that provide drill-down capabilities so you can quickly identify and analyze variances.

You can also use Workday Adaptive Planning to create a variance report that highlights the changes in dashboards, offering a range of visual options for presenting the numbers within highly accessible context.

And by relying on more timely and relevant budget numbers, you can use flexible budgets to provide senior executives and line of business managers with dynamic guidance on spending, investments, or where cost controls might be necessary based on the situation your business faces as days, weeks, and months progress.

You’ll get through this chaos by leveraging the benefits of flexible budget variance capabilities within Workday Adaptive Planning, you even might get through it in a stronger position than your competitors.

This blog post was originally published by Adaptive Insights.

Read more FP&A Done Right posts:

FP&A Done Right: The Office of Finance in the COVID-19 Economy

FP&A Done Right: Modernize your Budget Process to Anticipate Change

FP&A Done Right: A Future Without Spreadsheets?

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