The 12 Principles of Best Practice FP&A: How does it all come together for effective Financial Planning and Analysis?
Summarizing our best practice FP&A blog series, we look at how to conduct Financial Planning…
This is the final installment of a 12-part blog series appropriately called “The 12 Principles of Best Practice FP&A“. These Principles are based on global research conducted with more than 700 organizations worldwide.
Principle 12: The best performing companies also do a better job of monitoring results and tying them to incentives
“You get what you measure” is an often-used expression, and I’d add to that “You get what you measure AND pay for.” Let’s look into that.
First, what does it mean to do a better job of monitoring results? The best run companies have reliable data to begin with; they trust their numbers. The systems and processes are designed for accuracy, clarity, and timeliness. There is one version of the truth, and it’s undisputed.
Doing a better job of monitoring results also means measuring operational results and building an understanding of how operational results drive financial outcomes. They connect the dots between, say productivity and profitability, and rigorously report on both.
There are some technology implications here, including the need for self-service reporting and analytics. One mistake companies often make is not accommodating the various needs of the organization – and they are normally quite varied. Someone managing the production line needs to have a dashboard that reflects productivity at each stage of the process. A warehouse manager needs to know inventory positions of every SKU, both current and forecasted. A marketing manager needs to analyze the sales lift they got from their latest promotion. The list goes on. But consider something as seemingly standard as a P&L. There are accounting rules governing that, so there are only so many ways to look at it, right? Wrong. One manager might need to see the P&L by geography, another by Product Line, another by Business Unit, another by Sales Territory. One manager might want to look at a P&L and compare the results to last year, another might want to compare to the latest forecast, another to the plan. One manager might want to look at results by month, another by quarter, another by rolling 12-month average. And let’s not even broach the topic about all the ways that data can be translated into forecasts.
As much as I’ve listed various examples here, there are hundreds more. Some companies try to address this by thinking of every possible permutation and producing a mountain of reports. That makes it hard to sift through all of them to find the one you want. Other companies limit the number of reports to make them easy to find, but that drives people back into Excel to get the analysis and reports they need.
The best run companies offer self-service reporting and analysis so people can get the data they need when they need it. A key to this is ease of use. If people find it hard or confusing to access the reports they need, or difficult to get the data they need, they’ll give up.
As a side note, “easy to use” is relative. I know this firsthand. I’ve been fortunate in my industry and consulting career to work side-by-side with the Dallas Cowboys, Pepsi Cola International, Bayer Pharmaceuticals, Tufts University, and for the Port Authority of New York & New Jersey. I named these five because they are obviously dissimilar, and I can tell you what was perceived as easy for one of those organizations would have been complex for another. Of course their business models were different, but it goes well beyond that. Culture. Management. Hiring practices. Industry. Training & development. They all have a role to play in shaping perceptions of what is “easy to use.” The implication of that is that reporting/analysis systems need to be tailored to fit the organization. I’ve seen something as minor as repositioning a drop-down menu impact the perceived ease of use. The term I’ve heard is bespoke or made to order, and it drives usage.
So let’s assume those powerful but easy to use systems are in place, the measures have all been well defined, and people can get the data they need when they need it. Are we done? Not quite.
You might measure the amount of water I drink every day, but I’m unlikely to alter the amount I drink unless there is an incentive to do so.
There are scores of books written about incentive pay, but we have limited space in this blog post. So I’d like to focus on “connecting the dots”. We’ve seen in earlier posts the best run companies have a deep understanding of how operational results drive financial performance. We’ve also seen that they know where they stand today and develop targets for the future. Knowing that hope is not a plan, they develop initiatives to turn those targets into reality. Both the targets, and the initiatives to achieve them, clearly cascade down through the organization at lower levels of specificity. When all of that is firmly in place, as it is with the best run companies, tying incentives to achievement of results is a comparatively easy thing to do. People know their role in the organization, and what targets they are working to achieve. The question for Senior Management and Human Resources is how much compensation to put at risk, but all the groundwork at that point has been laid.
The best run companies monitor their operational and financial results, including progress toward goals, and provide the right incentive structure to help ensure those goals are met. In some respects, all the previous Principles discussed have provided the foundation to make this possible.
This post brings us to the last of the 12 Principles of Best Practice FP&A. In the final post of the series, we will tie it all together and discuss how to get started (hint: it needs to begin with an assessment of where you stand today).