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This is the third 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 #3: The best performing companies have a much better understanding of how their operational plans drive their financial results, and monitor the progress of those plans.
The best performing organizations know that their financial results are the product of operational decisions and actions. For example, increased manufacturing productivity translates into decreased Cost of Goods Sold and increased EBITA. Operations and the resulting P&L are completely intertwined. While we all know this on some level, the best performing organizations make those connections explicit. When they establish a goal of increasing EBITA by some amount, they know what they have to do to achieve that, and put projects in place to make it happen.
Beyond that — and this really separates the good from the great – the best performing organizations monitor the progress of those projects and have a clear understanding of how progress (or lack of progress) will impact the P&L. So, for example, if a project that is designed to increase productivity by 5% is delayed by six months, they know the impact on Cost of Goods Sold (COGs) will be $Y and the impact on EBITA will be $X.
The role of Finance here is significant — this is where we can live up to our role as a Partner in the Business. Operational Managers know everything there is to know about the specifics of their operations, but don’t necessarily understand the P&L or their impact on it. Finance can bridge this gap. It requires that they know enough about the business and the area the serve to be conversant on the issues and have a well-reasoned point of view. Once they have this foundation, they can connect the dots between operational goals and the impact on the financials. They can then work with Operational managers to share this know how and build business acumen.
Monitoring the progress and impact of these plans requires, among other things, a robust Dashboard. Displaying KPIs, goals and progress toward goals, the status of initiatives, are all key elements of an effective dashboard. The more sophisticated organizations have “drillable” dashboards that capture cascading goals and KPIs so each successive layer of management can key in on their responsibility, but at the same time see where they fit in the chain.
The last point to make here is the importance of continuous improvement. Not just in perfecting KPIs, but also in learning the connections between operational performance and the P&L. Take, for example, the impact of promotions on sales. We know there is an implicit connection, but how strong is it and to what degree does it exist? Which promotions work and which don’t? Incorporating lessons learned from real world experience will improve forecast accuracy, and ultimately will help the organization achieve greater success.
That leads us into a discussion of value-added variance analysis, the subject of the next blog post.