How Enterprises Can Maximize The Strategic Value Of FP&A

Efficient financial planning and analysis (FP&A) is one of the pillars of a high-performing organization.

When it comes to improving an organization's bottom line, functions such as sales and product design often occupy the spotlight. While FP&A is often seen as a required function due to regulation (reporting to tax authorities) and governance (managing budgets), in reality, FP&A teams that work efficiently provide insights that drive strategic innovation.

According to a study that FP&A software company DataRails recently published on the economic impact of FP&A in the US, financial analysts often yield business value commensurate to 10x the costs of their wages. A huge portion of the value created comes from assessing opportunities as they arise and eliminating inefficiencies.

Here are some of the biggest loss drivers in the FP&A process. Eliminating them will help enterprises unlock the value of their financial data and increase their bottom lines.

Manual labor costs

DataRails's research indicates that companies of all sizes lose two hours per analyst every week to manual tasks related to FP&A processes.

Given average financial professional salaries and the number of FP&A roles, small businesses in the US lose as much as $2.6 billion annually. The number decreases as the business size grows, but that's a function of the relatively small number of large businesses.

Currently, there are 17,860 large businesses in the US, compared to 658,923 small businesses. Thus, while the overall losses to manual inefficiency amount to $857 million for large businesses, the average large business loses much more than smaller companies. The numbers aren't any prettier for small-to-medium and mid-sized businesses, with each segment losing an annual $1.5 billion and $1 billion, respectively.

Manual FP&A processes typically involve reconciling figures in large Excel files, cleaning financial data, and checking for integrity. These tasks are clerical, and asking highly-qualified FP&A professionals to execute them is a waste of resources.

An electronic solution that ties all data sources together and integrates with Excel offers the best of all worlds to FP&A teams. Thanks to integrations and connected data repositories, FP&A team members can dissect data within Excel and rely on automated processes to ensure their datasets are clean. For instance, missing commas and changing currencies won't break their models anymore, since advanced tech solutions can handle these issues.

Process upgrades of this kind involve low onboarding time lags, and organizations can upgrade their FP&A performance almost instantly.

Opportunity costs

Inefficiencies in financial data work often prompt the rise of prohibitive opportunity costs. The time it takes for a highly-qualified FP&A professional to manually prepare datasets can be better spent stress testing projections and creating more robust models. Even more alarming, these opportunity costs often go unnoticed, since they aren't listed as cash costs.

DataRails's study aims to quantify these costs, and the results are significant. Overall, companies in the US stand to recover an additional $1.7 billion from lost opportunity costs by creating more efficient FP&A processes. Large firms can realize as much as $242 million in business opportunities, while mid-sized enterprises can gain $187 million.

Automating most manual FP&A processes allows organizations to build greater flexibility in their financial outlooks. For instance, an FP&A team can create better stress tests that push projections to their limit. CFOs will know the limits to which their balance sheets will hold, thus creating better working capital and cash management processes.

A flexible stance also allows a company to prioritize opportunities and risks efficiently. If a company is faced with a high-risk yet high-reward opportunity, it can rely on its FP&A team's projections to model the impact on its balance sheet. Decision-making thus becomes simpler, since financial data becomes more reliable.

Organizations can also respond to situations much faster, a huge advantage in today's fast-moving marketplace. When combined, these factors allow a company to reduce its opportunity costs significantly and build a robust business.

Hidden internal costs

While the quantifiable business losses caused by inefficient FP&A processes amount to $6.1 billion annually, the true costs are much higher. DataRails's study highlights a tragicomic case where a bookkeeper's death crippled an organization, because he was the only one using a specific software package to manage finances. Because missed reporting deadlines, the organization got into trouble with its regulators.

Employee morale also suffers when workers are subjected to inefficient FP&A processes. While highly-qualified finance professionals will balk at having to execute clerical tasks, the rest of the organization won't fare much better. Complicated expense reporting, slow reimbursement, and constant job insecurity due to a precarious company financial position don't make for a happy workplace.

In a public company's case, concealing such information is impossible, and this will have a material impact on its stock price. Given the nature of debt-financing covenants that link funding to minimum stock price levels, the impact could be crippling to a company's future. Furthermore, capturing investor confidence will be tough, closing avenues for inexpensive financing.

A good example of an FP&A team redefining a business comes from Amazon. DataRails's study highlights how Amazon's FP&A team modeled offering free shipping versus discounting products by 10% to arrive at a conclusion. In addition, this team also modeled the economic impact of Amazon Prime and defined price points and profit levels with high accuracy, contributing to the success of a program that eventually emerged as one of the ecommerce giant’s signatures.

Outsized contribution

FP&A remains a hidden function from the outside, but high-performing companies understand its value. By eliminating inefficiency, companies can create a host of benefits, from capturing more opportunities to improving employee morale.