The Evolution of Financial Planning and How You can Leverage xP&A to Navigate Uncertainty
Confused about the different financial terms, how they relate to each other or what this means for you as a leader? Look no further, we’ve got you covered.
In this blog, we explore the history of financial planning, how finance functions have evolved in response to changing market conditions over time, and how to leverage a corporate performance management (CPM) solution, like Calumo, to stay competitive in an everchanging market.
In Brief:
- Financial Planning & Analysis (FP&A) is an analytical function within Accounting and Finance, used to help inform strategic decisions.
- The role of FP&A is changing as new tooling that include AI and business intelligence (BI) become available.
- Extended Planning & Analysis (xP&A) is the tool of choice for FP&A now that such tooling exists.
- The most efficient and cost-effective xP&A solution is achieved when a single product, like Calumo, is used for both BI and corporate performance management (CPM).
The Current Economic Climate and How it is Changing
For many organizations, individual divisions are often assigned their own plans, targets, and systems that are typically created in isolation of one another. A siloed approach to the performance data of HR, Production, and Sales teams can fail to provide real insight into the impact they’re having on the business overall.
The COVID-19 pandemic has affected several areas of business, including significant changes to supply chains, workforce, sales, and operations. Disruptions have highlighted the importance of having systems that provide real-time feedback across the whole organization. Modern businesses need to be agile, adaptable, and resilient.
Trying to manually collate data from disparate systems to align individual division goals and performance to overall business strategy is near impossible–leaving business leaders without clarity over the relationship between their division’s output and the ‘bigger picture’ of their organization.
One of the primary challenges Finance teams face is data collection:
- No access to source systems.
- Inputs from disparate departmental systems.
- Differences in taxonomy and timing creates inaccuracies.
- Time consuming given the ever-evolving nature of business activities and industry.
- Massive Excel spreadsheets, which are error-prone, often slow to process data, and limit collaboration.
“By 2024, 70% of new financial planning and analysis projects will become extended planning and analysis (xP&A) projects, extending their scope beyond the finance domain into other areas of enterprise planning and analysis.”
2020 Strategic Roadmap for Cloud Financial Planning and Analysis Solutions, Gartner
Before we dive into xP&A, we need to understand the changing role of finance teams and how financial planning and processes have evolved over time.
What is FP&A and How Does it Differ From Accounting?
Accounting records the transactions of an organization to give an account of what has happened and create a clear record of resources available. Accounting reports are a snapshot of an organization’s financial state at a given point in time.
While accounting reviews past and historical information to determine a company’s current financial state, financial planning and analysis (FP&A) focuses on forward-looking data to anticipate future outcomes.
Where accounting requires a high level of accuracy and completeness, FP&A is less concerned with the granular details, instead focusing on the strategic direction of a company. FP&A involves quantitative and qualitative analysis of operational aspects of a company to both assess its progress toward achieving its goals, and to map out future plans.
FP&A considers economic and business trends, past company performance, and potential obstacles with the aim of providing answers to problems like resource allocation. Aggregating and analysing the data create the most value, provide the most benefit for customers, and the best returns.
The Changing Role of FP&A
The role of FP&A has evolved over time. In the past, FP&A focused on leveraging historical financial data to extrapolate metrics, such as future sales and earnings. Organizations used this data for financial planning and cash flow management to help ensure profitability and growth.
Changes in technology and the amount of data available today mean that FP&A has moved from more reactive planning to providing insightful predictions and analytics that directly influence an organization’s strategic direction. The four main FP&A functions include:
- Planning and budgeting
- Integrated financial planning
- Management and performance reporting
- Forecasting and modelling
FP&A vs xP&A
The term xP&A, which stands for “extended planning and analytics,” was coined by Gartner in 2020 to describe taking FP&A best practices and extending them across the whole organization.
It’s expected that businesses experience changes over time. In most cases, business leaders can somewhat predict and accommodate for those changes by making adjustments in one or two specific areas, for example, increasing production when there’s a spike in demand.
The problem with this is that production, operations, sales, and HR divisions typically have their own systems and plans conceived in isolation of the others, without real insight into the impact they may have on the business overall.
Under an FP&A model, finance teams would evaluate the impact of changes from a predominantly financial perspective. This is where FP&A makes the leap to xP&A.
Automated processing and corporate performance management (CPM) tools enable assessment and insight into more than just the finance side of the business.
xP&A consolidates forecasts and performance metrics from across Finance and Operations (S&OP). By integrating information from various departments into a holistic view of the business, business leaders can forecast, monitor, and evaluate problems and their proposed solutions against the business as a whole, not just its separate divisions. Thus, enabling better decision making and greater performance.
Benefits of Adopting an xP&A Approach
- xP&A Promotes Agility
xP&A takes a proactive approach to planning by establishing an integrated view of your business as a baseline for all decision-making. When issues arise, leaders are positioned to immediately assess the situation, evaluate options, and move forward with their chosen solution.
- xP&A Provides a Single Source of Truth and Allows Easier Identification of Opportunities
Information from multiple systems often causes conflicting information, forcing leaders to spend time trying to make sense of their data instead of focusing their attention on value creation.
xP&A software increases accuracy and eliminates the cumbersome process of consolidating data, creating a single source of truth that all business leaders work from.
The unified, accurate data makes it easier to identify growth opportunities.
- xP&A Creates Performance Transparency
Removing data silos creates a single view of financial and operational activity. xP&A provides leaders with the tools they need to quickly identify improvements in efficiency and output, enabling them to act as strategic advisors for the Executive Leadership Team and empowering them to become true business partners.
- xP&A Enables Collaboration and Increases Accountability
xP&A allows strategic goals to be cascaded down into operational activities, which aligns department heads around KPIs that support organizational goals, rather than focusing on individual departmental incentives.
Accountability becomes clearer when department heads have visibility into organizational KPIs and can understand how they directly impact those metrics.
- xP&A Enables Scale
With higher volumes of data, from increasingly diverse sources, many organizations struggle to take advantage of insights that their data can provide. An xP&A tool can translate business value from large datasets.
“By 2024, 50% of new financial planning and analysis implementations, upgrades and replacements will be sourced from core financials vendors, due to superior integration and product bundling.”
2020 Strategic Roadmap for Cloud Financial Planning and Analysis Solutions, Gartner
To realise xP&A effectively, organizations need a unified platform, like Calumo, which offers the flexibility to adapt to the unique needs of different users, while preserving data accuracy.
What is Business Intelligence and How Does it Relate to CPM?
BI and CPM are both used to understand how effective a business’ processes are and to support strategic initiatives. Many don’t understand how these two terms relate as both BI and CPM:
- Are commonly used as a part of company strategy to streamline operations.
- Focus on improving business processes.
- Perform data management tasks.
- Have reporting, analytics, and dashboard capabilities.
BI is the methodology, processes and systems used to transform raw data into meaningful and useful information to help support strategic decision-making.
BI software places heavy emphasis on investigating data and provides real-time analytics for ad-hoc queries, on-line analytical processing (OLAP), and predictive modeling for forecasting. BI allows the manipulation of a huge range of data types and points, including unstructured data.
By analyzing large amounts of information to help identify new opportunities, BI turns data into actionable information for leadership. As a result of BI analysis, a business may decide to change its objectives or goals–CPM helps monitor the progress of strategic initiatives based on these decisions.
CPM involves monitoring and managing an organization’s performance, according to key business metrics, to improve revenue and growth. CPM software typically does this using planning, forecasting, and budgeting, and often includes modules for supply chain management, sales, finance, and marketing.
The Evolution of CPM
The term CPM, also known as BPM (business performance management) or EPM (enterprise performance management), was devised by Gartner in 2001 to describe the various processes, systems, metrics, and methodologies used to align an organization’s plans to its strategic goals to improve its overall performance.
Historically, CPM tended to focus on financial software, supporting a cyclical process of strategizing, modelling, planning, executing, monitoring, and reporting.
Today, besides month-end consolidation and reporting, CPM is both continuous and iterative, rather than cyclical. The growing need for businesses to be more agile means that monitoring is constant, and businesses perform ad-hoc scenario analysis whenever an opportunity or issue arises, regardless of reporting cycle.
As a result of this change in workplace practices, CPM has evolved. Expanded capabilities that integrate large volumes of transactional data with financial data for reporting and analysis purposes. CPM software is now designed to be used enterprise-wide, eliminating data latency, while ensuring the accuracy and integrity of operational data needed to support decision-making.
Use a Single Product for BI and CPM to Achieve Maximum Results
Both BI and CPM use essentially the same data, but structure and present it in different ways to provide different levels of functionality and analysis.
CPM uses historical data combined with KPI metrics to plan, budget and forecast, and then monitors performance by comparing these to actuals. When things change, BI allows you to perform what-if analysis and scenario planning and adjust your strategy if necessary.
That being said, having BI without CPM only provides one piece of the puzzle—the most efficient and cost-effective implementation is achieved when a single product, like Calumo, is used for both functions.
To speak to one of our specialised consultants, contact us today.