With financial planning and analysis teams growing in size — and importance — across businesses in recent years, having data-focused FP&A executives who can look at the business like a story, with different details and pieces that all come together is key to providing accurate forecasts throughout a fiscal year, experts say. 

CFOs must understand the nuances of the different roles members of the FP&A team play on the finance team in order to hone in on each person's unique skill sets and prepare their organizations for success.

The corporate octopus

In order to visualize how FP&A teams operate differently than the accounting department, Frank D’Amelio says he likes to think of the finance function as a “corporate octopus.” 

“You've got the head of the octopus, which is the FP&A team. But then they've got tentacles into every part of the company in order to pull together that consolidated view and that complete picture of the company,” said D’Amelio, Deloitte’s US CFO Program’s CFO-in-residence, formerly Pfizer’s CFO and a veteran finance executive. 

CFOs can think of someone who is a VP of a finance function as being the supporter of a specific sector of the company — like commercial business or research development, and then think of the VP of FP&A as being the supporter of the whole business. 

“Someone in FP&A pulls together the whole company whereas the VP of Finance pulls together just one piece of the company,” said D’Amelio. 

By nature, he said, those in FP&A positions are really high performers. “This snapshot or picture of the entire business that they create is presented to the CFO who then discusses it with the leadership team, board of directors, etc.,” said D’Amelio. 

In terms of how their responsibilities vary on the day to day versus before a year-end board meeting, FP&A execs will spend most of their time putting pieces of the business together, analyzing those pieces, and creating that big picture to then connect with operational folk and prepare for when they need to give the CFO a picture of where the company is. However, no matter what time of the year it is, “these individuals are always working with the financial teams, trying to put together projections for the quarter and for the full year,” said D’Amelio.

A forward looking view 

Although both are a part of the finance function, there is a clear difference between accounting executives and FP&A executives.

Those in charge of the behind the scenes work that goes into budgets and forecasts as well as the analysis of those results, need to have a futuristic, or forward thinking mindset.

“FP&A roles are more cross functional and they might actually be more technical, especially if you're leveraging more advanced capabilities around machine learning, to support your forward looking predictability,” said Alok Ajmera, CEO of Prophix, a corporate performance management software company in an interview.

When CFOs are recruiting for such positions involved in the FP&A function, it is important that they seek curious individuals, according to Heidi Crane, veteran CFO of companies like BH Cosmetics, SurfAir and TechStyle Fashion Group and financial planning advisor.

“Companies are experiencing a skill gap,” said Ajmera,  “you can’t take your accountant that's closing the book and then turn them around and expect them to sit with the broader operations and understand how to model and track what's happening,” he said. 

There is also a shift in demographics that come into play in terms of how these individuals tend to operate, said Ajmera. 

“There was a time when CFOs and finance leaders carried a badge of honor in the sense that they would say ‘I spent my entire weekend pounding out this Excel report and I got it out Monday morning,’ and now we are in time where I would say good luck hiring and retaining talent that is willing to do that,” he said. 

People are now coming into the workforce as analysts and directors, who have grown up completely in digital environments. 

“The expectation is that they are going to be able to access data quickly, and do their job in an intelligent, technical way. And that's actually forcing something: the combination of a demographic shift in terms of people coming into the roles, and also the accessibility of technology actually starting to drive that change through the business,” said Ajmera.

All these nuances in perspectives that are emerging across the finance department functions are especially important for CFOs to keep in mind in the year ahead as challenging economic headwinds are expected to continue to require finance departments to be at the top of their games.

“In 2023, inflation, interest rate changes and supply chain disruptions will complicate the CFO's day job as their profitability forecasting will have to change in accordance with these factors. So FP&A is going to be a top concern,” said Chris Wright, managing director of global finance at Protiviti in an interview.

CFOs at companies of all shapes and sizes have long tracked three main buckets of financials: backward-looking accounting, present-looking cash management and forward-looking financial planning and analysis (FP&A). 

In recent years FP&A has become a hot buzzword as it has grown in importance and companies have increasingly created separate departments dedicated to such processes. Advances in technology now mean growing treasure troves of data can be tapped to help finance chiefs make better and more informed decisions with the help of their FP&A groups. Among the success stories: FP&A modeling at Amazon led the retail giant to choose its strategy of free shipping over 10% discounts.  

Having accurate planning and forecasting is hugely important because if it isn’t working that can mean you have more product than you need or you don't have enough and you're losing sales, Karen Sedatole, an accounting professor at Emory University’s Goizueta Business School, said in an interview. “It's a really expensive proposition to not get right,” Sedatole said.

In today’s uncertain economy, the growing challenge of scrutinizing and forecasting costs and economic patterns is spotlighting the importance of FP&A to CFOs, experts say. This first piece will explore the history and evolution of industry thinking around planning and analysis.

WHAT: 

FP&A focuses specifically on future spend — budgeting, forecasting and then analyzing the factors of a business that are influencing spend.

“Accounting is about the production of financial statements, and not necessarily that much more. FP&A is about the story behind the numbers, getting deeply into the analysis of the results, and understanding the business first and foremost,” Judy Munro, senior managing director of executive search firm Robert Half, said in an interview.

What an FP&A team exactly looks like varies but typically there are four main areas that this strategic team focuses on in order to support a company’s financial health, according to consulting firm Gartner.

Those key issues are planning and budgeting, which is essentially an annual plan; integrated financial planning, which is the process of understanding whether your business is performing well or not; management and performance reporting, which involves the organization’s performance analysis; and finally, insights/forecasts and modeling, which involve testing assumptions under different circumstances. 

Extended planning and analysis (xP&A) is one of the latest developments in FP&A. This involves the integration of financial planning with operational planning so that when decisions are made, there are fewer surprises as to how the enterprise is impacted.

The FP&A process also involves several different departments, Sedatole said. They include the sales side which has a lot of insight into what customer demand is likely going to be and the supply chain side as they make sure the resources are in place to be able to meet that customer demand. The finance group itself is the third group of critical players. “They're interested in projecting what earnings are going to be,” Sedatole explained. 

WHEN

FP&A has been around for as long as businesses themselves but its nomenclature and modern shape has evolved in recent decades, experts said.

“These activities used to be done by what we called management accountants, then it slowly evolved in the late nineties to early ‘10s to FP&A, and now it has kind of evolved into strategic finance,” said Gillian Sheeran, CFO of Pricefx — a European pricing software company — and a fintech consultant, in an interview. 

The increased demand CFOs face to provide detailed insights based on financial performance and the growing importance that FP&A has to the finance function was detailed in a 2019 Institute of Management Accountants report.  

Traditionally, 15 years ago, companies primarily just looked at historical sales — as the primary input data, Sedatole said. As technology progressed, so has the ability and scope of FP&A teams. Now companies can look at social media and customer reviews and a wide range of other data.

Beyond that, both mico and macro economic data like gas prices, interest rates and other external data can now be incorporated into FP&A. Even the weather and popular social disruptions like a revolt in a country can have a key impact on a supply chain. Mike Kelly, America’s Finance Consulting Leader at Ernst & Young (EY) told CFO Dive previously that he once worked with a client who was actually able to predict the COVID-19 pandemic using advanced forecasting tools their finance team put in place. 

Munro views the evolution similarly. She recalls when she was a CFO from 1988 to 1994 software and data tools weren’t available to do the kind of in-depth analysis now possible. “We've come a long way. Now, there are all kinds of tools that allow you to easily extract information from a database,” said Munro, who was CFO of Mr. Jax Fashions, a garment manufacturer.

As for the right time to implement a robust FP&A system, experts say you can never be too early. “When you are at an early stage, FP&A is key. You need to be able to anticipate as much as possible,” said Romain Attard, CFO of biotechnology firm Tissium. 

The drive for efficiency that FP&A can offer is particularly necessary in a slowing economy. “During a recession especially, you have to be ruthlessly efficient,” Sheeran said. “You have to thoroughly understand that each of the metrics you're analyzing is directly linked to your profitability, your cash and your corporate strategy.” 

HOW MUCH

The cost of FP&A implementation varies according to company size, Sedatole said. However, it is an investment that CFOs will see a large return on if done right, she said.

“Part of the problem is a lot of companies will hire the technical expertise needed for a strong FP&A team, like data scientists. But then, the issue resides in incorporating the data into the organization and getting people to work together,” she said. 

In order to cut costs on FP&A teams, companies can upgrade their tools as they grow in size, but this can wind up being problematic and more expensive in the long run, according to Attard. 

Some companies may have the idea of implementing inexpensive systems at the beginning of their life cycle, but with this, you run the risk of having to build an FP&A team from the ground up later on, he said. Although investing in FP&A is costly, waiting to lay out the ground work later on will backfire.

The financial toll of inefficient FP&A data processes is $7.8 billion, according to research from the University of Baltimore and financial automation company Datarails. 

Investing in robust systems that can automate these activities and processes for FP&A teams can allow companies to focus more on future planning. 

WHY 

The purpose of FP&A, at its core, is profitability. “You would be surprised how large companies can get and still not understand their profitability, and at the end of the day, this is the purpose of FP&A,” said Sheeran. 

Traditional FP&A teams are built to work best through quarterly and annual cycles instead of real-time challenges, according to a McKinsey report. However, having a modern and separated FP&A team that can speed up their own processes — like generating reports and combing through data —  can in turn trigger more efficient and effective practices throughout an entire organization.

The key to getting the most out of FP&A teams is prioritization, stressed Heidi Crane, CFO of FightCamp who spent the early days of her career in strategic financial planning.

“As CFO, you are the leader of the group, and you need to understand the things that drive the business and where you need to focus your time,” Crane said. “Having a few key priorities is really important, otherwise you won't get anything done.” 

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Shawn Duffy: “You always have to be mindful that successful businesses need top-line growth. You can’t just have a successful business because you cut costs.” 

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3. Rapid decision making

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CFOs in 2023 may want to think twice before planning for an end to the turmoil of the past two years.

A new variant of COVID-19 may flare up, inflation persists well above the Federal Reserve’s 2% target and geopolitical tensions, such as Russia’s invasion of Ukraine, loom large in even the most carefully crafted scenario planning.

The U.S. government is trying to curb many of the risks, with mixed results so far. One of its antidotes, as prescribed by the Securities and Exchange Commission (SEC), will require CFOs to spend more on compliance and plan for more disclosure and detailed risk management.

Other trends, such as a possible slide into recession, are beyond a CFO’s control.

Here’s a look at four of the trends for 2023. 

1. Close combat against inflation

Battling inflation is a core mission of the Federal Reserve. Since 2021, inflation has won.

Fed Chair Jerome Powell acknowledged early last year that policymakers underestimated price pressures.

In March, three months before the consumer price index (CPI) hit a four-decade high of 9.1% on an annual basis, policymakers began the most aggressive pullback in stimulus since the 1980s. Over the course of last year, they pushed up the federal funds rate by 4.25 percentage points.

Fed tightening reduced the CPI to 7.1% by November while also increasing the risk of recession. The probability of a downturn during the next 12 months is 65%, Goldman Sachs said Thursday, citing consensus estimates while adding that its own researchers see a 35% probability of recession.

Powell has repeatedly said the Fed will curb inflation even at the cost of setting back businesses and employment. But with price gains easing and the risk of a downturn rising, some economists fear policymakers in 2023 will pause or reverse course before bringing down inflation to their 2% target.

“What worries me is if inflation starts approaching 5%, they might let up and then we’ll see inflation shoot back up,” according to Aleksandar Tomic, director of the graduate programs in applied economics and applied analytics at Boston College.

Inflation this year will likely persist somewhere between 5% and 7%, Tomic predicted in an interview. “I don’t think there is any way we will get to 2% within 12 months without really bringing the economy down tremendously.”

Based on their median projections last month, Fed officials forecast that they will raise the federal funds rate by December to 5.1% — from a current range of 4.25% to 4.5% — before trimming the benchmark to 4.1% by Dec. 2024. They see the economy growing 0.5% this year and 1.6% in 2024.

Powell acknowledged that the forecasts are educated guesses at best. “No one knows with any certainty where the economy will be a year or more from now,” he said at a Dec. 14 press conference after the Fed released its projections.

Given the murky outlook, CFOs should avoid borrowing at variable interest rates or use swaps to hedge against rising rates, Tomic said.

Scenario planning is also essential when preparing for the future economic or monetary policy landscape, Tomic said, adding “whoever tells you anything with certainty is just lying to you.”

“This time last year, nobody thought Russia would invade Ukraine,” he said. “For many companies that turned everything upside down.”

2. Job openings go unfilled

Many CFOs eager to fill some of the economy’s 10.5 million job openings may need to keep “help wanted” signs posted well into 2023.

The tight labor market will probably persist for at least the next few months, according to Cristian deRitis, deputy chief economist at Moody’s Analytics.

“The dynamic in terms of demand exceeding supply is going to hold for a long while,” he said in an interview. “I don’t see a reversal of the trends there unless we go into recession,” he said, noting that Moody’s forecasts a “slowcession” of low growth rather than a downturn.

The unemployment rate in December fell to 3.5% from 3.6% the prior month as U.S. employers added 233,000 jobs, the Labor Department said Friday. The total number of available jobs was unchanged.

CFOs aiming to hire workers face several obstacles, including limits on immigration, an aging and shrinking labor force, and a trend of pandemic-induced early retirement, deRitis said.

Fed policymakers worry that the strong labor market will fuel wage pressures and worsen inflation by compelling companies to raise prices. Wages rose last year by 4.6%, according to the Labor Department.

“Wages are running well above what would be consistent with 2% inflation,” Powell said at a Dec. 14 press conference.

At the same time, compensation gains lagged inflation by more than 2 percentage points, prompting many workers to quit jobs for higher pay elsewhere and compounding wage pressures.

For some workers, “the only way for your salary to keep up with inflation is to change jobs,” Tomic said.

Eventually, as the Fed’s aggressive monetary tightening takes hold, unemployment will likely rise this year to 4.2%, deRitis said. Average monthly job growth will probably slump to around 75,000 from 370,000 in 2022, taking “some of the pressure off wage growth that we’ve been seeing that would certainly help the Fed’s case.”

Annual growth in wages may fall to between 3% and 3.5%, deRitis said.

CFOs leery of raising wages too much may want to consider providing workers with more job flexibility, including out-of-office work arrangements, deRitis said.

“It’s key for the employer to be creative in terms of the ways that they compensate employees,” he said. “I think you can build loyalty and high retention by having flexible policies.”

3. SEC demands disclosure

Since his swearing in as SEC chair in April 2021, Gary Gensler has laid out aggressive goals for increasing disclosure by public companies.

Investors need more information on companies’ cybersecurity, workforce diversity and vulnerability to crypto asset markets, Gensler has said.

Some proposed rules would shake up management by CFOs and their C-suite colleagues, compelling more detailed measurement of employee demographics and an overhaul in aspects of risk management, according to David Brown, a partner at Alston & Bird.

“We are forcing companies through disclosure to change the way they operate,” Brown said in an interview. “It’s extraordinarily ambitious.”

Gensler in March sparked criticism — and more than 14,000 public comment letters — after releasing a 490-page proposed rule that would require publicly traded companies to provide detailed disclosures on carbon emissions and climate risk.

The SEC aims to mandate that companies describe on Form 10-K their strategy toward climate risk, including plans to achieve any targets they have set for curbing such risk.

Companies would need to disclose data on their greenhouse gas (GHG) emissions, either from their facilities (so-called Scope 1 emissions) or through their energy purchases (Scope 2). They would also need to obtain independent attestation of their data.

Clear, uniform disclosures on the costs from climate change will benefit both businesses and investors, according to Gensler. Businesses will gain detailed insights into potential costs and opportunities, while investors will be able to better gauge risks at specific companies and compare risk levels across industries.

Companies, industry groups, lawmakers and asset managers — including BlackRock — have focused much of their criticism on the mandate that companies disclose in detail Scope 3 carbon emissions by their upstream and downstream suppliers and vendors.

Gensler has said the requirement would only apply to large companies that have already committed to Scope 3 measurement. Yet critics say the rule would impose onerous costs and challenges in measurement on small businesses, such as farmers, woven into the supply chains of big companies.

The SEC in coming months may sidestep opposition to the Scope III requirement and other controversial aspects of the proposed rule by rolling out the final regulation in two phases, Brown said.

In the first phase, the agency would require measurement and disclosure of Scope 1 and Scope 2 emissions and details on climate risk, including how the C-suite and board track and manage such risks, Brown said.

In the second phase, companies would need to gain external assessments of their GHG emissions and climate risk calculations, and report measurement of climate risks on their 10-Ks, Brown said. As part of this phase, large companies that made prior pledges to disclose Scope 3 emissions would be required to do so.

In a two-step approach, “people still may challenge it, but there may be less of a chance that the challenge is successful,” Brown said.

Despite opposition, the SEC will push forward with the regulation, he said. “I don’t think there’s any chance whatsoever that they’re going to shelve it.”

4. Sharper accounting oversight

The implosion of crypto exchange FTX and absence of financial controls revealed in its bankruptcy filings — such as the use of emojis in an on-line chat platform to approve disbursements — will sharpen scrutiny of the accounting industry and its standards this year, experts say.

While some accounting experts are quick to note that regulations won’t prevent those who flout the law from harming investors, others say the FTX failure will likely intensify efforts by regulators to avert failures in accounting and financial reporting.

Soon after FTX collapsed in December, the SEC called on companies to fully disclose crypto asset risks, joining efforts by lawmakers, investors and creditors to gauge the crypto market’s vulnerabilities.

“We don’t know where FTX is going to fall out … it’s a period of time where we’re trying to see where all these things are going to land,” Kecia Williams Smith, an accounting professor at North Carolina Agricultural and Technical State University, said in an interview.

The blowback from FTX, although big, will probably not prompt the same sweeping changes in accounting and financial reporting that followed the Enron accounting scandal, she said. “We’re tiptoeing on the precipice but I don’t think we’re back at Enron proportions.”

But the failure of FTX, which owes more than $3 billion to its top creditors, will undoubtedly spotlight for the Financial Accounting Standards Board (FASB) the problems it needs to address as it sets standards for crypto-currency this year, according to Kelly Richmond Pope, an accounting professor at DePaul University in Chicago.

“This fraud is so egregious it’s forcing you to see how bad it can actually be and how negligent founders and CEOs can be,” Pope said. FTX “gives [FASB] something to dissect … We need to see this so we can set up the right protocols for us to follow in the future.”

The FTX debacle played out late last year as CFOs and their finance and accounting teams were already facing sharper regulatory scrutiny of financial reporting and a push for more disclosure.

The FASB begins 2023 with many ambitious projects carrying over from 2022. In addition to crypto standards, it also plans to revamp outdated accounting for software and is poised to beef up the income tax information that companies would be required to disclose in financial reports.

The board is also making the most sweeping segment accounting change in 25 years — a move that would require companies to require more frequent and comprehensive data broken down by business units.

Meanwhile, the Public Company Accounting Oversight Board (PCAOB), under its new Chair Erica Williams, pledged in its 2022-2026 draft strategic plan to increase average penalties and enforce some rules for the first time.

Intensified enforcement will persist in 2023, Smith predicted.

“CFOs who are trying to have a good 2023 just don’t want to be on the bad actors list,” Smith said. To avoid sanctions, finance chiefs should work closely with their audit committees and keep in close communication over changes in disclosure requirements and other matters.

“The common theme … is making sure the company’s disclosures are transparent and not misleading to investors,” Smith said. “The preventative measure is to always have investors top of mind, because that’s the kind of enforcement actions we’re seeing.”

Becoming CFO of SalesLoft in 2018 gave Chad Gold the opportunity to build the financial planning and analysis (FP&A) function from scratch. To make the most of it, even before he hired his team, he built a model that connected the operational metrics that company executives rely on to run the business to a wider selection of financials than is typically done in planning. 

“Not just the P&L but the income statement, the balance sheet and cash,” said Gold, whose comments were included in an FP&A podcast called Planning Aces. “So, we built that model and then that allowed us to have conversations with the business to say, Hey, look, I need your operating metric in three years to be here so that my income statement can be here and my cashflow can be here. The model connects it all back, because if you’re an operator in the business, you’re not close enough to the financials [to see the connections].”

Chance to retool

Few CFOs get the opportunity to build their FP&A function from scratch, but the pandemic gave finance leaders something almost as good: a chance to retool their planning process. 

The goal wasn’t just to get through the downturn but to rethink planning as a tool. For many finance leaders, that meant making two big changes: newly focusing on non-financial metrics, especially for companies that pivoted to online commerce and recurring revenue sources, and helping FP&A analysts better understand the business operationally so their analyses can become more relevant.

“So, the FP&A team is a group now that is focused on things that are beyond the basic numbers,” Harmit Singh, CFO of Levi Strauss & Co., said in the podcast.  

The well-known apparel company responded to the pandemic by taking a big leap into direct sales, which required his team to understand previously unfamiliar metrics like the quality of online customer experience.   

“The best FP&A teams, in my view, are folks who actually understand the business,” he said.

It helped that he hired people over the years with operational experience alongside a finance background.

“My group is largely made up of people who’ve actually worked in the field in different businesses,” he said. “I think that makes a huge difference.”

Embedded analysts

Some CFOs have gone so far as to embed their FP&A staff in operational divisions, rather than keep them walled off in corporate. But it’s not the physical separation that’s important; it’s the operational knowledge and the connections on the business side that enable analysts to make their forecasts more relevant and consequential.

At Scouler, an agriculture supply-chain management company, CFO Andrew Kenny brought in a global head of FP&A who in turn brought in analysts that are each embedded in a business function. 

“The way we ultimately structured it was FP&A reports directly to my finance director for each division, with a dotted line into our global head of FP&A,” he said. “And then we put in an FP&A lead in each of the divisions.”

The changes sound complicated but the goal is simple: to arm CFOs with more relevant and actionable analyses so they can be better partners to the other executives.

“You’ve got to get all these other elements in place, because what makes you a better business partner is having all those metrics and tools and forecasts in front of you,” Gold said. “You have to have a forecasting process, no matter how good it is. You have to be able to see where you’re going. You have to be able to understand what happened in the past. And basically if you can’t do those things, you don’t do anything else.”

When Ross Tennebaum was part of an investment banking team working with Slack in its early days, each of the operational heads at the collaboration software company had a sidekick they would turn to whenever substantive questions came up in meetings.

Tennebaum, now CFO of tax software company Avalara, later learned the sidekicks were analysts in the company’s business operations (BizOps) team, and they were doing the same kind of work as financial planning and analysis (FP&A) team members. The difference was in their orientation; instead of coming at questions from a finance perspective, they came at them from an operational perspective.

“They literally had an analytical answer to every question about the business,” Tennenbaum said in a Planning Aces podcast. “They were so dialed in and had such a deep understanding in numbers. It was super impressive.”

Tennenbaum said he’s been trying to replicate that kind of analytical capability at Avalara. “I’ve been painting that picture to our team,” he said. “setting that as a goal to what we want to develop into. It’s a super exciting mission that can take finance to a point of being a partner in the business.”

More data, better results

The kind of analysis FP&A teams provide has long been a part of the finance function. What’s different today is the amount of data teams have to work with and the sophistication of the tools they have to process and draw conclusions from that data, said Steve Player, who co-hosts the podcast with Jack Sweeney of the CFO Thought Leader podcast.

“This has been going on in business for a long time, but today we have a cheaper and easier way to see things,” he said. “The data is there; you just have to access it and make it useful information.”

An FP&A team's job isn't concretely defined, but many finance leaders will agree the function has changed over the years. Previously, the team was meant to help forecast and then measure performance against budget. At the current rate of spending, for example, is marketing or sales staying within budget or is it spending more than planned? 

Today, by many measures, the best practice is to make FP&A part of, or at least a partner to, the organization’s operational teams — in essence, become like Slack’s BizOps team — so analysts can understand what drives that function area and then devise ways to track, and then improve, performance against that measure — ideally on an almost real-time basis rather than wait for monthly, quarterly or annual reports.

“If you’re really good, you can know how to dollarize any one of those metrics, so you’ll be able to predict what the month and the quarter and the year are going to be simply because you’re watching it happen,” said Player, a budgeting and planning consultant.

The goal is to identify levers in each function area that drives that part of the organization’s overall success, put a dollar amount to the levers so leadership can know how much spend will result in how much improved performance, and then course-correct as the metrics rise or fall. 

“What you really want to watch is, how are our plans coming?” Player said. “Are we getting people hired that we need? Are we getting them trained? Are they making the sales calls they need to? Is the sales campaign going the way we had hoped? You start working on improving the operation because the operation delivers the financial result. That frees the leader up to keep looking at the big picture, and have Plans B and C ready.”

Margin of error

In some ways, FP&A teams in private companies have an edge over those in public companies, because they can find ways to measure business drivers and get a clear picture of how well function areas are performing without having analysts, investors and regulators peering over their shoulder. 

“This is where you get into the great debate between publicly held companies and privately held companies,” Player said. 

Especially in high-flying tech sectors, when a company goes public, it’s expected to beat its forecasted performance in its first two years and can get slammed if it doesn’t.

“Do these guys really know what they’re doing?” he said. “How well do they really know what’s driving their business? How much landing room do they have? How much margin of error do they have to hit those numbers? Accounting has a lot of estimates, lots of things that aren’t as precise as some people might think.”

Its not unusual for finance leaders to maintain an informal analysis separate from the company's official forecast to test assumptions without confusing the external story. That external story tends to err on the conservative side — under-promise and over-deliver. 

Brad Kinnish, CFO of business internet connectivity provider Aryaka and a former investment banker, said a company going public has two constituencies whose needs it must meet, and the planning team must keep them both in mind when identifying drivers, how to measure them, and how to tweak them as performance data come in. 

The first is the investment community, which must feel confident about the company it’s being asked to put money into, and the second is the company leadership, which must be clear-eyed about whether the business model is capable of succeeding.

“Part of what [the CFO and FP&A team] are trying to figure out is, is this a realistic two-year projection?” said Kinnish. “Are they going to be able to meet and beat [projections], because in many parts of the market, particularly in the software area, the expectation from investors is that you’ll come out and you’ll have a baseline two-year projection and that each of the first three quarters you’re public you’re not only going to meet, but beat, your numbers and then you’re going to raise your forecast. So, that’s part of what you’re evaluating. Does that FP&A team and CFO know enough? Do they understand their projections and business well enough to play out those forecasts and meet and beat, because you want the company to do well when it’s out and publicly launched.”

Different sectors, same needs

Although expectations are high for companies in the tech sector, brick-and-mortar companies, including classic retailers like Banana Republic and Gap, rely on their FP&A teams in the same way to identify, measure, and tweak their business drivers. The difference between these kinds of businesses and those that are more tech or ecommerce focused is the nature of the drivers. 

“From an FP&A structure standpoint, [they’re] very similar across the board,” said Waifa Chau, CFO of developer API platform company Nyla and a former FP&A executive at Banana Republic, Gap and the ecommerce arm of Walmart. 

In all cases, members of the planning team would partner with business operations — merchandising, marketing, sales, operations — and share their data and analyses with a corporate FP&A team that would combine everything into company-wide measures. 

“You would have a corporate FP&A, a group that rolls everything up, a consolidation of the overarching,” Chau said. “You definitely need someone who is almost part of the marketing team or part of the merchandising team so they’re really understanding the intricacies and the ins and outs of those areas, those functions, and how they relate to the P&L and the numbers from a forecasting standpoint.”

The ecommerce operation at Walmart relied on FP&A in the same way as the brick-and-mortar stores, but the levers that were available to tweak operations based on the data were different. Instead of in-store inventory, there were warehouses and delivery mechanisms, for example. 

“With ecommerce, we look at [more than] just gross margins,” he said. “That’s what you would look at from a brick-and-mortar retailer, so there are nuances.”

Bottom line, no matter a company's industry, CFOs can partner best with others in the C-suite by having an FP&A team that combines a financial mindset with an understanding of the drivers in each operational unit so analysts can help identify, measure and tweak performance drivers that make a material difference to the organization's growth. 

“Not only can you look at the decomposition [of the data], you can put dollar amounts on each one of those [tweaks],” Player said. “So, on a cross-sell, how much can I afford to spend to make that cross-sell? If I know how much more margin it’s going to give me, it becomes easier to figure out what I can invest to make that happen or make that decline rate slow down. It’s the deep mechanics within the system to understand and work with operational leaders on what the company can do to change this.”