What Senior Management Needs to Know about FP&A Software

Should senior management be directly involved in the selection and implementation of FP&A software solutions?

In working with several larger companies, all manufacturers, I have had numerous discussions with finance department managers on top priorities in finance, new technologies, and how to deliver better results to senior management. One such popular topic is the corporate annual budget process.

While all these organizations have abandoned their spreadsheet budgeting, forecasting, and analysis, they still employ legacy CPM (Corporate Performance Management) software with severe limitations compared to modern-day FP&A (Finance, Planning, and Analysis) software applications.

Limitations of Traditional CPM Software

First, traditional CPM software was not designed to be an extension of the actual accounting software into future, budgeted periods. Basic forecasted financial statements, such as a balance sheet or statement of cash flows, can be produced but are largely dependent on rough assumptions and complex modeling, requiring substantial programming and maintenance.

Second, the results are crude approximations of the future financial position of the company. Changes to the underlying budget do not always propagate through the model to deliver the expected results. Maintaining such complex models, especially when there are changes to the budgets, is naturally time-consuming, very expensive, and never delivers the ideal “real-time” results. It is little wonder that many such organizations do not properly forecast their balance sheets (or not at all), especially when they perform multiple iterations of the budget.

In my conversations with finance managers at these companies, I have mentioned the need for a forecasted balance sheet and statement of cash flows, both of which contribute to understanding the organization’s future financial health.

The Need for Modern Solutions

In time, even larger organizations that have invested large amounts in legacy software are going to be open to reinvesting in more contemporary solutions. These solutions focus on delivering real insight into the future financial health of the company.

In an earlier blog post, titled “What Does the Annual Budget Mean to You?”. I explored what different functions of the company see in the purpose and utility of the organization’s annual budget, and how different levels of management have different levels of expectations.

The Role of Senior Management in FP&A Software Selection

Using my experience with FP&A processes, interviewing people in various finance roles, and interacting with senior enterprise managers, I’ve learned that a good portion of the decision-making when selecting FP&A software (which includes planning, budgeting, forecasting, and analytics solutions) is in the hands of the finance department. They are nearly always responsible for producing and maintaining the company’s annual budget and are also tasked with periodically analyzing the company’s actual performance in each accounting period against the approved budget.

In most organizations, members of senior management receive, among other financial reports, a periodic (usually monthly) set of reports highlighting performance deviations from the budget and the reasons behind them. This seldom includes an analysis of the actual balance sheet against its budgeted counterpart.

Importance of Forecasted Financial Statements

As I have stated many times, senior management (CEO, CFO, COO, etc.) should be able to receive a forecasted financial position of the company. This position should be synchronized to the budget, responding to changes in the budget, its various versions, and “what-if” scenarios. This should be available for every single period of the budget, like having future financial statements available before the beginning of the budget year, showing what the balance sheet and statement of cash flows are going to look like if the approved budget is executed correctly.

Senior management is entitled to that information and should insist on getting it periodically and reliably.

Involvement of Senior Management in FP&A Software Selection

Senior management (especially the CFO) should be directly involved in the evaluation and selection process of the FP&A software solution. While this purchase may not always require a CFO approval, depending on the purchase approval matrix implemented in these companies, FP&A software should always involve the CFO from the very beginning of the procurement process.

Senior management must be given the opportunity to evaluate an FP&A software’s true capabilities to generate a forecasted balance sheet and statement of cash flows from the initial budget, during every step of the budget preparation process, and at every iteration of the budget or its various versions. It is in the best interest of the CFO (as well as the CEO and Board of Directors when feasible) to be part of the evaluation and decision-making process.

The Evolving Role of the CFO

This is particularly important with the changing role of the CFO from strictly leading the accounting and finance groups to becoming a strategic partner of the CEO. Not involving the CFO in the evaluation and decision-making process may deprive management, the Board of Directors, and shareholders of their right to receive complete and accurate information directly pertaining to the future financial health of the organization.

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‍Alan Hart, MBA, is Principal Consultant at Pacific Shine Group in Portland, Oregon, with responsibility for client business development and hands-on client project implementations. Prior to starting Pacific Shine Group, he worked in various executive accounting and finance positions with technology and growth companies. Notable is his 18 years in the hi-tech manufacturing industry where he served as Controller, Vice President of Finance and CFO of several privately as well as publicly held companies in the Hi-Tech industry, such as Hybrid Arts, Inc. Hamilton Bay Associates and Syncronys Software. In his role in management consulting, Alan has worked in diverse industries and with a variety of clients, including fortune 1000 companies such as Boeing, Delta Airlines, Intel, Wyndham Worldwide and others, as well as many mid-market organizations such as Guitar Center, Ducommun AeroStructures, Cypress Semiconductor, TriQuint Semiconductor and others.

Combining his skills and experience in engineering with deep understanding of technical accounting, he is able to assist small and medium-size manufacturing companies establish GAAP compliant accounting and reporting systems.