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FP&A: Reverse Engineering the Budget

Sep 16, 2016
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Nilly Essaides, Director & Practice Lead, Financial Planning & Analysis, AFP

In the ideal world, budgets and strategy should be tightly aligned. The annual budget should translate the company’s strategic targets into financial terms.

Strategy should drive the budget. But does it? Brice Hill, corporate vice president of finance operations at Intel, likes to run a reverse engineering exercise on the budget. He takes a department or group budget and deconstructs it to see if he can tell from the budget what management’s strategy and priorities are. “You should be able to tell the strategy of the organization from the details of the budget and how resources are allocated,” he said. “If you can’t, then something is not right.”

At its most simplistic level, if management says its strategy is to grow sales and the budget does not include investment in hiring sales reps or sales training, clearly there’s a mismatch. Or if the strategy calls for accelerated new product development but R&D investment remains static, the stated strategy and the implied strategy don’t jive.

This process of backing out the strategy from the budget is a valuable way to identify any gaps between what management says it wants and what management actually does. To achieve the stated strategy, those gaps need to be bridged. According to Hill, that’s where financial planning and analysis (FP&A) can add the greatest value—in showing how strategy and budget are aligned, or not, and what needs to change to achieve organizational objectives.

Ultimately, “strategy equals budget. If you say something is important you, you’ve got to look at the wallet. You can’t just tell people that something is important and ask them to do it. Management needs to back it up,” said Melanie Jameson, finance director at Premera Blue Cross, a healthcare company in Seattle.

Applying the theory to the finance organization

You could take the same philosophy and apply it to the priorities of the FP&A function itself. AFP research ahead of its upcoming guide, “How FP&A Can Become a Better Business Partner”, shows collaboration with the business is a top priority for finance teams. But is this focus reflected in how FP&A’s budget is allocated?

“The critical part is having the time to work with the business,” said one FP&A chief. And while many companies see this as an important mandate for FP&A, they don’t give their finance professionals enough resources by continuing to require them to perform traditional FP&A activities. “If you don’t put the resources behind it, it’s simply not going to happen. Companies that treat business collaboration as an ad hoc role don’t really get the benefits.”

He is not alone. Companies like Maersk Line and Oracle have already reorganized the FP&A function and split it into three:

1.      A back office, shared service center (SSC) that takes care of all repetitive activities like reporting, forecasting, etc. That SSC is usually placed in a low-cost center like India or Costa Rica.

2.      A middle office or business support group that performs the analytics function. It can standardize analysis and create ad-hoc analysis on request and directly supports the front office.

3.      A front office that includes a consulting-like organization of business “advisors” who work directly with the business and are sometimes embedded in the business but report into finance. These professionals get to know the business inside out, help the business solve problems, develop business plans and provide insight and foresight to their business partners.

The idea is to give FP&A the resources it needs to accomplish its business partnership role and become an active member of the business team.

The lesson for FP&A professionals is the same—whether it is the company’s budget or the finance group’s budget, it needs to be the financial articulation of the business strategy. If the budget is disconnected from the strategy, there’s little chance the department, the function or the entire organization will deliver on its objectives. Reverse engineering the budget is a great way to identify and remedy any inconsistencies.

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