Adding enterprise value with FP&A – where does your team stand?

Over the past several years, the role of the finance team in corporate organizations has evolved considerably. Traditional responsibilities included accounting, financial reporting, audit and compliance, treasury, etc. While these functions remain critical, changes in global economics, technology, regulation, and other business-critical factors have caused companies to demand more from their finance teams. In fact, it’s not uncommon for companies to view these functions as pure cost centers. This puts them in the crosshairs of cost rationalization and implementation of effectiveness measures. It’s not surprising, then, that the office of the CFO is, with increasing frequency, being called upon to assume a more prominent role as strategist and operator (in addition to the traditional roles). Said another way – corporate finance teams can no longer exist as a cost center; they must contribute to the creation of enterprise value (through FP&A).
So, what does it mean to create enterprise value? A business textbook answer would likely involve discussion of growing revenues, cutting costs, improving cash flows, and taking meaningful business actions to create shareholder value by increasing market cap or indicative enterprise fair value. It’s a fair synopsis; however, it’s an end state, the intended outcome, and, for any going concern, involves a continuous cycle of activities. Regularly achieving this goal requires businesses to regularly evaluate business performance considering relevant facts and circumstances to take actions that are accretive to enterprise value. This cycle of enterprise value creation can be condensed into three core phases:

1. Analyze and evaluate facts and circumstances
2. Develop a strategy and execute
3. Identify outcomes and measure performance

This cycle repeats with the goal of continuous creation of enterprise value. It’s important to note that the enterprise value creation cycle is iterative. It’s likely that, as a business evolves and mature, that the cycle may not yield desired outcomes; however, it is important to continue the cycle as it allows businesses to understand their critical business factors, the implications of their actions, and how to make changes to restore the cycle of enterprise value creation. Within this cycle are ample opportunities for FP&A teams to engage with their business partners as contributors to the creation of enterprise value. This is the evolution of the modern FP&A team.

How can FP&A teams participate within each phase of the cycle described above? Let’s look at each of the three phases to understand key FP&A activities that create value.

Analyze and evaluate facts and circumstances
Traditional analysis prepared by FP&A teams often includes variance and trend analysis of historical financial performance – versus budget, forecast, or prior year. It may even include some degree of analysis on cost structures, revenue drivers, and other more topical business elements. While this is helpful information when evaluating performance, it is likely not sufficiently robust to inform real-time business decision-making. Whether enacted or not, corporate finance teams have a unique proximity to both financial and non-financial data. This ought to give FP&A teams the ability to have influence over business decision-making and, at a minimum, a seat at the table. Meaningful data combined with actionable analysis is a powerful business tool. If reading out historical results is not particularly meaningful with respect to creating enterprise value, then what activities are?

Within this phase there are several ways FP&A teams may contribute to the enterprise value creation cycle. Some of these include:

1. Implementation of rolling forecasts and a fluid capital allocation process
2. Development of and reporting on financial and non-financial KPIs
3. Synthesis of operational and financial metrics to create actionable business intelligence
4. Preparation of market and competitor analysis to aid in benchmarking and pricing

The ability to support business-critical activities with data and analysis is a powerful tool. FP&A teams must engage as value-added business partners by identifying the needs of their business and tailoring a program of analysis and business intelligence that allows for optimized decision-making and, ultimately, maximization of enterprise value.

Develop a Strategy and Execute
As discussed above, one of the more dynamic shifts in the office of the CFO is from controller and technician to strategist and operator. Growth objectives and cost conscientiousness cause most organizations to limit their exposure overheads. Instead, capital is allocated to activities perceived as being more strategic in nature. This is true of corporate finance functions, as well. With increasing frequency, core finance activities like controllership and financial reporting are targeted for cost effectiveness with residual capital reserved for enhancing strategic and analytical capabilities. In this regard, there is strong demand from decision-makers for a deeper level of business partnership with their finance counterparts.

As with the first phase, there are several ways for FP&A teams to engage in the formulation and execution of business strategy, including:

1. Alignment of annual operating plans and budgets with short-, mid-, and long-range strategy
2. Integration of finance teams within core commercial and operating functions
3. Formulation of corporate development/M&A benchmarks and project selection criteria
4. Managing a capital allocation process that recognizes core elements of business strategy

Again, the theme here is a transition from execution of the core, tactical finance activities to immersed participation in the strategic and value-creating activities of an organization.

Identify Outcomes and Measure Performance
The last phase of the cycle is not unlike what FP&A teams have been doing for a long time – it involves reporting of financial results that describe the success of business activities relative to pre-determined benchmarks. But it also means evaluating operational metrics. It means objectively evaluating the effectiveness of core strategy elements, whether financial or non-financial, and developing ways to modify and enhance strategy and execution prospectively. Here, perhaps, is where FP&A teams may make their greatest contributions to creating enterprise value – through analysis and objectivity. Key activities might include the following:

1. Robust variance analysis of actual results versus budgets and forecasts
2. Measurement of project and M&A effectiveness (synergy tracking, quality of due diligence, etc.)
3. Identification of successes and failures in execution of core elements of business strategy (both financial and non-financial)

As this phase completes, revised formulations of business strategy and enterprise value creation will likely arise. These must then inform the activities undertaken in phases one and two as the cycle repeats.

The evolution of the corporate finance role from back-office technician to strategic contributor is only gaining momentum. As this shift plays out, and finance practitioners continue to demonstrate their competency as strategic business partners, the demand for these types of value-creating activities will continue to grow. Is your team prepared? Contact Deane Corporate Finance today to get started.