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

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

Jul 17, 2018 | Insights

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.

Strategic FP&A and the Modern Business Environment

Strategic FP&A and the Modern Business Environment

Jul 16, 2018 | Insights

The evolution of the modern business environment, and the regular introduction of new challenges, regularly presents unique opportunities for corporate finance and FP&A teams to add value to their businesses. Over the last several years, businesses have endured myriad challenges: the extremes of near economic ruin and prosperity, regular disruption of markets and industries through technological advancement, proliferation of applications for big data and analytics, and various changes in the regulatory climate (to name a few). As the business environment has changed, so, too, have the strategic and financial needs of businesses. Directly correlated with this is the more recent evolution of the role of the CFO from controller and technician to strategist and operator. What, exactly, are corporate finance and FP&A teams doing to help their businesses respond? Let’s have a look at a few examples.

Variable Economic Growth and Volatile Market Conditions
Over the past ten years, businesses have experienced the good, the bad, and the ugly of the global economic climate. The Global Financial Crisis of 2008 began an historic period of uncertainty, oddity, and, ultimately, prosperity. Arising from the ashes was an unparalleled period of government intervention in private enterprise and easy monetary policy. Both bolstered rebounding corporate profits and the resulting ten-year (nearly) bull market in equities. And while the evolution of the role of the CFO from technician to strategist was already in place, the events of 2008 and the resulting economic and market conditions certainly accelerated its trajectory. If nothing else, the financial crisis created uncertainty and demanded a renewed sense of fiscal responsibility. Enter the CFO.

CFOs have been many companies’ logical choice to bolster fiscal responsibility and to assist in navigating continuously changing conditions. While, historically, traditional roles were focused on reporting backward-looking results and less on execution of strategy, they were quietly armed with a high-powered tool: their proximity to a company’s financial and non-financial data. When coupled with analysis and practical application, this proximity to data makes the CFO (and their FP&A team) a powerful, strategic ally to a business, especially when called upon to navigate dynamic economic and market conditions. Through preparation of financially- and strategically-sound forecasts and analyses, the CFO organization is well positioned to assist in navigating uncertainty and change.

Technological Advancement and Disruption
The pace of technological advancement in recent memory has been staggering (see Moore’s Law). There are countless new technologies that have some degree of business application. Perhaps even more staggering is the pace at which companies are adopting new technologies to augment, enhance, or automate existing business processes. Cloud computing, artificial intelligence, social media – all now play a critical role in the execution of enterprise activities. Quickly emerging are technologies like blockchain, which is likely to completely disrupt the way we think about data and transaction processing. Technologies like quantum computing are rapidly nearing viable commercial applications and will disrupt every industry with superior computing speed and power. Companies are making billions of dollars of investments into these technologies as they innovate for the future – it’s critical for any business to remain a going concern.

Where does the office of the CFO come into play here? The CFO is the presumptive arbiter of enterprise financial performance, which gives them responsibility for tasks like capital prioritization and allocation. Accordingly, it is important for the CFO to understand the relative criticality of technological adoption for their business in order that they may appropriately allocate capital to allow for adequate investment in technologies. Also, the CFO must understand the business process and resource implications of technological adoption as these ultimately inform thinking on forward-looking financial performance and subsequent capital budgeting. Lastly, the CFO’s proximity to financial and non-financial data affords the opportunity for FP&A teams to prepare meaningful analyses around the impact on the business of technological adoption and investment.

Proliferation of Big Data and Analytics
Business intelligence has always been a priority for businesses. Understanding a company’s markets, competitors, and internal strengths and weaknesses is paramount to formulating and executing business strategy. The rapid pace of change in technological capabilities has impacted the ways in which businesses interact with their customers, vendors, and competitors, a result of which has been the creation of vast amounts of business-specific data. Technological advancement has also allowed businesses to more effectively and efficiently store and analyze this data. This has created an opportunity for CFOs and FP&A teams to add value to their organizations with enhanced data analysis.

As referenced above, FP&A teams are regularly called upon to provide data and analysis on critical matters facing their business. A synthesis of business-specific financial data with volumes of non-financial data on customers, vendors, and competitors is powerful – for understanding the business implications of certain business decisions, aligning strategy and tactical matters with financial outcomes, and measuring overall business performance. In a highly robust state where precise, real-time, predictive analytics are derived in large corporate data sets, companies may achieve a competitive advantage. Having a clear strategic direction and expected outcomes, as informed by data and analytics gives business decision makers an elevated change for success. However, continuous adoption and readily available technological applications have made this type of business intelligence more prominent and, more likely than not, simply a pre-requisite for doing business. To ensure continued success of their business, CFOs must incorporate data and analytics into their regular financial management activities or risk being left behind.

Rapid Pace of Social, Economic, and Regulatory Change
Times are changing – constantly. Over the last several years we have witnessed several social, economic, and regulatory changes, all with meaningful business implications. From the proliferation of social media to the regulatory response to the 2008 financial crisis, the environment in which companies are doing business has evolved. Brexit, uncertainty in fiscal and social policy under the Trump administration…more changes are coming. Regular environmental changes create challenges in execution of strategy. They require agility, flexibility, foresight, and, ultimately, action – all of which must be informed by financial and non-financial data. Again, this presents an opportunity for the office of the CFO to make a meaningful impact on their business. As with much of the discussion above, implementation of analytics and business intelligence afford decision-makers with the tools they need to successfully navigate these types of challenges. The CFOs proximity to company-specific data make them uniquely positions to cultivate these tools and enable effective business decision making.

Is your FP&A team prepared to support effective business decision making during periods of regular change? Are your decision-makers equipped with the tools they need to navigate modern business challenges? Contact Deane Corporate Finance today to learn how we can help!

Driving Performance and Value with FP&A

Driving Performance and Value with FP&A

Jul 16, 2018 | Insights

WhitepaperDoing Business has never been more complex than in today’s business environments. Uncertain worldwide growth, technological disruption, political unrest, and an increasingly complex regulatory environment challenges even the best decision-makers. Business success means navigating these challenges while executing strategy that drives enterprise value. Decision-makers require precise, timely information about their business to accomplish this…Read the full article

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