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Can you predict the future?

August 10, 2021, 10:15 AM UTC

Good morning,

Nobody can see the future—but CFOs have to try.

To get a handle on how financial planning and analysis (FP&A) is evolving, I spoke with Kip Krumwiede, Ph.D., the director of research at the Institute of Management Accountants (IMA). Krumwiede is the lead author of the report, Overcoming FP&A’s Biggest Challenge: Predicting the Future, released on August 4. IMA compared the results of best-, middle-, and worst-performing companies in FP&A practices and ultimate financial outcomes. The organization surveyed 245 global financial executives and managers.

How can strong FP&A practices add value? Respondents at best-performing companies that rated their overall FP&A higher over the past five years garnered 21% average revenue growth, compared to 12% for middle and 4% for worst performers. IMA asked respondents to rate on a scale from 0 to 100 to what degree their company is using FP&A efficiently. The average response for those in the best-performing group was 69 compared to 59 in middle-performing and 53 in worst-performing groups. To identify best-performing companies, IMA chose two factors: respondents who reported their company consistently met or exceeded set FP&A targets and consistently met or exceeded the results of their competitors.

Courtesy of IMA

“Good FP&A provides a mechanism to help ensure the financial and operational goals of the organization are broken out into specific short-term and long-term goals,” Krumwiede says. This practice makes it more likely for an organization to meet the overall financial objectives, he says.

For long-term accuracy, a predictive analytics model should be based on actual or expected causal relationships among resources, processes, key performance indicators, and customers, the report found. And that requires data integration—combining a wide range of data from various sources and making them equally available. An example? A CFO of a software company that uses data from a customer success system when reviewing late payments can approach customers differently, according to the report. The CFO can look at clients’ level of satisfaction through net promoter scores (how satisfied the customer is with the software) and approach a happy customer who is late on a payment differently from one who isn’t satisfied.

Addressing the “Knowing-Doing Gap”— a solid connection between predictive analytics, competitive strategy, and operational execution—is also essential, the report found. When evaluating predictions, teams should take into consideration planned strategic actions, such as a company investing in research and development for new products. The strategic action should be linked to performance measures and built into the predictive analytics model, according to the report.

Here are more actions IMA recommends to improve forecasting the future:

-Build a simple model to test the logic and assumptions. Once that is validated, migrate to a dedicated FP&A software program for automation.

-Use scenario planning to identify opportunities and potential risks.

-Create data collection systems on market and sales data.

-Models require simplifying assumptions and estimates about the future. 

-Continuously monitor results to quickly determine business reasons for any significant differences from the forecast. 

-Finance professionals may need an upgrade in analytical skillsets.

“If FP&A is intertwined with the strategic plans, it increases organizational awareness of the strategy and each department’s role in achieving it,” Krumwiede says.


See you tomorrow.

Sheryl Estrada
sheryl.estrada@fortune.com

Big deal

The compliance training market for financial institutions in the U.S. will increase over the next four years, according to Technavio, a technology research, and advisory company. The market is estimated to grow by $1.22 billion between 2021 and 2025, progressing at a compound annual growth rate (CAGR) of almost 16% during the forecast period, the report found.

Courtesy of Technavio

Going deeper

From enforcer to influencer: Shaping tomorrow’s security team, a report released on August 9 by KPMG, recommends that board leadership ensure cybersecurity specialists are part of the C-suite decision-making process. The report also offers seven actions, including embracing automation and bracing for future disruptions, to empower IT leaders and chief information security officers.

Leaderboard

David Borecky was promoted to the position of CFO at Impossible Foods, which develops plant-based substitutes for meat products. Borecky, a finance leader and interim CFO, originally joined the company as chief accounting officer and has led the accounting, tax, and financial operations of the organization for more than two years.

Deirdrea Renwick was named CFO at JZZ Technologies, Inc., a media technology company, effective immediately. Renwick has served as the accountant, controller, and CFO for a broad group of companies and industries during her more than 25-year career in finance.

Overheard

"You are starting to see retail reflect wholesale now."

—Ashley Boeckholt, cofounder of MaterialsXchange, on the historic gains in lumber prices in the spring being wiped out with wholesale prices falling as well, as reported by Fortune

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