“Those who have knowledge, don’t predict. Those who predict, don’t have knowledge.” – Lao Tzu.
Some business owners downplay the complexity of Financial Planning and Analysis (FP&A) and mistakenly task their accounting team with this crucial function, or hope their CPA firm can be of help. This can be a mismatch because many accountants are not equipped to handle this level of financial responsibility and organizational oversight, and outside CPAs are just not that involved in their clients’ business.
Let’s examine how an outsourced, fractional CFO can improve FP&A:
Without data FP&A cannot occur, but some companies flounder when it comes to tracking the right metrics. A fractional CFO can use the breadth of their experience to identify the right KPIs (key performance indicators) for the business. This is the first step in improving FP&A and will continue to inform strategic decision-making throughout the company’s lifecycle.
Additionally, because many CFOs come up through the ranks of accounting, finance, and analytics, they have the background needed to clean up reporting and get better data. The CFO is on point for assuring integrity in the collection process and the overall accuracy of the data used for all business decisions.
The CFO’s contribution should be in the design, implementation, and oversight of the management information system… The CFO’s role is to determine what financial and operational data is routinely collected, organized, and disseminated to managers across the company in order to effectively manage revenue, margins, credit, inventory, capital spending, and other aspects of the business. In short, a top- notch fractional CFO should drive the constant improvement of data collection, analysis, and evaluation and the effective use of the information gathered to enhance decision-making.
Turning Goals into a Strategic Plan
A long to-do list or a list of goals is not a strategic plan. Businesses that set goals and try to hit them without an overarching strategic plan can end up wasting resources, pulling their teams in too many directions, and thwarting their own expansion efforts.
If financial planning were like cooking, organizations that try to unite goals into a plan would be the equivalent of gathering a bunch of ingredients and then trying to make a dish out of them – it might work, or it might fail miserably, it all depends on luck. Strategic planning is taking the opposite approach – deciding what you want to make first and then getting the ingredients to do so and putting together a plan of how you are going to use them, when, and in what capacity to create the finished product you want.
A fractional CFO is in the best position to do this because they have the overall organization in their view, which means they can tie in different areas of the business to create alignment around a strategic financial plan. Unlike other financial professionals that may only have accounting or financial analysis under their purview, a fractional CFO can look at the broader picture to understand how strategy will affect areas like HR, sales, marketing, and manufacturing.
Identifying Current Challenges
A fractional CFO’s position at the top also gives them the best vantage point to spot current and future challenges. Relying on data, CFOs can anticipate the kinds of obstacles that current market conditions and industry information indicate may be coming, which is crucial to future success.
An outsourced fractional CFO can take a more objective approach to FP&A to keep the organization informed and prepared for the challenges that lay ahead because they do not have to act in their own best interests. So, while any CFO can identify danger on the horizon and the weaknesses within a business that are most vulnerable to failure when the storms hit, an outsourced fractional CFO can provide an unbiased opinion to better serve the business.
Planning for the Unexpected
It is undeniable that a CFO can help an organization prepare for expected challenges, but what about the unexpected?
Seasoned CFOs can use current financial indicators and their previous experience to model and plan for the various scenarios that a business may face in the coming months and years. These plans can inform critical decision-making related to spending cuts, rightsizing the labor force, and timing planned business investments. CFOs can forecast the short and long-term impacts of these decisions to better position the company in response to economic shocks.
Even if advance planning has not happened, a fractional CFO has likely seen a variety of “worst case” scenarios, which equips them to roll up their sleeves when the unexpected happens. In these kinds of challenging scenarios, a CFO is integral for effective cash flow management to keep the business going in the short-term and make strategic adjustments to position them for future success. If needed, a fractional CFO can also leverage their external resources to seek better terms on the company’s existing funding, find additional funding, and negotiate with third parties like landlords and vendors.
Strategic planning relies on good communication. While some companies may be siloed, preventing individual contributors and their managers from collaborating effectively with other areas, CFOs have the altitude needed to work cross-functionally. Subsequently, there is more open communication around how each team contributes to the overall success of the company, resulting in better alignment around strategic planning. Additionally, there is better understanding of how current performance compares to the organization’s strategic vision.
FP&A is crucial in setting and executing on strategic vision and, as such, falls under the umbrella of a CFO’s responsibilities. Therefore, it should not be entrusted to non-executive level employees. A CFO’s skillset includes FP&A because these activities are vital for strong financial leadership, which is their primary concern. For organizations that are not large enough for or ready to hire a full-time CFO, an on-site, fractional CFO can fulfill the same function to provide strong FP&A at a much lower cost.
Michael Stier is an Area President for FocusCFO based in Charlotte, NC.