Expert Q+A: How Finance Teams Can Make an Impact During Annual Planning

Business leaders today are facing heightened pressures to ensure that financial planning approaches drive rapid and sound decisions and enable growth while balancing stricter financial caution. This expert interview explores how CFOs and stakeholders can strengthen annual budgeting efforts.

Expert Q+A

Annual planning efforts are a core component of the role of CFOs and corporate finance professionals. With many companies’ budget processes already underway, how are teams balancing internal constraints and ensuring accuracy?

Neal McDonald (NM): For many companies in Q4, budgeting is ‘crunch time,’ and they may be facing heightened internal constraints. This could be due to an unexpected event, such as losing key personnel within the corporate FP&A teams, so the company needs to rapidly figure out how to finalize the budget (whether through redirecting in-house personnel or hiring interim support). Or, new strategic changes could cause challenges. For instance, private-equity backers might be working on a very tight timeframe to conduct the first pass at a budget for a newly acquired portfolio company, and it can be challenging to compile the information in a timely, accurate, and strategic manner. Even if CFOs or finance teams aren’t facing these unusual circumstances within their organizations, annual planning can still be a heavy lift.

During any budgeting or forecasting exercise, effective CFOs and finance leaders aim toward explainability over accuracy. This means, that if you have prepared a budget for 2024, and then the year unfolds, and the actual numbers do not match up to the budget as expected, finance professionals want to be equipped to steer the conversation away from ‘why weren’t the numbers accurate?’ toward ‘how should the business respond?’ Being able to articulate why things are off-budget is critical, and adept finance leaders will be able to work in partnership with operations or other key functions to quickly develop a rationale for making decisions as the year unfolds. In turn, these monthly reporting activities can drive improvements and make the forecasting efforts more accurate.

The past few years have been volatile for companies. Looking toward 2024, what do you think are some of the key economic challenges and trends impacting the current budgeting cycle?

NM: Inflation will remain a continued consideration, as company leaders often try to address inflation by passing along those rising costs through price increases to the end customer. But in 2024, the question will be: how much can businesses realistically continue to transition that burden to their customers (without hurting the customer relationship)? And it appears there might be some natural contraction in EBITDA or margin because companies won’t be able to continue to price through all the costs that are hitting the business, supply chain-related or otherwise.

In terms of growth strategies, there are many considerations that CFOs and finance leaders will need to balance in light of today’s economic conditions and when facing the possibility that business or market constraints could get worse, depending on the industry. Anticipating constraints in 2024 could mean that growth strategies will need to be less aggressive, and that measured outlook will impact how companies conduct their scenario-planning efforts.

Another trend that could impact growth and planning strategies might be the transition to a focus on organic growth, as some companies might have seen a slowdown in acquisitions or have a more scaled-back mergers and acquisitions (M&A) strategy for 2024, so the strategic planning might shift away from inorganic growth. In these cases, business growth will require steering toward more profitable products or channels, with inflationary pressures built into the profit and loss (P&L).

If companies anticipate the playing field will cultivate modest growth in 2024, where should CFOs and finance leaders place their focus to be most effective?

NM: In the current environment, some near-term tactics include:

• Leveraging cash management and forecasting tools to better anticipate inflows and outflows across short, medium, and long timeframes. Doing so will enable teams to make decisions in line with a ‘cash-is-king’ mindset.
• Documenting risks and opportunities within the budget (particularly liquidity metrics); partnering with business and functional leaders to mitigate risks and pursue identified opportunities.
• Ensuring cross-functional collaboration (e.g., sales, operations, supply chain) to align assumptions and drive plan accountability.
• Having access to data that is dimensional, and standing up data governance to ensure comprehensive reporting that enriches data with meaningful attributes. Linking that meaningful data into the financial plans will allow CFOs and cross-functional teams to develop a more detailed financial strategy. FP&A teams can also help their organizations expand market share by focusing on proper segmentation. This means thinking about the various profit lines of the business and building profit cubes around segments, which could be overarching across business units or more granular, perhaps at the SKU level.

What other strategies and tactics are proving to be helpful for companies during annual planning for 2024?

NM: In the current environment where companies are facing pressure to grow amid various constraints and economic pressures, it helps to echo strategies implemented by leading FP&A teams. To be able to unlock meaningful insights, it becomes essential to channel resources into technological advancement and to align people and processes to take full advantage of those advancements. To that end, it becomes pivotal for the FP&A team to collaborate closely with functional leaders, including IT, to showcase how business process refinement coupled with innovative technology can drive value in the planning and reporting process.

The FP&A team also plays a critical role in transforming data into a shared asset across the company — while emphasizing speed to perform various planning functions. Planning tools and technologies not only enhance reporting and decision-making but also rally the entire organization around a unified and accurate view of key metrics and performances.

Further, having the right team in place will drive success in the use of technologies. If a company experiences turnover and finds itself short on finance resources —especially if the budgeting process involves using Excel or another highly manual process— it can help to bring in interim support to get through the most pressing demands of annual planning. For any team structure, the in-house or third-party experts involved in the process need to be able to be knowledgeable about areas of planning that may have given the company trouble in the past. For example, if a retail organization consistently misses its inventory forecasts, then it will help to engage FP&A team members with technical depth to work with the merchandise planning functions to determine how budgeting processes can be streamlined and better understood across things like receivables and distribution and sales cycles. That functional and technical expertise can support budgetary accuracy and the ongoing rationale for decision-making.

How can CFOs strengthen their annual planning approaches and help their teams avoid issues in the future?

NM: Learning from year-end pain points can help companies elevate and evolve the Office of the CFO and be more impactful during all planning and forecasting cycles.

If a company regularly encounters pain points during its annual budget process, the team can benefit by documenting and substantiating the issues that arise while budgeting is underway. Finance leaders and team members can ask questions such as:

• What are the recurring problems with the data sets?
• How much time does it take to develop the budget?
• Where are there budgetary inconsistencies across divisions or business units?
• Is there a need for better visibility regarding assumptions being made (such as adding inflation factors to year-over-year costs) by finance or accounting teams rather than obtaining cross-functional input?
• Have budgetary predictions been accurate in the past? If not, are there obvious triggers?
• Are there driver-based models in place to substantiate growth numbers, or have models been developed based on a top-down growth goal?

Gathering this information in parallel with budgeting efforts will clarify how to improve the process throughout the year. After everyone moves through the year-end demands, they can then reference this information and address the prevalent issues, enabling the team to avoid pitfalls during future planning and forecasting cycles.

As finance and operations professionals seek to plan with confidence and accuracy, what should they consider regarding using technology and ensuring the quality and availability of the data?

NM: The starting point is all about knowing how data originates within an organization and how that data is integrated with other business systems throughout the enterprise. For example, when examining the data of a retail business, if a customer with loyalty member data purchases a piece of apparel, the point-of-sale system captures the data (size, color, item price, location of purchase, loyalty member number, payment type, etc.). In turn, that data can be used throughout the business in a variety of ways, for example, for marketing to analyze customer trends and adjust advertising strategies, for the financial information to make its way to the general ledger, in operations analysis of how many staffers are needed at each retail location. Being able to report on the business depends on how the data travels through the organization and how it’s managed as part of the master strategy.

Any technology or processes need to provide a clear line in originating data, transforming it through any IT or business intelligence function, systems, or tools, and then into a reporting tool. If there are issues, they will need to be solved so that there is clear visibility derived from one source of truth that enables CFOs and cross-functional leaders to understand the business and how to respond appropriately to the data at hand. Ultimately, when creating or refining reporting solutions, CFOs and finance teams will want to determine how best to ‘dimensionalize’ the data so that it is useful for reporting and guiding sound decisions.