How to address deficits in financial planning

Current financial planning and analysis capabilities are falling short with nearly half of global finance teams struggling to perform essential forecasting and budgeting functions consistently and accurately. By Deepak Chaudhari, Head of Tata Consultancy Services (TCS), Ireland

When the COVID-19 pandemic triggered extreme uncertainty, Financial Planning & Analysis (FP&A) within the finance function played a key role for organisations, from both a mid-term strategic and short-term operative perspective.  As the ‘fog light’ of the organisation, FP&A aims to provide accurate outlooks on top-and bottom-line views, from sales to cash in hand, to adapt to a turbulent environment more effectively.

Now, with further proof of its criticality, there is renewed emphasis on FP&A functions.  Many teams are revisiting their current operations as they look toward further growth.

To help guide these conversations, Tata Consultancy Services (TCS) recently undertook a global survey of 750 senior finance leaders, from a variety of industries, to better understand the key issues organisations are facing today: What is the current state of FP&A? What are Trendsetters doing differently from their peers? How are organisations preparing to meet the demands of the next era of FP&A?

The top key findings from the TCS 2021 Global Financial Leadership Study: The Next Era in FP&A  reveal that firstly, current FP&A capabilities are falling short; secondly, trendsetters with advanced FP&A capabilities are reaping the rewards and thirdly, most organisations are increasing technology investments to close the FP&A gaps.

FP&A capabilities are falling short

Rigid processes, lack of scalability and inadequate business insights are leading many finance leaders to make significant errors in their planning and forecasting.  The TCS Global Financial Leadership Study exposed four pillars where finance teams need to rapidly strengthen their FP&A capabilities; namely Adaptive FP&A; Critical Skills; Data Quality and Management; Risk and Control.

Current FP&A capabilities are falling short with nearly half of finance teams struggling to perform essential forecasting and budgeting functions consistently and accurately. 50% of respondents said they consistently fail to deliver short-term forecasts or make significant errors.  Current skills are also proving insufficient for the increasing demands on FP&A, including the ability to use advanced data analysis and FP&A technologies. What’s more, only 54% say their teams possess sufficient risk assessment capabilities.

This data disconnect is impacting decision-making.  Is the data disconnect a result of immature technology capabilities …… or do old habits die hard?  Finance leaders are relying heavily on their own intuition and that of others.  These executives estimate that on average, 43% of their financial planning and forecasting relies on intuition instead of data and analytics.

Trendsetters with advanced FP&A capabilities are reaping the rewards

A small group of finance executives have been identified as leading the way. TCS’ study dubs them financial ‘Trendsetters’ as they are further along in data maturity and poised to dominate the next era of FP&A. Making up only 6% of the total respondents, they have more mature digital capabilities, operate in a more agile manner, and demonstrate greater use of AI and machine learning.  Trendsetters also invest more in transformational financial planning and analysis capabilities to future-proof their respective organisations before the next big disruption. They are moving beyond intuition-led decisions, using data and analytics capabilities to drive fact-based decision-making.

Trendsetters are clear leaders in agility, effectiveness, and investments while others (Followers) are simply trying to keep up:

• 9 out of 10 Trendsetters (91%) say they can reallocate resources quickly when business demands shift, an ability put to the extreme test throughout the 2020 downturn and the COVID pandemic. Fewer than half (48%) of Followers can say the same.
• 78% of Trendsetters believe they can develop budgets effectively, compared to only 43% of Followers.
• 83% of Trendsetters say they are planning to increase investments in artificial intelligence and machine learning capabilities throughout the year, compared to 55% of Followers.

To quote one of the organisations who participated in the TCS study, Gaurev Malik, Regional CFO at US healthcare business, Quest Diagnostics: “A smart finance leader used to be someone who could explain why the number is what it is.  These days, a smart finance leader is someone who can drive the number to what it should be.”

Finance leaders view rigid risk evaluation practices as the biggest gap in their FP&A capabilities.

Most organisations are increasing technology investments to close the FP&A gaps

Finance leaders view rigid risk evaluation practices as the biggest gap in their FP&A capabilities.  Scalability concerns and a perceived lack of insights into business patterns indicate growing demands and more sophisticated what-if analysis for FP&A functions.  To address these concerns, most organisations are planning to increase investments in technologies to shore up current FP&A gaps, including improved scalability to manage new business demands and gaining visibility and insights.

Findings from the study in relation to technology investments indicate that:

• 69% of all respondents said they plan to increase investments in cloud-based systems over the next 12 months; 63% say they already increased investments in cloud-based systems throughout the past year.
• 67% plan to increase investments in data and analytics over the next year; 61% said they already did so within the last 12 months.
• Data-driven decision-making and business effectiveness go hand in hand, so financial leaders have a strong incentive to get there quickly.

From Awareness to Action

Even before the pandemic, many FP&A teams were struggling to provide what their organisations needed: agile forecasting and analysis to enable smarter decision-making in the finance function and throughout the business.  COVID further exposed those weaknesses and now they must be fixed.

The finance function can enhance its position as a growth enabler and strategic partner to the rest of the organisation.

To do this, finance leaders will need to commit to renewal.  New technologies, particularly in the data and analytics field, will help the FP&A function to evolve.  But they will also need to invest in the skill base, whether internally or via arrangements such as shared services.

The finance function can enhance its position as a growth enabler and strategic partner to the rest of the organisation.  And improving risk-assessment capabilities will ensure that the function is better placed to protect the business.

The call to action is for organisations to now address the question around how they can best meet the demands of next-generation finance functions?  FP&A Trendsetters are setting the standard and other organisations must now rise to meet it, with the agility to work at the pace of business, deliver real-time insights and drive elevated performance.

To achieve that, they must focus on:

Integration – ensuring all initiatives are connected to enterprise strategies, with clear expectations of the financial impact and tightly linked sales, marketing, operations, financial plans and forecasts.

Automation – leveraging machines to build forecasts with robust statistical models that harness machine learning and artificial intelligence capabilities.

Adaptability – developing the agility to sense and manage changing market dynamics, ensuring the enterprise can swiftly recalibrate resources as needed.

Proactivity – considering multiple scenarios and clearly articulating financial implications of business decisions with agreed on potential counter measures for each response.

To view the full report and receive more information, visit https://on.tcs.com/gfls

About Tata Consultancy Services (TCS)

Tata Consultancy Services is an IT services, consulting and business solutions organisation that has been partnering with many of the world’s largest businesses in their transformation journeys for over 50 years.  TCS offers a consulting-led, cognitive powered, integrated portfolio of business, technology and engineering services and solutions. The company’s 528,000 consultants in 46 countries, including Ireland, help empower individuals, enterprises and societies to build on belief.

TCS’ proactive stance on climate change and award-winning work with communities across the world have earned it a place in leading sustainability indices such as the MSCI Global Sustainability Index and the FTSE4Good Emerging Index. For more information, visit www.tcs.com