When Ross Tennebaum was part of an investment banking team working with Slack in its early days, each of the operational heads at the collaboration software company had a sidekick they would turn to whenever substantive questions came up in meetings.

Tennebaum, now CFO of tax software company Avalara, later learned the sidekicks were analysts in the company’s business operations (BizOps) team, and they were doing the same kind of work as financial planning and analysis (FP&A) team members. The difference was in their orientation; instead of coming at questions from a finance perspective, they came at them from an operational perspective.

“They literally had an analytical answer to every question about the business,” Tennenbaum said in a Planning Aces podcast. “They were so dialed in and had such a deep understanding in numbers. It was super impressive.”

Tennenbaum said he’s been trying to replicate that kind of analytical capability at Avalara. “I’ve been painting that picture to our team,” he said. “setting that as a goal to what we want to develop into. It’s a super exciting mission that can take finance to a point of being a partner in the business.”

More data, better results

The kind of analysis FP&A teams provide has long been a part of the finance function. What’s different today is the amount of data teams have to work with and the sophistication of the tools they have to process and draw conclusions from that data, said Steve Player, who co-hosts the podcast with Jack Sweeney of the CFO Thought Leader podcast.

“This has been going on in business for a long time, but today we have a cheaper and easier way to see things,” he said. “The data is there; you just have to access it and make it useful information.”

An FP&A team's job isn't concretely defined, but many finance leaders will agree the function has changed over the years. Previously, the team was meant to help forecast and then measure performance against budget. At the current rate of spending, for example, is marketing or sales staying within budget or is it spending more than planned? 

Today, by many measures, the best practice is to make FP&A part of, or at least a partner to, the organization’s operational teams — in essence, become like Slack’s BizOps team — so analysts can understand what drives that function area and then devise ways to track, and then improve, performance against that measure — ideally on an almost real-time basis rather than wait for monthly, quarterly or annual reports.

“If you’re really good, you can know how to dollarize any one of those metrics, so you’ll be able to predict what the month and the quarter and the year are going to be simply because you’re watching it happen,” said Player, a budgeting and planning consultant.

The goal is to identify levers in each function area that drives that part of the organization’s overall success, put a dollar amount to the levers so leadership can know how much spend will result in how much improved performance, and then course-correct as the metrics rise or fall. 

“What you really want to watch is, how are our plans coming?” Player said. “Are we getting people hired that we need? Are we getting them trained? Are they making the sales calls they need to? Is the sales campaign going the way we had hoped? You start working on improving the operation because the operation delivers the financial result. That frees the leader up to keep looking at the big picture, and have Plans B and C ready.”

Margin of error

In some ways, FP&A teams in private companies have an edge over those in public companies, because they can find ways to measure business drivers and get a clear picture of how well function areas are performing without having analysts, investors and regulators peering over their shoulder. 

“This is where you get into the great debate between publicly held companies and privately held companies,” Player said. 

Especially in high-flying tech sectors, when a company goes public, it’s expected to beat its forecasted performance in its first two years and can get slammed if it doesn’t.

“Do these guys really know what they’re doing?” he said. “How well do they really know what’s driving their business? How much landing room do they have? How much margin of error do they have to hit those numbers? Accounting has a lot of estimates, lots of things that aren’t as precise as some people might think.”

Its not unusual for finance leaders to maintain an informal analysis separate from the company's official forecast to test assumptions without confusing the external story. That external story tends to err on the conservative side — under-promise and over-deliver. 

Brad Kinnish, CFO of business internet connectivity provider Aryaka and a former investment banker, said a company going public has two constituencies whose needs it must meet, and the planning team must keep them both in mind when identifying drivers, how to measure them, and how to tweak them as performance data come in. 

The first is the investment community, which must feel confident about the company it’s being asked to put money into, and the second is the company leadership, which must be clear-eyed about whether the business model is capable of succeeding.

“Part of what [the CFO and FP&A team] are trying to figure out is, is this a realistic two-year projection?” said Kinnish. “Are they going to be able to meet and beat [projections], because in many parts of the market, particularly in the software area, the expectation from investors is that you’ll come out and you’ll have a baseline two-year projection and that each of the first three quarters you’re public you’re not only going to meet, but beat, your numbers and then you’re going to raise your forecast. So, that’s part of what you’re evaluating. Does that FP&A team and CFO know enough? Do they understand their projections and business well enough to play out those forecasts and meet and beat, because you want the company to do well when it’s out and publicly launched.”

Different sectors, same needs

Although expectations are high for companies in the tech sector, brick-and-mortar companies, including classic retailers like Banana Republic and Gap, rely on their FP&A teams in the same way to identify, measure, and tweak their business drivers. The difference between these kinds of businesses and those that are more tech or ecommerce focused is the nature of the drivers. 

“From an FP&A structure standpoint, [they’re] very similar across the board,” said Waifa Chau, CFO of developer API platform company Nyla and a former FP&A executive at Banana Republic, Gap and the ecommerce arm of Walmart. 

In all cases, members of the planning team would partner with business operations — merchandising, marketing, sales, operations — and share their data and analyses with a corporate FP&A team that would combine everything into company-wide measures. 

“You would have a corporate FP&A, a group that rolls everything up, a consolidation of the overarching,” Chau said. “You definitely need someone who is almost part of the marketing team or part of the merchandising team so they’re really understanding the intricacies and the ins and outs of those areas, those functions, and how they relate to the P&L and the numbers from a forecasting standpoint.”

The ecommerce operation at Walmart relied on FP&A in the same way as the brick-and-mortar stores, but the levers that were available to tweak operations based on the data were different. Instead of in-store inventory, there were warehouses and delivery mechanisms, for example. 

“With ecommerce, we look at [more than] just gross margins,” he said. “That’s what you would look at from a brick-and-mortar retailer, so there are nuances.”

Bottom line, no matter a company's industry, CFOs can partner best with others in the C-suite by having an FP&A team that combines a financial mindset with an understanding of the drivers in each operational unit so analysts can help identify, measure and tweak performance drivers that make a material difference to the organization's growth. 

“Not only can you look at the decomposition [of the data], you can put dollar amounts on each one of those [tweaks],” Player said. “So, on a cross-sell, how much can I afford to spend to make that cross-sell? If I know how much more margin it’s going to give me, it becomes easier to figure out what I can invest to make that happen or make that decline rate slow down. It’s the deep mechanics within the system to understand and work with operational leaders on what the company can do to change this.”