Role of FP&A In Business Strategy

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As consumer demand evolves, you might be faced with the challenge of adapting to new trends or adopting new products and lines of business.

I learned meaningful lessons on the role of finance in business strategy to evaluate new opportunities and determine whether to jump on the bandwagon or let it pass.

Focusing only on the strategy piece is not sufficient for FP&A professionals, rather they need to understand how to integrate their financial expertise with strategic insights in order to come up with solid business recommendations.

In today's article, I would like to share 3 steps approach of 8020 consulting that I used in Finance (FP&A) function when putting together a strategy presentation for company’s top executives before getting the greenlight to go forward with the project.

1. Generating Insights Using Market Research & Study

2. Financial Modeling

3. Strategic Alignment

Let's explore each of these steps.

1). Generating Insights Using Market Research & Study

Whether you have an inkling on what your position is on the new idea, or you are in the process of determining where you stand, research can help define, reorient or reinforce your position.

Chances are either the specific idea you are considering has been executed by a different company, or something similar to it has. And more likely than not, it’s been attempted by your direct competitors. By analyzing past case studies, you can use your competitor’s strategy to your advantage.

For example, let’s say your company is considering entering a new market. If your competitor has already taken the leap, it offers a chance to study their every move and evaluate their success. If you can recognize patterns across the industry, you might discover unleveraged opportunities by the competition or learn your company is better suited for success due to unique synergies. You might even find your competitors are struggling to find their footing due to fundamental problems that any company would face, and avoid entering that market.

There is much information available... some of it free and some at a premium.

Following are some key sources of information that you can use to generate actionable insights and foresights.

• Company's annual and quarterly reports- which might answer questions like: Is the company pivoting to new strategy to counteract some low numbers ? or Is the company ramping up and pushing forward even stronger after reflecting significant growth?
• Monthly subscription to some industry-specific websites - here you might even be able to get your hands on some revenue data or user data by SKU.
• Articles and press coverage - this one is highly underrated method for conducting research that is Googling. Companies get a lot of press coverage, so you might find gems of information here.
• Benchmarks and consumer understanding - researching the market helps you determine benchmarks for success. Numerous reports are available for research that can provide market value for the industry and directional forecasts into where the industry is headed

These reports can provide details into what subcategories of products the consumers are more likely to purchase. You can apply this information to your company’s capabilities and offerings to set more meaningful goals. Perhaps the standard revenue model and projections don’t apply, or the market standard is exactly what you expected. In either case, knowledge and comparison are more productive shooting in the dark.

Furthermore, market research gives insight into arguably the most important player in the field: your consumer. Understanding customer response can help you determine your key demographics, project revenue flow, analyze marketing strategies and assess overall demand.

2). Financial Modeling

While financial modeling and strategizing should go hand-in-hand since each feeds the other, for the purpose of this article, I’m listing it as the second step.

After your market research, you should be informed enough to move into financial modeling. The benefit of financial work compared to purely creative work is that it is quantifiable and—at least to some degree—directionally accurate.

Build Or Buy?

One common fork companies reach is the build vs. buy dilemma. (This can be expanded to anything between joint venture to strategic partnership and more.) 

With a proper financial model, you can offer concrete numbers and projections to help with the decision-making process. Does it make sense to start the new line of business, enter a new market and launch a new product from scratch? Or would it be more strategic to buy a company that already does everything you are looking for, and integrate them into your own company?

To determine the cost of buying a company, you’d need to build a valuation model. There are plenty of resources available that offer insight into how to determine the value of a company, so I will leave that to you (to research!). Alternatively, to project how much a new line of business costs to develop, you would need to build a financial model from scratch using all the knowledge you gained from your market research.

Unlike a valuation model that can be based on the company’s financial statements and growth rates, you would need to build a bottom-up model based on assumptions you set for the business’s operations. This is where industry averages and timelines come into play. The assumptions should reflect the market and your competitors. For example:

• What will the product release cadence be?
• What is the average revenue for each product?
• Is there seasonality?
• What is the optimal quantity?
• When does the business become profitable?
• What will the new organizational chart look like, and how much will it cost?
• How much does marketing cost? Etc.

Most, if not all, of these questions should be answered in the research portion.

Some assumptions can reflect the value your current operations can provide. Are there any synergies and revenue boosts? Does the company have enough facilities, or will it need to buy/lease? Are there ways to cut costs with already-available resources?

It's advisable to built a model from scratch for the new line of business. Forecast each line item of your business’s P&L, including the cost of hiring a new team, development, marketing, facilities and other costs (OPEX & CAPEX) to your business. Revenue forecast need to include some successful product launches and some failures to get a realistic outlook on how the business would perform.

By putting all your assumptions together, you should be able to build a solid model that forecasts the profitability of the new line of business. And if you identify unquantifiable benefits, you can include them in the strategy with all the quantifiable advantages.

3). Strategic Alignment

“Strategy is simply resource allocation. When you strip away all the noise, that’s what it comes down to. Strategy means making clear cut choices about how to compete.” Jack Welch

As mentioned in the section above, strategizing and building financial models go hand-in-hand. The financial models should reflect the strategies under consideration. And many of the questions asked while building financial models are asked when illustrating the strategies.

Now that you’ve built multiple financial models, you can leverage sensitivity analysis and scenario analysis to evaluate which scenario is financially optimal for your company’s needs.

You might find your company desires some intangible benefits that may be harder to quantify accurately. For example, between the choice of a strategic partnership or an acquisition, the company might prefer having more ownership of the operations and go with an acquisition. However, if having a say in every single step isn’t a priority, perhaps a strategic partnership is the better option. These types of considerations are harder to quantify in a model, but they often carry a lot of weight in the decision-making process.

Clear Explanation And Presentation of The Strategy

A key aspect of strategy is to be able to represent all your research and financial modeling in an easily digestible way that depicts a narrative for your company. Here you need strong presentation and data storytelling skills as well in order to build holistic business stories using integrated approach.

The strategy is your proposed plan for the company to go from Point A to Point B, and why it’s the best path to take to stay competitive. As you might be thinking, it should be quantified in the financial models, so all that’s left is to put it into words and graphics. A strategy deck will often be presented in a certain structure that includes:

• Market research,
• Competitor case studies,
• Strategic perspectives and capability, benefits and synergies,
• The game plan (the strategy itself),
• Additional growth opportunities and
• The financials.

Each project’s presentation will differ based on needs, and all the research and thought put into the models need to be captured in the presentation.

Concluding Remarks

It must be noted that you can have the greatest strategy ever, but it will just be great ideas in a presentation until you execute. To conclude this article, here’s another quote from Jack Welch, “In real life, strategy is actually very straightforward. You pick a general direction and implement like hell.”

If you are aspiring to build best-in-class FP&A skills and capabilities (in yourself or your finance team) in order to take your finance career to the new heights, then you are highly recommended to explore and get globally recognized FP&A Certification from AFP-USA that is FPAC. You can opt for self-learning package as well as live training course from HOFT Academy being AFP authorized training provider. Reach out to us for more details.

If you are interested to develop and transform Integrated & Next Generation FP&A function in your organization with the right mindset, people, process, tools, systems, structure etc. with world-class FP&A Target Operating Model, then reach out to Hub of Finance Transformation Consulting and one of our expert consultants will get in touch with you.