The Relationship Between FP&A and Data

In this article, I will share insights into the relationship between the data recorded in a company (mainly accounting data) and the impact it can have on the quality of Financial Planning and Analysis (FP&A). I will also share my thoughts on how bad data can lead to inaccurate FP&A reports, which in turn result in poor recommendations and misalignment with a business’ strategic goals.

What does FP&A means?

Firstly, it’s important to briefly explain what FP&A means in simple terms.

Imagine Mr. X runs an online business on Amazon, selling toys. Mr. X, if serious with his business, would hire an accountant to record the day-to-day transactions of the business. This is important for several reasons, with tax calculations being one of the primary drivers, among other things. The act of recording what has already happened in the business (PAST) and what is happening now (PRESENT) is what accounting does. Think of it as the business’ diary — except instead of secrets, it’s full of numbers.

Now, imagine Mr. X’s business has grown to the point where he has a significant amount of free cash sitting in the bank, thousands of units are being sold monthly, and scaling up without launching new products is becoming a challenge. Mr. X wants to know:

• How much can the business afford to invest in new products?

• If he orders a new product, how many units should he order?

• What type of product should he invest in to maximize profitability?

All these questions are future-focused, far beyond the scope of accounting. This is where FP&A professionals comes into play, turning numbers into actionable insights, like the Sherlock Holmes of the finance world.

The Connection Between Accounting Systems and FP&A Quality

Let’s continue with Mr. X’s business as an example. Imagine that the accounting system he uses does not capture key data points, such as:

• What category of toys sells the most? Is it toys for 0 to 3-year-olds or 3 to 6-year-olds?

• Is there seasonality in toy sales?

• Do creative toys sell more than stuffed toys?

• What are the profit margins for each toy category?

If I were advising Mr. X on what category of toys to invest in for future growth, I would need answers to these questions and more to perform a meaningful analysis. Without these details, my advice would lack depth, and Mr. X’s business could miss out on opportunities or make suboptimal decisions. It’s like trying to navigate a maze blindfolded — possible, but not pretty.

The issue lies in the fact that the accounting system was not designed to capture this critical information during data entry or the accountants are not capturing the data that is necessary. As a result, the quality of FP&A insights in this case would be limited. The old adage holds true: garbage in, garbage out.

There is a fundamental relationship between the quality of data being captured in an organization’s ERP system and its ability to look ahead and make informed decisions. Neglecting this is akin to building a skyscraper on shaky ground — sooner or later, it’s bound to collapse.

Common Mistakes Businesses Make

In my experience, business owners and CEOs often expect actionable and valuable recommendations from their FP&A teams while paying little attention to the state of their accounting system. They overlook the fact that high-quality FP&A outputs are directly tied to the capabilities of their accounting systems. Without accurate and detailed data, even the most skilled FP&A professionals will struggle to deliver meaningful insights. Imagine asking a Michelin-star chef to whip up a meal using just ketchup and crackers — the results won’t impress.

The Role of FP&A Professionals in Enhancing Data Quality

FP&A managers are uniquely positioned to provide recommendations on enhancing data recording practices. They understand the type of dimensions and metrics that would be most useful for conducting high-value analyses. For example, they can:

• Advise on setting up data capture for product categories, regional sales, or seasonality.

• Highlight gaps in the current ERP system & processes that hinder effective analysis.

• Collaborate with IT and operations teams to implement improvements in data quality directly based on the key matrix of KPIs for the business.

Why It Matters

The future profitability of a business is tied to the decisions taken today, informed strategic decisions are tied to the quality of its FP&A reports & recommendations. And the quality of those reports depends on the accounting system’s ability to capture relevant, accurate, and detailed data. A well-designed ERP or accounting system & processes are the foundation for actionable insights and strategic decision-making. Think of it as the steering wheel of a car — without it, you’re just rolling downhill and hoping for the best.

Final Thoughts

Any business owner who wants to get real value from their FP&A reports and sustainable growth must prioritize enhancing their accounting system and data recording practices. It’s not just about looking at past performance but ensuring that the data captured today can answer tomorrow’s critical questions.

The journey to better FP&A starts with clean, comprehensive, and well-structured data. By addressing these fundamentals, businesses can unlock the full potential of FP&A and make decisions that drive growth and profitability. Investing in data quality today will pay dividends in strategic clarity tomorrow. After all, when it comes to accounting data, it like a well-tended garden — it thrives when nurtured with care and attention.