Almost every management pack or financial performance report I have ever seen contains columns for actuals, a plan/budget/forecast (or all three), and a variance or variances. However, the value is not in the numbers and calculation, it is in the analysis and the storytelling.
This article draws on personal experiences to illustrate how a seemingly simple concept can create so many problems.
Where is the storytelling?
The extreme situation, which we still see far too often for my liking, is that there is no storytelling or narrative explaining the numbers. This is commonly at the behest of the c-level executive consumers who profess to understand their business to the extent that they do not need any explanation.
We often see this situation in privately owned organisations where senior executives have been in-situ for many years and run the business on ‘gut-feel’. I would say this is a short-sighted approach that completely ignores the risk attached to it. What if gutfeel no longer works, as illustrated during the recent pandemic disruption, or senior executives move on? This would leave the organisation lacking in information and, potentially, the skills within the finance team to step up to the plate.
Learn more about the skills you need within a finance team, here!
The most common situation is one that is discussed over-and-over again in forums. This is that so much time is spent on putting the numbers together that there is little time left for analysis and storytelling. This is the most frustrating scenario because finance has the skills but does not have time to use them to add value.
The cause of time deficiency can be due to the need to automate processes, improving productivity and thus freeing up the time for storytelling. However, if this problem is addressed and productivity is improved, the CFO and the finance team need to fight to retain this ‘extra time’ within the close cycle. Too often we see any time gains lost by a tightening of the close cycle. While a quicker close has benefits, the value that can be added by storytelling still trumps this.
What is the story we are telling?
For me, this is the most frustrating aspect of variances and one that goes back to my days as a financial controller in the 90’s. And, little has changed, as illustrated by a recent discussion I had with someone who works in the FP&A team of a large organisation.
The point of storytelling is that it needs to tell you something new. It is pointless repeating the same story month after month. Let us take 2020 as an extreme example. An organisation has a 2020 budget, created in the latter part of 2019, based on what was known at the time. And then the pandemic hits, the world changes and a new plan is put in place. The FP&A team in question already has a huge job to re-plan and keep things on track. What are they asked to do? To include the original budget and new plan in the management reports and provide a running narrative on variances to actual. The outcome? They spend hours every month explaining actual variances to a budget that is no longer applicable, repeating the same narrative over-and-over again.
Want to read more about FP&A, we recommend these articles!
It is a pointless exercise and, more importantly, dilutes the story being told. As part of the adoption of the new plan, there should have been an exercise to compare the budget to the plan and the variances analysed. Once this exercise is complete, a line should be drawn under this and variances are now to the current plan. This is the process that should be repeated if continuous (or rolling) planning is adopted. The same concept should apply to profit bridges and the like.
I have heard the argument before that the reason that budget variance is continued is for external stakeholder purposes. I have yet to see any justification for this. There are disclosure obligations for quoted companies (“Key UK Listing Rule obligations”) which stipulate the need to update the market of “a change in financial condition, performance or expectation of performance if the change would be likely to lead to a substantial share price movement”. In this respect, if a budget is out of date and is replaced with a new plan, the difference should be explained to the market who then forget about the budget and concentrate on the future performance against this disclosure. If the market does this, why do we not do this internally?
Stick your head above the parapet!
We are getting to the point where the finance team need to stand-up and be counted. If we know something is wrong, does not make sense and is causing a problem, we need to be prepared to argue the case for change. If we do not, we will be stuck in a cycle of repeats, doing what we have always done and not developing the skills we want to display.
Be brave, select the right variance to analyse and tell a great story. Simples!