FP&A and the power of proof in the tech industry

“I’ve been spending time with the procurement function to understand how to better allocate and optimize our investments.”

Joo Mi Kim

Some companies have been developed new efficiencies that could affect their future performance. “I’ve been spending time with the procurement function to understand how to better allocate and optimize our investments,” said Qualys CFO Joo Mi Kim during a recent Grant Thornton webcast. “We are performing an in-depth analysis of third-party vendors to identify cost savings by asking ourselves some questions. ‘What are the pros and cons of switching vendors?  What is the ROI over the next couple of years?’”  

To show investors the updated proof they demand, tech companies need to make sure their forecasts are current and data-driven. “You see a lot of tech companies re-forecasting on a quarterly basis,” Schulz said. “You need to show what information is actually underlying the forecast. Retain a repository of that information and the underlying assumptions that built the forecast, so that a third party can stress-test it.”

The underlying data is especially important as tech companies shift from projecting cuts and cost savings to growth. “Now that companies have gained operational efficiencies, they’re looking at where they can grow,” Schulz added. “It's not only how to control costs. It's showing projections for top-line growth at this point in time.”

To generate updated data-driven forecasts with efficiency, FP&A teams need dynamic tools. 

“It's important that you can pivot very quickly on your forecast, and you can make it dynamic.”

Lisa Heacock

Grant Thornton CFO Advisory Market Managing Partner

“It's important that you can pivot very quickly on your forecast, and you can make it dynamic,” emphasized Heacock. “You need to have a software tool, versus just a spreadsheet where there could be a lot of mistakes and errors.”

“Many FP&A departments end up forecasting through spreadsheets, and that's where you’re at a significant disadvantage,” Schulz pointed out. “That is additional lag time, when you're talking about doing refreshes, because you're having to aggregate information from disconnected sources. Try to bring together a solution that's automated, quick to refresh, connected to the other systems in your tech stack. Ultimately, that's where you really start to get an advantage.”

Dynamic solutions for FP&A don’t have to be part of a large enterprise investment. “Often, people immediately think of these large enterprise solutions,” Schulz said. “I'm not necessarily talking about a robust enterprise-wide build out — there's a whole suite of SaaS offerings out there to enable more automated solutions. These are FP&A tools where a company doesn't need to have a significant implementation, but it gets them moving out of that spreadsheet FP&A drudgery.”

“Ultimately, it's not necessarily the biggest and most known solution — it’s the one that scales with your organization appropriately,” Schulz added. “You have to look at the implementation time, the training requirements, and how much of a lift it is to actually use it and make it be functional. For mid-market tech companies, it's important to really assess the tool based on your scale and where you see yourself growing eventually.”

“It's really important to nail down the requirements — which is not entirely an IT function, it's also a business function,” Heacock said. “You need to understand the current and future strategy of the company, to make sure you set it up appropriately. What type of reporting and information do you need, to manage the business? What does the business structure look like? What are the segments? When selecting software, it’s important to select the best fit based on requirements  that will work “now” and in the future based on the growth strategy.”

The wrong solution can wind up being no solution at all. “I've seen it a lot of times — if you don't set it up well, people tend to go back to the spreadsheets,” Heacock said.

“Make sure that you're looking back to see: How well did I forecast? … or why was I off, so that I can make the forecast better in the future?”

Lisa Heacock

Grant Thornton CFO Advisory Market Managing Partner

A centralized FP&A solution can also help a tech company compare data trends over time and derive conclusive results. “Make sure that you're looking back to see: How well did I forecast? How did the forecast compare to actuals? How do actuals compare to the original budget, or why was I off, so that I can make the forecast better in the future?” Heacock said.

“If you have a smaller company, where the same people focused on closing the books are completing the FP&A function, they might spend all month closing the books,” Heacock said. “That leads to more issues, because there's not enough time for analysis.”

“That happens a lot, especially if a company uses spreadsheets for budgeting and forecasting — a lot of times they're not able to get through and actually do analysis, so they miss things. They're going to mis-forecast,” Heacock said. “If there's a dedicated team focused on analysis, even just comparing and analyzing different trends, that is key. It helps you build in better assumptions, so you have a better, more solid, forecast.”

In tech companies that are seeking capital, FP&A can be the core of a quality forecast. As tech companies move into the future and begin to look at IPO again, forecasts will meet even greater scrutiny.