Learn more about how an integrated, real-time operational and financial organizational model can improve financial planning and analysis for manufacturing.
COVID-19 has severely challenged and exposed gaping weaknesses in financial planning and analysis (FP&A) for manufacturing. Forecasts and models based on traditional historical data failed in the face of a massive and unique disruption. Finance and accounting departments rapidly retreated and focused on forecasting cash to support business survival—critically important, but could more have been done? What lessons should we learn about how the FP&A function must improve for the future?
The most important lesson is the need for an integrated, very near real-time operational and financial model of the organization. This model needs to be causal and reflect the reality of resources and processes for the entire organization, not just production, and not just for financial reporting. COVID-19 affected every part of the organization. An important element of causal modeling is the nature or responsiveness of resource use (and the related cost flows) as fixed and proportional (or any other relationship). These definitions are contentious because they are often misunderstood and mis-applied; done correctly they provide deep insight into marginal costing as well as profitability, and facilitate cash flow analytics. Some would argue that COVID-19 made all costs proportional, but that is an incorrect characterization. COVID-19 made many costs avoidable (both fixed and proportional costs) that had never been considered avoidable before. The characteristics of fixed and proportional relate resource use and cost to output whether the objective of the work is regulatory compliance, making payments, or producing a product. Manufacturing has long used real-time operational systems for production, but finance is generally far from integrating financial information with operational systems in real time. The technologies and methodologies are available, but the finance and accounting profession have not embraced the importance of managerial costing knowledge for internal decision support.