Intelligent Finance Operations – How Finance Observability is Shaping the FinOps of Tomorrow
Most CFOs today run into the same problem – too much data and insufficient time. This can be incredibly frustrating in an environment that changes faster than London weather. As soon as insights about past performance are put into action, it is already too late!
Traditional finance reporting involves a lot of wasted time – going through all data points on your spreadsheet tools, reviewing final analysis for accuracy, raising questions on business performance with different teams, waiting on their responses, and finally creating leadership reports (generally as presentations).
Based on a poll conducted by APQC of over 430 FP&A professionals, 25% of FP&A time is spent on performing value-added analysis, with the remaining three-quarters spent either gathering data (42%) or administering processes (33%).1
This is where Finance Observability tools change the game. Finance observability focuses on the idea – monitoring business-critical functions closely and reporting the deviations for quick action. These insights are prioritized by their impact on business for resolution. The 80:20 rule of thumb suggests that 80% of your overall business initiatives contribute only 20% to the P&L. Based on my personal experience, this rule does not seem too far off.
This makes prioritizing high-value areas for analysis, creating workflows that trigger major deviations, and reporting insights in a manner that can be actioned upon critical activities
Finance Observability tools revolutionize Financial Analysis by enabling FP&A teams to focus their energy on high-value areas and freeing up time for Business Partnering. Here are some examples.
1. Automated Flux Reporting
Flux analysis, a measure fluctuations in account balances period over period, is the starting point for most period-end analytics. Flux reports enable finance to analyze the deviation between current and previous period data to identify significant variations. This is generally done at an account level to ensure last-leaf level analysis.
Flux reports are generally very detailed and specific when explaining the reason for deviations. Consider the below example :
The merchandise margin rate increased due to successful assortment optimization and better sales penetration of private-label items. Private label penetration increased to 19% in 2022 from 18% in 2021.
Insights like these are needed regularly for leadership to gain a deep understanding of business performance.
Finance Observability seeks to :
- Automate Variance Calculations
- Explain the relationship between accounts
- Report and collaborate on insights via a digital medium (no more emails!)
On a macro level, a Simple Price, Gross Margin and Unit Variance Analysis can help summarize key variances to the accounts impacting your gross margin.
2. Mission Critical Exception Reports
While Flux reports capturing the significant deviations in business performance, Exception reports explain the deviations from standard practices and rules.
Exception reports allow businesses to collect data and information outside the norm, alerting associates to potential problems so they can take action.
These reports could range from a list of sale transactions below threshold margins to payments made to vendors without proper approvals. Given the variety and criticality of these reports, finance functions become the fiduciary owners of producing them.
Finance observability aims at:
- Identifying and creating a rule-based workflow in systems
- System logging and tracking all critical business events (sales, expenses, etc.)
- Automated reporting of ‘exceptions.’
Finance observability focuses on creating a strong exception reporting framework helping finance understand the impact and risks of such exceptions and internal process improvement.
Kevin Morris expands on this concept using sales analysis as an example in his article, Sales Analysis: The Incredible Opportunity For Finance!
3. Intelligent Early Warning Systems (EWS)
Early warning systems are tools, functions, and processes that let you identify leading indicators of change in your business environment and assess the impact those changes might have on its overall performance so that you can modify plans quickly to keep it running smoothly.
The key components of EWS in FP&A include:
- Predictive dashboards.
- Frequent scenario modeling and analysis.
- Detailed reporting cadences with financial and operational data.
Leveraging the power of EWS requires sophisticated systems which are fast and reliable. If your finance team still relies on Excel spreadsheets to manage its data, manual data collection makes it difficult to aggregate the information needed for reporting. Automating data sources and workflows also creates a strong ground for leveraging AI and ML-related tools.
If you can’t connect and correlate your planning templates to predictive KPI dashboards, it will be difficult for you to identify trends that could impact your business.
With their modular data structures, centralized databases, and system-driven scenario analytics, Finance Observability tools can provide an effective early warning solution to meet your business needs.
According to a prominent 2022 Industry Benchmark Report covering 350 CFOs, 56% of Finance Teams Don’t Have an Early Warning System.
Olga Rudakova shares idea on how to do this in here piece, Why Dashboards are a Powerful Tool in FP&A
Conclusion
Finance observability tools help growth focused finance teams be more productive and equip teams with advanced capabilities to manage business better. Centralized and standardized data structures allow businesses to better exploit data for measuring business performance and predicting and measuring potential risks.
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