by Jon Repka
This is the final installment of our four part series on Why Outsource…? This article will look at the last of the four outsourcing options available at Paro: financial planning and analysis (FP&A). As with the other three, there are some similarities in the reasons for outsourcing, but outsourcing FP&A has its own traits and warrants its own article.
The Roles of FP&A
FP&A is crucial to every business’s future, as every business must understand where it came from, its current state, and its most likely paths forward. FP&A analyzes the all-important cash flow to ensure the company can continue on its current path, predicts the probable success of various paths or projects, and considers all the numerous variables that affect the company, like economic, market, and business conditions.
FP&A personnel build financial models and employ metrics to determine if the company’s state is positive or negative. Depending on that result, FP&A can then determine which projects are most likely to succeed, including expected values of investments in each project. Long, slow establishment in one market might be ideal, but for a company on less-than-ideal footing, focusing on short-term success in a critical market might be the only option.
FP&A helps management make informed decisions to safeguard the company’s survival, assets, and even its employees (since bankrupt companies cannot employ anyone). This informing usually stems from FP&A professionals’ interpretations of the data and translation into less technical terms and subsequent management actions.
Why Maintain an FP&A Department
Some businesses, especially SMBs, might have strategic plans in place for expansion and don’t see the need for FP&A departments. However, the economic landscape is always changing, and businesses that fail to understand changes early and adapt will almost certainly struggle in the future. Keeping workers on the FP&A payroll will ensure the business will be aware of changes, react agilely to those changes, and generally shift its strategy according to the most up-to-date, relevant factors. Furthermore, cash flow problems are a major concern for businesses, because they need to constantly be monitored and safeguarded—FP&A departments work to ensure no surprises arise from cash flow problems.
For businesses on the fence about creating an FP&A department at all, it is important to consider the complexity inherent in model building and the interpretation of the results. As businesses grow, financial complexity will rapidly multiply, and haphazardly making investments and financial decisions without the proper care can lead to cash flow problems and eventual bankruptcy.
The reasons for outsourcing are myriad, including previously gained expertise and the reduction of the financial burden stemming from full-time staff. Some software licensing may come along with the package, and industry best practices are likely to be passed on to the hiring company.
The strongest reason to outsource might be previously gained expertise. A highly qualified, experienced FP&A freelancer will have worked with many companies and understand which models and assumptions best fit the business or problem at hand. If none of those models or assumptions apply, they can use their honed intuition and past successes to build an entirely new model for the hiring company.
That means previous experience and what was most successful at other companies will diffuse to the hiring company. The freelancer will consider past successes and failures when making decisions, benefiting the current company with what worked best while filtering out failing approaches. For freelancers that take on more than one project at a time, it might even mean concurrently running best practices across an entire industry, benefiting each customer by having the strongest current understanding possible.
Technology is essential to modern business, and outsourced staff will likely have their own technology for building models, calculating metrics, and presenting the results. This could be as small as using open-source software, so the hiring company does not need to purchase expensive enterprise-level licenses, to as big as being a member of a large outsourcing company that offers its freelancers access to the latest paid technology.
Moreover, computer programming and IT system knowledge has become essential for FP&A operations. For that reason, an outsourced FP&A employee could assist the growing SMB in implementing their own, in-house systems. In-house systems give the company more control over its data, regardless of whether an internal or external employee is using it.
Leaner In-House Staff
Due to the highly technical nature of FP&A, it is unlikely any single person in the organization can perform FP&A duties in addition to another central role. It may be possible to have a tiny team, with some people doubling as AP or AR staff and creative, management, or other roles. However, the barrier to entry for FP&A is significantly higher in the background knowledge realm, especially on the technical side (payroll might have higher background requirements for legal and taxation issues).
This is especially relevant to one-off projects and analyses. If a company wants to start a new project but isn’t convinced of its value compared with the investment, bringing in an outsourced FP&A member is an excellent way to determine the outcomes of that investment. There is no need to have a full-time staff member for a single, one-time analysis. Outsourcing ensures that existing employees are not overwhelmed with a task that is outside their area of expertise.
Finally, a company may have an in-house CFO but the CFO is too busy to take on smaller tasks or projections. In that case, the CFO might need part-time assistance, another point where outsourcing makes sense: on-demand, one-off tasks that require less knowledge of the company but where existing employees lack experience and know-how.
Unlike the others in this series, FP&A has two timeframes: continuous and one-time. The others are all continuously needed, and FP&A can also be continuously needed for monitoring cash flows and, in bigger companies, for the high number of projects and forecasts. For seismic changes like M&A, or single project analyses like whether the investment to enter a certain market is worthwhile, a one-time use strategy is acceptable. Both aspects can be outsourced, or just one at a time.
All in all, all services that can be outsourced benefit the hiring company from gained experience, expertise, reduced pressure on internal staff, and technical know-how. Each type also presents its own unique benefits, such as an understanding of the regulatory landscape for payroll, current customer service practices with AP and AR, and an up-to-date understanding of economic and business conditions of FP&A.
The size, position, and strength of a company does not bar it from hiring freelancers, and indeed many companies outsource all kinds of traditionally in-house services. The biggest to the smallest business can benefit from outsourcing, and every business deserves to inform itself of the benefits.