Financial planning and analysis (FP&A) which is an important function within the Finance area, is responsible for providing the organisation with the insights they need to make operational, financial, and strategic decisions. Specifically, the main objective of FP&A is to transform the company’s business performance using digital, data and analytics. However, one key component that acts as a backbone for FP&A performance is the Key Performance Indicator (KPI).

What exactly is a KPI? 

Why are the KPIs an important component in FP&A? What can organisations do to design and build a robust KPI framework and deliver improved business performance?

Let us first start by understanding the KPIs. A KPI is a quantifiable measure used to evaluate the success of the FP&A organisation in meeting its performance objectives. A good KPI framework covers the leading (predictive and prescriptive insights) and lagging (descriptive insights) metrics. Descriptive insights help to answer the question “what happened?”, predictive insights answer the question of “what will happen?” and prescriptive insights answer the question “what should be done?” Basically, if a business entity including the FP&A function is using KPIs to measure its performance, those KPIs typically drive business behaviour, results, and the organisation culture.

What is the business impact of KPIs? Why should the FP&A team pursue KPIs?  

In other words, strong FP&A performance management is based on the fundamental principle that “what gets measured gets done.” KPIs provide the visibility to measure and manage business performance.  Aberdeen Group examined the use of KPIs in more than 350 enterprises and found that the best-in-class companies derive performance improvements, including of 10 per cent increase in the time-to-decision making; 9 per cent increase in other  profitability and revenue  growth; and customer performance improvements of 9 per cent in both net-new customers gained and customer satisfaction.

How can an FP&A organisation design and build a robust KPI framework? 

There is no one-size-fits-all when it comes to choosing the “right” KPIs for your business. Building the FP&A KPIs framework that is specific to your organisation starts by formulating powerful questions. Questions are important as they provide the context to the insights or KPIs. One important factor to consider while formulating good questions is the framing bias. The framing bias is a cognitive bias that impacts decision making based on the way the question is formulated. Given that we are all influenced by the way the question is presented. For example, take two vendors whose quality of delivery needs to be assessed. One vendor performance says, “10 per cent defects” and another says, “90 per cent defect-free”. The framing effect will lead to us picking the second option because human beings tend to value options that are framed positively. Hence having the KPI definition i.e., “defect-free” or “defect prone” is very important as it impacts the data selected and ultimately the decisions made from the KPIs.

So how can an FP&A function implement a good KPI framework?  First and foremost, the questions in formulating the KPIs should be tied to the strategic objectives of the business – the value drivers.  Once the right questions are selected for the KPIs, three foundational elements discussed below should be factored in building a strong FP&A KPI framework. FP&A teams should be very careful in selecting KPIs because the wrong KPIs can potentially harm the organisation.

Reliable Insights. While there is a natural inclination in every business and in every individual to know more, one needs to evaluate how these insights from the KPIs will be used for making decisions. Albert Einstein once said, “not everything that can be counted, counts.” However, trying to analyse all the data to derive insights might be expensive and time-consuming. Instead, try forming a hypothesis or a logical proposition as the hypothesis will provide you with an indicator of what data to acquire whilst helping you to stay focused. Once a good hypothesis is formulated, design the KPI model, by asking these important questions for an accurate and deep understanding. Why do you want to know – articulate the root cause? How much do you want to know – the scope? What is the value of knowing and not knowing – the strategy to convert insights into actions? This begs the question on the recommended number of KPIs in the framework. Cognitive science researchers believe that human beings can normally cope with just five to nine pieces of information at a time and this figure is popularly known as the “Magic Number”. This means 7 +/- 2 KPIs (leading and lagging) is the recommended count of KPIs in the KPI framework or FP&A dashboard.

Accountability. While designing and implementing the KPI framework is complex, more challenging than that is realising the change; integrating the insights from the KPIs into a business’s operating model is very difficult. While change is inevitable, it can often be uncomfortable. How effectively can we use these insights and bring change in operations, compliance and decision making? How can KPIs be an active part of FP&A operations?  Successful change initiatives are often associated to accountability. This means having an accountable FP&A leader who is close to the KPI being tracked for performance. For example, if the KPI is on “Days Payable Outstanding (DPO)” to improve the cash conversion cycle (CCC), it is advisable to have the Account Payable (AP) Manger track and improve the DPO KPI.

Quality Data. Finally, reliable KPIs are dependent on quality data given that most businesses are plagued with quality data. Research published in Harvard Business Review says that just 3% of the data in a business enterprise meet data quality standards. But how do you define quality data? Data is considered to be of good quality if they are fit for use in operations, compliance, and decision making. In this backdrop, while quality data in business is contextual (based on time, location, data consumers, business environment, and so on) and multidimensional (such as accuracy, correctness, completeness, timeliness, and more), defining the context and selecting the pertinent data quality dimensions will help decision-makers trust the insights offered to them thru the KPIs and ultimately help them make better decisions.

Summary 

While many FP&A teams do a great job in identifying the consumers of the insights coming from the KPIs, unfortunately, the goals of the insight consumers are often not very clearly defined and do not align with the larger objectives of the enterprise. In January of 2019, research advisory firm Gartner reported that 80% of data analytics insights did not deliver business outcomes. One effective solution is formulating a good objective statement by asking questions, formulating a hypothesis, and defining the performance KPI framework based on the three key elements discussed above. Management guru Peter Drucker once said – “You cannot manage what you cannot measure”. In other words, insights from KPIs offer FP&A performance visibility, and visibility provides business value.

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A new way to budget and forecast for shift based employees

Over the last few years we have been working with a number of Aged/Disability care organisations to improve their budgeting and forecasting processes specifically around staff costs which is many cases accounts for 70-80% of total expenses.

There are many roster tools available in the market however they are mainly focussed on coverage rather than cost and having the ability to compare costs with funding and make adjustments to suit is vital.   

The importance of having an efficient and effective budget process and the ability to quickly run ‘what-if’ analysis and test multiple scenarios, has been brought into sharp focus for many businesses as a result of the uncertainty that exists as a fallout of the pandemic. This is especially important for businesses with shift based employees.

The majority of businesses that approach us about improving their budget and forecast process had been running their budgets in spreadsheets, and were finding the process very slow and time consuming. 

One of the most common issues with spreadsheet based budget and forecast models is that they are all individual spreadsheets which are commonly sent out to the relevant business managers for completion. These spreadsheets are very rarely linked back to any form of master or global input.

The more uncertainty there is, the more flexibility and speed you need

In the normal annual budget and quarterly (or more frequent) re-forecast, this de-centralisation of the global inputs doesn’t pose much of an issue. The budget administrator can take the time to ensure the global inputs are correct, wait for the completed budget to be returned, and then consolidate and report. 

In times of significant uncertainty, however, where conditions are changing dramatically between re-forecast cycles, more and more businesses are finding the lack of flexibility and speed in an Excel budget process cumbersome and inefficient, which can cost a business financially in the long run.

We’ve noticed particular interest for a faster and more flexible alternative from industries with a large number of shift-based employees (including community services, aged care and NDIS providers). These types of organisations are diverse and specialised in the services they provide, their employee mix, and in the way their employees are remunerated. On top of this, they often have reliance on government plans and fundings, which change regularly. 

For businesses where the major cost is staff, the spreadsheet approach is often not appropriate. The greater the percentage of total costs attributed to labour costs, the more importance should be placed on them. When the majority of labour costs are attributable to shift employees, managers can find themselves in a difficult spot if they’re relying on a spreadsheet model.

The complexities of shift based employees

Shift based employees often have more than 4 different effective rates of pay once shift loadings are taken into account. On top of that, there are often different allowances applicable and different coverages required for annual leave and public holidays.  Couple this with the fact that employees in these industries are often on Government awards, SCHADS or EBAs which have different levels and pay grades that may increment on an annual basis, and you have a complex labour cost calculation.

Staffing requirements, coverage and availability in these industries can change quickly in ‘normal’ times, so the ability to re-forecast these changes quickly and easily is now more important than ever. The ability to quickly adjust budgets and forecasts to reflect the latest shift and roster changes, to fill the gaps in staff shortages with agency staff who have different cost rates and allowances, is of paramount importance.

Many organisations, both for-profit and not-for-profit/for-purpose, currently rely on spreadsheet calculations. Spreadsheets, while easy to change for individual budgets and employees, have limitations when it comes to shift cost calculations. Often, organisations have to budget with ‘worst case’ costs as they are unable to calculate an accurate cost, and are unable to change global assumptions/rates/loadings and have these quickly applied to the underlying calculations.

So what’s the solution for better budgeting labour costs for shift based employees?

At bi5 Solutions, we’ve worked with organisations to provide a more efficient and robust budget process, with incorporated shift calculators providing faster and more accurate budget calculations and updates. Unlike spreadsheets, our solutions are able to easily calculate shift/labour costs by individual employees, or positions, by calendar day, allowing for more accurate weekend and public holiday loading application and cost calculation. The manager can easily adjust weekly or fortnightly shifts by individual employee or position, and have these costs instantly fed back into the consolidated budgets. They are now able to use employees’ exact cost rates, and apply annual pay grade/level increments accurately. This removes the need for the ‘worst case’ labour cost budgets that are often used due to the difficulty and complexity in doing a more accurate calculation in Excel.

In the current environment of uncertainty, planning and re-calculating to respond to staff absentees can happen much more quickly, allowing organisations to budget for agency staff with higher rates. For industries that are impacted by changes in government funding, or need to generate a budget/estimate quickly and accurately, these solutions allow organisations to lessen the risk of making the wrong calculation and wrong decision. 

Build a custom budgeting and forecasting solution on your chosen platform

Utilising our preferred EPM platforms (BOARD, Jedox) we can deliver a Budgeting and Forecasting solution that can integrate with your existing systems (ERP, Roster tools, payroll, HR, PowerBI…etc) to bring through data such as employee details, pay rates, shift details and actual financials, to further simplify the budget process. We work closely with managers and admin to ensure that it’s built in the way they need for their particular requirements. We can usually get budgeting and forecasting solutions up and running in the order of 1-2 months.  

Overall, with a budgeting and forecasting solution the ability to adjust/reforecast budgets more regularly and effectively is significantly improved, providing for faster planning and better financial management.

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