One of the most frustrating parts of handling finance inside a company is the need to bridge actual, historical numbers with future, forecast numbers. The divide between the two sides of this is so fundamental, that we structure most finance teams around this divide. This makes sense, but it is also such established practice, that it needs to be rethought.
One of the…joys… of working on Wall Street is the amount of financial modeling you get to do. For people who like this sort of thing (raising hand) the Street is the place to be. We know many senior finance professionals who burdened by some task look longingly at the junior analyst who get to spend the day playing around in Excel. Chances are the junior analyst working 30 hours straight does not quite see it that way, but youth is wasted on the young. Building a model can be fun in that it allows for imagination in optimizing around constraints. This is probably similar to how many coders feel about starting a new application, but asking the same developer how they feel about fixing already-written code will illicit a completely opposite reaction.
The same is true in financial modeling. Most of the work of the finance team is keeping track of things – accounting both literally and figuratively. This is a messy, time consuming process. As much as many high-growth companies tout their AI expertise and sophisticated operating algorithms, a surprising amount of work still gets done in duct-tape-and-chewing-gum excel spreadsheets. Someone has to keep track of all the bills and payroll systems and bank accounts. Someone else has to keep track of revenue coming in the door. And spare a thought for the person who has to keep track of all the contractual commitments, often years after the contract was signed. This is messy, in the mud work. Crucial, but not fun.
Far less often do companies need someone need to build a greenfield model – a new product, a new project, a new business. Again, this makes sense, all companies operate with finite resources and cannot constantly be building something new.
Then the CEO has a new idea, something shiny and attractive and urgently needing to be chased. And even without the hyperactive CEO, companies need forecasts – all companies need internal goals and ways to measure them and public companies need to issue guidance to the Street. So someone gets to build the model, but it ends up being a small part of the Finance labor force with a very small amount of time dedicated to it.
The hardest part is then the process of bridging the actuals and the forecast. In all the dozens of companies we have worked with and hundreds we have interacted with at other levels, we have never found a company that has a smooth, automated process for this. There is no seamless bridge. Some of this disconnect is just the result of reality being different than forecast, but that is a small hassle. The far larger problem is the way that the accountants keep track of actual numbers is always different than the way the forecast is built. The actuals have all sorts of corner cases, exceptions and Post-It notes taped to the Payables Manager’s monitor. To give an example, we recently worked with an enterprise SaaS company that was building a very slick, automated process for onboarding customers. It was easy to forecast (they even used statistics!), it threw out all the KPIs and metrics, it resonated with investors, it even made the CFO smile. But of course, the sales model only tracked 40% of revenue, most of their business came from one-off negotiations and complicated multi-year contracts. This process brought even the people building the forecasting model close to tears.
Once companies reach a certain size they start to build Financial Planning and Analysis (FP&A) teams. And while in theory their job is to build all the forecasting models the executives need, in practice, these teams end up spending a lot (the majority?) of their time on reconciling the future and the past. This is both necessary and unfortunate. Necessary because someone has to do it. Unfortunate because too often the FP&A function ends up spending all their time looking backwards when they would be able to provide a lot more value if they were looking forward. Companies become what they measure, and if the people holding the measuring tape are always looking to the past it is easy to lose sight of the future.