When I worked at Pepsi as a FP&A Manager it was drilled into our heads that our job was to “get the story behind the numbers” and be able to communicate that story intelligently. But what does getting the story behind the numbers really mean?
The report that almost every finance organization runs each month compares actual results to budgeted results (or to the latest forecast). The report lists the general ledger accounts and amounts, and their variances. Those are the numbers. They story behind the numbers explains why the variance exists, and the implications (if any) for the business.
Producing the variance report – the numbers – is of marginal value to the organization. I’m not saying it’s not important, I’m saying that’s not where our value is. The real value is in getting the story behind the numbers so that management can take action where it’s needed. Do that job well and they won’t think of you as just another accountant. They’ll start looking at you as a partner in the business… perhaps someone who could be a CFO someday.
So what do you need to get the story behind the numbers? Keep in mind it’s a two sided equation. You’re comparing actual results on one side with projected results on the other. Here’s what you’ve got to be able to answer:
- What did we expect would happen?
- What actually happened?
- What assumptions turned out to be not true in reality?
Let’s look at the Actual side of the equation first… answering the question “What happened?” It’s where most accountants focus their attention anyway. To get the story behind the numbers you need to know what makes up the actual spending. The invoices recorded in your ERP or G/L system will tell you that.
What about on the projection side, answering the question “What did we expect to happen?”
That’s normally the hard part because there’s so little backup or explanation for those figures. Often times the budget for a particular account in a particular department is comprised of just a number. No supporting line item detail. No written justification. No recorded assumptions. No clear understanding of what was in that person’s head when they developed the budget.
So you wind up comparing actual results – with great detail supported by invoices – to a projection with little or no detail. How can you possibly explain the variance? You can’t provide the story behind the numbers because there isn’t one.
Now, in fairness, the supporting justification, documentation, and backup might – might — exist somewhere. But you’ve got to call the department head to get it — and they don’t always return the call. If you’ve got a lot of variances you’ve got a lot of calls to make. And sometimes not even the department head remembers what they were thinking at the time.
All the learning, all the business value of this exercise of comparing actual with projected results goes to zero. It’s actually less than zero in my book. You’ve just wasted precious resources of the organization in tracking down invoices, only to compare them to a black hole. Pointless.
Now if we’re going to do something about all this we need to first acknowledge our blind spot. As Finance professionals we’re very comfortable with the general ledger. We’re comfortable with purchase orders and invoices. In short, we’re very comfortable with reality.
Projections on the other hand are messy. There are no T accounts. There are no balancing transactions. There is no GAAP or FASB governing projections.
So where do we focus our attention? On nailing those actual transactions down to the last penny. But without the other side of the equation – the messy part – we can’t produce a meaningful variance analysis.
What we need to do is a much better job of creating and documenting the assumptions, justification, business rationale and timing of the budgeted spending (and revenue projections).
Sounds easy enough. Like the secret to losing weight is to eat less and exercise more. So why don’t more of us actually do it
That, as they say, is the million dollar question. And it’s more than can be addressed here (this is already a long post) but that will be the subject of an upcoming blog.
So how good a job do you do today in getting the story behind the numbers?