Decision Based FP&A
The top 1% of FPA teams pre-wire a decision-response system
Most FP&A teams design their forecasting systems to achieve accuracy. They believe their job stops at forecasting the future and owning the forecast model.
Naturally, they focus on more precise models and create systems and subsystems to try to design for accuracy. They can’t wait to perform their month end Plan vs Actual to see how accurate their forecast was and then to build a new model.
Houston, we have a problem! That’s an ode to just launching Artemis to the Moon and sending humans around it for the first time in 50+ years.
The best FP&A teams are not about that. You and your team will crash and burn on landing with that mental model.
Your FP&A team should be designing for agility… not accuracy.
It’s time to design a decision-response system.
The Best Finance Teams
The best finance teams are intellectually honest about one thing:
All forecasts are wrong.
The best FP&A professionals know that forecasting with multiple variables is the equivalent of gambling. Being highly accurate in a multi-variable model is not statistically possible.
Unless you are a very late-stage or quarter-to-quarter public company, designing for decision agility is what your high growth scaling startup needs from your team.
Most of you already know your forecast is highly sensitive to overall market conditions, industry or customer surprises, government policy changes, and even natural disaster or mass internet outages.
Look at what happened to your forecast in just the last 30 days with the Iran conflict.
The top 1% of finance leaders design a decision-response system knowing their forecasts are going to be wrong.
They don’t just plan the future, they create scenario planning and they pre-wire the next set of decisions to keep driving their key metrics toward the overall goals.
They build these pre-wired decisions into their FP&A “system” and build the “next decisions” into their next forecast model along with the detailed assumptions.
Planning Three Steps Ahead Is Table Stakes
Every great CFO, VP of Finance, or FP&A leader knows the mantra:
“We need to plan three steps ahead.”
So we build:
Base / Upside / Downside scenarios
Sensitivity tables
Waterfalls and bridges
Probability-weighted forecasts
These are all great work products from the great FP&A teams to be able to see into the future better.
My key question?
“What do we need to DO in the future vs SEE in the future?”
Seeing more accurately into the future stops one step too early and keeps your FP&A team from being more influential in driving strategic future decisions.
Start incorporating a new decision-response system into your financial models. In the past I’ve called this pre-wiring the future decisions and summarized it as “course correcting”. It’s all the same concept.
Decision-Based FP&A
A forecast without a decision is just a prediction.
If you want to be an elite FP&A team, please start treating forecasting as THE INPUT…NOT THE OUTPUT.
Start asking a different question for each forecasted scenario… for each line/variable/assumption in your forecast.
“If this scenario becomes true, what decision do we make?”
“If this line item executes beyond it’s maximum expected outcome range, what is our next decision for that line item?”
“If it’s below the minimum expected range?”
Now code both the line item or scenario assumptions and the “next decisions” for that line item into the actual model. Go ahead, I’ll wait. I hope you tagged that row/cell data with the proper notes and narratives.
As your FP&A team’s leader, coach them to make the shift from:
Forecasting the future to Deciding the future
Planning scenarios to Pre-wiring responses
Predicting outcomes to Designing course correcting actions
Pre-Wiring Decisions: What It Really Means
Pre-wiring means you don’t wait for a variance to show up before acting.
You decide in advance:
What actions you will take
Who owns the decision
When you will move
How much to increase or decrease your inputs or investments
What tradeoffs you will accept
Do I need to say it again? Ok fine. The… forecast… will… be… wrong.
You may as well decide now (as in today) what to do WHEN the forecast will be wrong vs waiting for that future day.
Examples:
If product or engineering misses their next product launch milestone date, pause those sales reps tied directly to that product. You can’t sell what isn’t in market after all.
If you are within 6 months of cash runway and the VC you’ve been courting for 3 months passes, and it’s late October (with Thanksgiving and Christmas breaks coming up where the VCs start signing off), you freeze new hires until you have a signed term sheet.
If the new marketing campaign doesn’t create your MQLs (marketing qualified leads) for 2 straight months, you execute campaign B or campaign C… you don’t keep hoping the original campaign will start working.
By the way, with fewer MQLs for 2 months, you need to now pause your new hire SDRs (sales development reps) since your current SDRs are starting to surf Instagram more and more on the clock.
Roll your own. Pick your line item. Create your ranges of Bad, Good, Great.
Now create the “response decision” if the actuals fall below bad or rise above your great range.
This is no longer a forecast. It’s not even a “Financial Plan”. You’ve now created a “Financial Decision System”. You lead and influence the strategic future decisions of how we’ll respond when the actuals are significantly off the last set of assumptions.
Coach Your Teams To Stop Asking:
“Did we hit the forecast?”
Coach Them To Start Asking:
“Did we respond correctly when we didn’t?”
That’s a fundamentally different financial operating model.
FP&A as Decision Architecture
Old model:
Build the plan
Track variance
Explain what happened
Modern model:
Model scenarios
Attach decisions to each scenario
Create response plan triggers before the actuals come in
This is FP&A decision architecture. The finance team becomes:
The designer of this decision system
Focused on navigating against the uncontrollable variables
You are now your executive peers decision co-pilot to their function
The outcome of operating this way?
Your company is more agile
Your decisions are higher quality
The data drives the decision
No more opinions or hope
Reduces emotional debate of “just a little longer”
Prevents reactive leadership
Your CEOs and Boards will quickly start finally understanding your finance team’s value.
So here’s my reframing thesis I’ll leave you with:
Are you forecasting the future OR are you helping to decide it?
Because planning without pre-decisions is just optimism with spreadsheets.
And FP&A without pre-wired response plans is today’s incomplete decision system.
