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7 days ago

The Importance of Data-Driven Decision Making for FP&A Teams

The Importance of Data-Driven Decision Making for FP&A Teams

FP&A teams have always been data-focused. Finance teams as a whole live and breathe the numbers of their organization, and as a result often have an excellent understanding of overall business health. The recent industry shift is not to increase focus on data as such, but rather to leverage data in strategic decision making. This article explores why data-driven decision making is important.

Not All Decisions are Data-Driven

Every company, leadership team, department and individual employee needs to make decisions that impact the business multiple times a day. Usually the decisions are small ones, with minor impact. Some decisions, though, are significant, influencing the direction of the company and its likelihood of success or failure. That’s often especially true in FP&A teams.

There’s a common misconception that all decisions are both based on data and driven by data, and this can obscure the importance of data-driven decision making. 

Not all decisions are primarily based on data, and there are contexts in which this makes sense. Intuition, informal feedback and even “mood” can be important factors when you’re planning the details for an internal event, for example, or building a brand’s design and style guide. 

Sometimes whether something is data-driven or not depends on the goal; whether you’re choosing lunch according to how you feel today, or alternatively what will help you train for a race. 

What Makes Data-Driven Decision Making Different

In a business context, often data will be employed, but will not be used to drive decisions.

For example, it’s common to hear sentences like, “We’re going to miss our goals for Q4,” or “The marketing team is going to be way over budget by the end of the year.” 

Those are sentences that are based on data. You wouldn’t say them unless you had information indicating that this was what was going to happen. But they’re not data-driven. They won’t lead to the impact you want to have. On the other hand, try something like this:

“We have missed our sales forecast in H1, and our H1 production numbers are x% below what had been predicted, while customer churn is x% higher than expected. In order to avoid missing our goals for H2, we need to establish what’s causing this budget versus actual variance, and make some adjustments.”

With that beginning, your team is in a position to start influencing business behavior in the way it needs to be able to do. 

Why Data-Driven Decision Making is Important For FP&A Teams

FP&A teams need to be internally data-driven, in the model of that second set of statements. To be able to have the kind of impact on the company that the team deserves to have, and that the company needs, FP&A teams need both detailed insight into the weeds and also high-level analysis of what it all means when it’s put together.  

These days, it’s important for as much assessment and analysis as possible to be based on real-time data. Until recently that would have been impossible, but new technological advances have enabled the creation of platforms such as Firmbase. These platforms centralize data from diverse sources and departments into one place, in real time.

That changes what’s possible any time an FP&A team receives a request for insight or recommendations from leadership, whether from finance internally or from a different department altogether. Now, the response can be seamlessly based on up to the minute information, making it automatically far more relevant. In fact IBM has called FP&A one of the “defining use cases” for this revolution. 

Being data-driven makes FP&A recommendations more valuable. Beyond that, though, making effective recommendations requires being specific about the data behind them, and the data driving them. 

The more transparent your team can be about what you’re seeing, and why you’re suggesting a change, the more likely your recommendation is to be adopted. 

From Being a Company Calculator to Being Strategic Planners 

The reasons why data-driven decision making is important are connected to the wider industry shift from perceiving finance generally, and FP&A teams in particular, as strategic planners and guides, rather than number-crunching calculators. 

Technological innovation has made it possible for a lot of the numbers to be crunched by computers, as machine learning and AI take some of the tedious routine work off human shoulders. This means more data can be included in calculations and considerations. 

It also means that human professionals have more time for strategic analysis, using the benefit of additional information to expand their field of vision to drill down into trends, find out what’s causing them, explore new possible paths, and work out what the company ought to do to achieve its goals.

Data-Driven Decision Making is Important For Every Department

Making data-driven decisions is important for FP&A teams themselves. It’s just as important, however, to appreciate the impact that data-driven decisions can have on the rest of the organization. Just to name a few examples:

  • Real-time reality. Empowering other departments by helping them stay on top of the real-time reality of their KPIs and make decisions based on that data with continuous planning

  • New products or services. Proactively encouraging departments to seek assistance analyzing proposed new products or services so that you can use data to drive recommendations, and thus decisions. 

  • Inform initiatives. Using data-driven decision making to inform initiatives such as ESG programs, in order to employ them where they’ll have the greatest impact, and make them more effective. 

  • Long-term value creation. Use data to identify evolving trends and find ways to leverage them as opportunities. 

  • Identify opportunities for cross-departmental collaboration. Sometimes gaps aren’t apparent to anyone who isn’t deep in the data but, once found, can be closed to benefit all concerned. 

Make Data-Driven Decision Making Conscious 

Many teams think that they’re data-driven, but in reality they frequently make decisions on gut instinct, or the preferences of a senior executive. As we said at the start, there are places where data isn’t the only or even the most important factor. But those should be identified consciously. 

FP&A teams in particular benefit from evolving a culture in which they are actively, consciously aware of the need to be data driven and being able to back up their analysis and suggestions with data. Once they have that mindset internally, they can help other teams to make the same shift as well. 

It’s not an instant fix. But the process of shifting to reliably data-driven decision making is important because long-term it increases visibility into the reality of a business, and makes it possible to build strategies that take that reality and ensure that the business is moving in the right direction to achieve the needs and goals of the company. 

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