The Changing Face of Financial Planning and Analysis in CPG

The Consumer Packaged Goods (CPG) industry is driven by constant innovation and adaptation. As CPG companies operate in one of the most competitive sectors of business and typically distribute products with a relatively short life cycle, they must be consistently flexible and open to change to maintain success. This holds true now more than ever for a multitude of reasons, but particularly as a result of recent shifts in consumer behavior and a current level of economic volatility rarely seen before.

As the world is emerging from the pandemic and undergoing a period of recovery, some factors, such as consumer shopping habits, are beginning to stabilize and form new patterns, which CPG companies are adapting to. However, this has served as a wakeup call for many of these companies, as they have come to realize that many of their processes are inefficient and not well-suited for change in response to potential disruptions. Furthermore, a variety of macroeconomic factors remain highly erratic, and so it is essential that businesses reassess all strategies and procedures to be able to better cope with potential disruptions in the future.

One business function that CPG companies should consider evaluating and improving is Financial Planning and Analysis (FP&A). In this article, we will examine both the traditional aspects of FP&A and the shifting landscape, including the potential business value-additions CPG companies can see as result of revising their FP&A practices.

What is Financial Planning & Analysis?

FP&A constitutes a series of steps that an organization executes in order to make financial predictions, which they subsequently use to inform key business strategies and decisions. Traditionally, businesses will begin by collecting and processing the data they will use for their forecasts, which often consist of past performance data and data about the broader market and industry competitors. From here, they utilize a variety of models to generate forecasts, which are then used to allocate resources across departments and develop company-wide budgets and strategies. The process outlined so far is typically done periodically, and the time in between two cycles is spent evaluating KPIs, tracking financial performance, and translating findings to key business personnel.

While leading CPG companies have mostly adhered to the broader strokes of traditional FP&A procedures, they have found success by making small but impactful revisions to the process. FP&A can be extremely time-consuming, and some businesses have capitalized on advancements in AI and analytics to speed up the process while maintaining a high level of accuracy. Additionally, this has commonly been a process that is conducted quarterly or even annually, but leading CPG companies have developed methods to build dynamic forecasts and consistently reevaluate strategies as new data is received, giving them the tools to respond more effectively to an ever-changing market and industry.

The value-additions of modern FP&A

#1 FP&A to make current business processes more efficient and cost-effective:

In the wake of current macroeconomic factors, many businesses are facing financial stress and struggles with cash flow. They are looking to cut costs where they can. They are in need of highly accurate forecasts and evaluation of their processes to make changes to them when necessary. The performance monitoring and analytics part of the FP&A process—in which the FP&A team monitors a multitude of KPIs and translates their findings to key decision-makers—has the potential to address these concerns, but it is rarely pursued to its fullest extent. While this process often involves new innovations, it frequently ignores potential modifications to the business processes already in place. In reality, many of these processes are inefficient or ineffective and FP&A can be used to determine how best to improve them.

Leading CPG companies are looking to identify the critical drivers of performance, evaluate these drivers at every level, and make changes to the processes that most affect them. These companies are focused on deriving clear, unambiguous insights efficiently (giving them the flexibility to be able to pivot when necessary) and using a wide variety and scope of external and internal data sources to give them a broader perspective. Using these insights and data and explicitly linking them to financial performance, companies can effectively reallocate resources and refine their business processes to reduce costs and improve efficiency.

One meaningful example of this comes from the O2C (Order to Cash) division of a leading CPG firm that MathCo worked with. The CPG firm wanted to improve its cash inflows by transforming the invoice-to-cash collections process with an end-to-end collections engine to guide and enable collection agents to take proactive action. We delivered an analytics-based engine that improved collection time by one week and optimized the use of collections resources by prioritizing delinquent invoices for follow-ups. This enabled the company to avoid the risk of late payment of invoices worth $5.2M per month on average.

#2 Automating aspects of the FP&A process:

The first step of the traditional FP&A process, which involves data collection and aggregation, is essential as models built later in the process rely on the quality and completeness of the data. However, it can often be the most time-consuming step if additional actions are not taken to make it more efficient. Historically, FP&A functions have spent valuable time on this step, which they could instead be using to derive deeper and richer insights that impact the business.

The amount of data that FP&A functions have access to is exponentially rising, and a wider variety of data sources is integral to deriving more accurate and impactful insights from this data. However, with this increase in data availability, the time and resources required to process this data have continued to increase. In fact, according to a survey conducted by APQC, the time taken by FP&A teams to gather data and conduct financial processes accounts for 75% of their work ^[1]. And yet, in 2020, only 2% of FP&A teams had adopted any form of AI-driven solution ^[2]. Advancements in analytics and AI in recent years have given companies the capability to automate much of their FP&A process if used effectively. Hence, it is essential that FP&A functions adopt these processes moving forward.

As a result of the time-consuming nature of FP&A, many leading CPG companies are looking to automate as much of this process as possible. In particular, these businesses are shifting to software-based, universal automation ^[3] and investing resources in exploring AI and machine learning solutions where they are most applicable in their current processes, all while maintaining high standards of data quality and performing data cleaning and verification at the start. This allows their employees to make better use of their time and contribute more to activities that actually drive business value. It also helps equip FP&A leaders with the necessary resources to help influence the overall trajectory of the business.

One example of this kind of automation is a project commissioned by a leading beverage corporation, which worked with MathCo to develop a learning system to integrate with its preexisting target-setting model and automate the process. The beverage company was ready to collaborate with us and combine inputs from markets and stakeholders to achieve greater consensus. We helped them create an integrated forecasting framework built on different factors such as industry and market forecasts, performance forecasts, internal driver forecasts, and consumer trends. The framework integrated existing pricing and marketing model outputs, allowing us to tap into multiple data sources effectively. This initiative resulted in 88% market coverage, 98.8% volume coverage, and 95.3% revenue coverage.

#3 Improving frequency, accuracy, and useability of FP&A forecasts

One of the primary functions of the FP&A team is to create forecasts, which are typically used on a quarterly or annual basis, to create a budget by breaking down expenses needed to execute the business plan by department. Many businesses have also relied upon means of reporting that are static and do not respond well to a continuous influx of data. While traditional CPG companies could get by with these methods, the increasing frequency and severity of events, such as supply chain disruptions and labor shortages, have made this redundant. CPG companies now need financial forecasts that are more accurate and updated more frequently than ever, which enable them to make and execute business decisions in real-time and pivot when necessary.

Many leading CPG companies have foregone the annual or quarterly budgeting cycle and have adopted other techniques such as continuous budget cycles, which are continually updated with rolling forecasts and projections, and zero-based budgeting, which helps avoid overspending by continually evaluating the necessity of expenses ^[4]. They have also adopted dynamic reporting tools that continually generate and update forecasts as new data is received, with user interfaces that are interactive and easy to interpret for non-technical audiences, allowing business leaders to interpret the impact of market changes as they occur and make adjustments accordingly.

Our engagement with a global paint production company perfectly exemplifies these changes. A renowned global paint production company was looking for an analytics solution that would help them optimize costs and proactively prepare them for changing market dynamics. They had an extensive list of events that would impact commodity pricing. We used it to build a Procurement Knowledge Management system that could forecast price trends and simulate scenarios to optimize the spending on procurement using demand and forecasted price. With this, they are currently able to negotiate prices for commodities and have optimized their inventory maintenance while reducing the time taken to shortlist bids from multiple suppliers by 60%.

Summary

Financial Planning and Analysis has long been a business function that CPG companies have utilized, but increasing shifts in the market and consumer behavior have caused some leading business to alter their approach to it. Leading businesses seeking to continue using FP&A to gain competitive advantage have started using advanced analytics, AI, and machine learning to deliver FP&A solutions that are more efficient, accurate, dynamic, and cost-effective. In order to better optimize their performance and better prepare for potential disruptions and industry shifts, CPG companies with more traditional FP&A operations should seek to implement some of these changes.

Bibliography

1. APQC. “Preparing for the next Level of Financial Planning and Analysis.” APQC, May 24, 2019. https://www.apqc.org/resource-library/resource-listing/preparing-next-level-financial-planning-and-analysis-0.

2. Bryan, Jordan. “Adopt AI to Transform Forecasting.” Gartner, February 4, 2020. https://www.gartner.com/smarterwithgartner/adopt-ai-to-transform-forecasting.

3. Jadot, Fabrice. “Boosting CPG Competitiveness with Universal Automation.” Food Engineering RSS, June 14, 2022. https://www.foodengineeringmag.com/articles/100355-boosting-cpg-competitiveness-with-universal-automation.

4. Ellingrud, Kweilin. “Four Reasons Why Zero-Based Budgeting Works.” Forbes, April 1, 2019. https://www.forbes.com/sites/kweilinellingrud/2019/04/01/four-reasons-why-zero-based-budgeting-works/?sh=727c0dc519dc.