An FP&A team can help drive value through a process aimed at achieving goals for operating margins.
Corporate FP&A can play a key role in companies identifying areas to cut costs, in part by tracking reductions in the enterprise’s total cost base. The overarching goal in some cases is to help the corporate meet operating margin targets as it reallocates capital. The topic is particularly relevant now, with many companies seeking to reduce expenses amid higher inflation and interest costs as well as forecasts of slowing economic growth.
- Indeed, finance leaders have increased focus on cutting costs to prepare their firms for potential economic and geopolitical uncertainty, according to the fourth annual U.S. Bank CFO Insights Report. It found that these leaders are prioritizing investments in technology (47%) over layoffs (21%) as the primary solution for cutting costs in the next 12 months.
Analysis and targets. During a budget planning process, corporate FP&A can do analyses of the magnitude of expense reduction necessary to achieve an operating margin goal, for example. In such cases, targets can be given to business units (BUs), establishing baselines or starting points.
- Then it’s often up to the BUs to figure out how they will hit the targets—ideally looking first at reductions that don’t involve headcount. Levers identified by FP&A may include cutting travel expenses, consultants, sponsorships and contract workers.
- Questions that arise may include whether to recommend that BUs buy less of some product or to negotiate lower prices; in other cases, they may engage contractors to provide a service at a lower cost than the company is paying now by doing it itself. Giving BUs the flexibility to make their own hard choices can be a useful strategy.
- Peer benchmarking and other factors may, of course, make job reductions necessary, including cuts in executive headcount. A related issue that’s heavily scrutinized at some companies is the value corporate teams provide—or don’t provide—to business units.
Buy-in above all. An indispensable component of any effective, top-down, across-the-board expense reduction process is full buy-in from both business unit leaders and the company’s executive leadership. It’s imperative for the C-Suite to communicate their support throughout the organization.
- One reason buy-in is essential is that business units will inevitably push back on the targets they’re asked to meet. People tell you why their function is “special.” This can’t be just FP&A exercise; the message must be “we are all doing this.”
Not one and done. The process described here is not a short-term endeavor; FP&A’s interactions with BUs are ongoing. The process often leads to forecasting and other planning.
- FP&A may also be responsible for helping the enterprise avoid execution risk as the process unfolds, balancing the speed of changes with their scale.
- FP&A’s role includes tracking expense reductions, avoiding double-counting of cuts and maintaining one source of truth on progress.
