Quality of Earnings as a Framing Discipline in FP&A
When finance leaders talk about performance, they often point to earnings as the ultimate scoreboard. But as every experienced FP&A professional knows, not all earnings are created equal. This is where a Quality of Earnings (QoE) evaluation comes in.
QoE goes beyond the headline numbers to assess the sustainability, repeatability, and credibility of reported earnings. It asks: are these profits built on solid ground—or are they flattered by one-offs, accounting treatments, or short-term tactics? In other words, QoE reframes the picture, turning accounting income into decision-ready insight.
Framing Earnings in the FP&A Leadership Model
In our human-centered FP&A framework—Frame → Decide → Act → Learn—QoE sits squarely in the Frame stage. Framing is about helping the organization see clearly: surfacing assumptions, clarifying context, and aligning perspectives before choices are made.
Without QoE framing: leaders may anchor on distorted numbers, leading to misplaced confidence or flawed comparisons.
With QoE framing: leaders see the true economic drivers of performance, calibrate expectations realistically, and set the stage for wiser decisions.
When to Complete a QoE Evaluation
While QoE is valuable in many contexts, it is especially important at key inflection points:
Mergers & Acquisitions: Buyers and sellers need a clear view of sustainable earnings before pricing and negotiations.
Capital Raising: Investors and lenders want confidence that earnings are reliable and cash-backed.
Strategic Pivots: When shifting business models or entering new markets, QoE clarifies which earnings streams are durable.
Performance Disputes: Leadership teams or boards often turn to QoE to resolve conflicting views on results.
In short, QoE matters most when stakes are high and decisions depend on a true understanding of economic performance.
The FP&A-Oriented QoE Framing Checklist
Here’s a practical checklist you can use to integrate QoE into your FP&A framing work:
1. Clarify the Baseline
What is being presented as “earnings”? Net income? Adjusted EBITDA? Free cash flow?
Are definitions consistent across periods and peers?
2. Surface Adjustments & Assumptions
Identify non-recurring items (restructuring, litigation, relief programs).
Check revenue recognition practices for timing distortions.
Review capitalization of costs that may mask operating expenses.
3. Probe Earnings Quality Dimensions
Cash Conversion: Do profits translate into operating cash flow?
Working Capital: Are results propped up by payables or inventory moves?
Customer/Contract Concentration: Is performance overly dependent on a few relationships?
Margins: Are improvements structural or temporary?
4. Reframe for Decision-Making
Sustainability: Which earnings components will persist?
Volatility: Which are sensitive to external shocks?
Comparability: How should earnings be normalized for benchmarks or storytelling?
Scenario Sensitivity: How do earnings behave under upside, base, and downside cases?
5. Translate into Narrative
What matters most: the key factors behind “true” economic earnings.
Why it matters: the link to strategy and options.
How to think about it: bridges and visuals that clarify the story.
Bringing It Together
Earnings may be the headline, but the quality of those earnings determines their usefulness in guiding decisions. By treating QoE as a framing discipline, FP&A leaders ensure that decisions are anchored in reality, not illusion. The checklist above turns a forensic accounting exercise into a strategic framing tool—helping organizations see clearly, so they can decide wisely, act confidently, and continue to improve.
