Financial Planning and Analysis, or FP&A, is one of the most important components of a company’s financial health. There is a reason FP&A professionals are highly specialized and valued within organizations. The work they do, if done well, will drive almost every aspect of their company’s strategies, goals, and overall value. The power and capabilities of FP&A practices are growing immensely due to digitization and information technology advances.
The current economic landscape makes it more important than ever to have FP&A professionals on staff (or to outsource them). But it’s also important to be at the forefront of the ways in which your business benefits from their work.
In this article we will discuss what it means to carry out financial planning and analysis. We’ll cover what the process looks like, how to maximize its effectiveness, and why it is worth investing in (if you aren’t already).
What is Financial Planning and Analysis?
First, it is necessary to discuss what exactly FP&A refers to. Financial planning is a fairly general term, as is financial analysis. But when used together as FP&A, they refer to something specific.
FP&A typically denotes a group or team (or sometimes, for smaller businesses, an individual) within a corporation that provides financial management. It might be in position of Chief Financial Officer, who also provides financial projections.
These financial projections comprise the budgeting, forecasting, and analytical processes that go into a company’s overall strategic goals and objectives. FP&A professionals generally use operational and financial data to measure different variables in order to forecast the company’s finances. As a result, this will enable management to align finances with the rest of the business’s strategic goals.
Why Financial Planning and Analysis is Not Accounting
FP&A can occasionally get confused with accounting. Although there are certainly some similarities, the scope of the two fields is quite different.
Accounting largely comprises keeping records of a company’s finances, and reporting their financial information.
FP&A, on the other hand, takes the financial statements (among other data) produced by accountants and analyzes them in order to further their company’s financial growth and larger objectives. So, although it is critical to have an accountant on staff, for most companies that will not suffice in terms of greater financial planning and analysis.
The Financial Planning and Analysis Process
The above information should provide an idea of what FP&A is, now let’s look more in detail at what FP&A professionals actually do.
A very broad look at the FP&A process is:
- it starts with financial planning
- conducts an analysis of the company’s current financial state
- compares the current financial state with the target financial state
- uses the above information to create the company’s financial forecast.
All of this analysis will enable the FP&A team and management to better conduct future financial planning.
So what is the role of the FP&A professionals in this process? And what are some of the specifics they are examining in order to come up with these financial models?
Are you considering becoming an FP&A professional? Or considering hiring an FP&A professional? Or perhaps you are wondering how your business’ FP&A team aligns with others’?
If any of these ring true for your, keep reading. What follows are several examples of the analyses that a good FP&A professional should be conducting.
What Does a Financial Planning and Analysis Professional Do for a Business?
Everything that an FP&A department does should center around considering their company’s overall financial health. They are either gauging it, evaluating it, or trying to change it.
Oftentimes FP&A teams will look towards a company’s debt to equity ratio in understanding financial health. Financial planning and analysis also heavily involves conducting evaluations to determine whether current expenditures and investments are the best use of a corporation’s assets.
In considering this, FP&A groups often determine the products (tangible or not) that most contribute to the net profit. This helps them understand which goods and services are the most cost-effective (usually by comparing profit margins). And as a result, FP&A analyses can make recommendations on elements of a company’s strategy moving forward.
Another way for FP&A professionals to analyze cost-efficiency in a business is by looking at different departments. It is very common for medium to large sized businesses to have a wide range of budgets in their various departments, and a wide range in efficiency.
Through the FP&A process, professionals will work with each department individually to review, evaluate, and often re-calibrate their budgets. Not only is this beneficial, but FP&A teams are able to use this information to piece together a better, more cohesive corporate budget.
To Whom Does the Financial Planning and Analysis Department Report?
It is important to note that the financial planning and analysis department usually reports directly to the CFO. These entities usually work closely together to track, evaluate, and make recommendations on their company’s financials.
This relationship typically comprises a fairly large part of the FP&A team’s role. The responsibility of preparing internal financial reports, projections, and recommendations falls to the FP&A group, if a company has one.
If a company does not have an FP&A department, oftentimes this responsibility can fall by the wayside, which can ultimately be very damaging. FP&A projections and recommendations can carry a significant amount of weight in the decisions that leadership teams make. This is because their findings are often the primary data source in the financial decision making process.
How Financial Planning and Analysis Helps Create Business Financial Models
Corporations with strong, long standing FP&A departments will have a repository of various financial models. And creating these models is one of the most useful roles of FP&A professionals. Therefore a company would designate one professional or a team as responsible for creating, maintaining, and amending different financial models.
This in turn would ensure that a business will always be prepared to adjust their financial strategy if and when market conditions change.
Another FP&A duty that helps companies prepare for different financial scenarios is comparing and contrasting budgets and financial forecasts. A good FP&A professional will have a range of budgets and financial strategies for their company to put into place, depending on their financial needs.
Why Having a Professional is so Important
The last – and maybe most important – role of an FP&A professional that we will mention here is that of being a financial visionary. A business’ FP&A team should always be thinking about the future, evaluating different opportunities for growth and expansion.
This pre-planning process is one that too often gets neglected in favor of pressing day-to-day financial upkeep. Hence, this is exactly why it is critical to have an FP&A presence. Not only will the FP&A team consider opportunities for growth, they will actually generate five-year financial forecasts and map out plans for growth.
Although hiring an FP&A professional, or expanding your team of FP&A professionals, comes at a cost, the financial benefits will more than make up for it.
There is a reason that FP&A professionals aren’t cheap: they are highly skilled and trained in their specific line of work. The FP&A field is very reflective of advances in information technology and digitization of business. Making the most of your FP&A department means that you can achieve significant savings through their expert knowledge of how to apply automation and standardization to your company’s financial analysis and forecasting.
As always, we are happy to consult with you about the financial planning and analysis process for your business.
We Can Help
We know the challenges of owning a business, and now is a critical turning point for most. But that’s why we aim to be as open and available as possible. We can help with financial planning and analysis services for your company.
The Saddock Advisory team invites you to get in touch with us so you can learn more about our history, our services, and how we can help you! Fill out our contact form here and we’ll be in touch shortly.
Sources:
https://sfmagazine.com/post-entry/
https://corporatefinanceinstitute.com/resources/
