What is Financial Planning and Analysis (FP&A), and Why Do We Need It Now?
We can’t avoid it: with the recent downgrade to junk by Moodys and a global crisis under COVID-19, now more than ever we need to have our houses in order. This is where the investment into intelligent and multi-functional FP&A software is not optional, but essential for survival.
“For finance, this creates a real opportunity to lead their organisation as budgets are tightened, revenues and profits evaporate, projects are put under the microscope, cash conservation and deployment becomes even more critical, and nearly every other area of the business is impacted in some way. While the tide of a robust economy benefits everyone, the ebb of a weak economy will take a toll on those who are least prepared and informed.
– Bill Peterson
For companies to be consistently profitable and grow requires careful financial planning and cash flow management, which relies on the collection and interpretation of data.
The role of a financial planning and analysis function is to provide accurate and timely financial analysis and advice to the leaders of the company.
We know that sounds vague and dull but probably easy enough, but in these tumultuous times, FP&A software and support systems have come to the fore as a strategic and essential advantage to organisations, particularly given the dynamic and rapid speed at which companies are moving, and the economic complexity of the business environment.
Analysis for future-proofing your finances
Corporate financial planning and financial analytical systems use both quantitative and qualitative analysis of all operational aspects of a company in order to evaluate the company’s progress toward achieving its goals and to map out future goals and plans. FP&A software gives information that allows us to:
- consider economic and business trends
- review past company performance
- help to anticipate obstacles and potential problems
- help forecast companies’ future financial results
FP&A software collates all financial affairs, including income, expenses, taxes, capital expenditures, investments, and financial statements. Unlike accountants who are in charge of recordkeeping, financial analysts are charged with examining, analysing, and evaluating the entirety of a corporation’s financial activities, and guiding the company’s financial future.
What can corporate financial planning and analytics do for you during COVID-19?
The top 10 roles of corporate FP&A, and how they can help you now: |
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| 1. Evaluating whether the company’s current assets and investments are the best use of the company’s excess working capital, by looking at return on investment (ROI) and comparisons with other ways the company might utilize its cash flow (e.g., other possible investments, increased stock dividends, etc.) 2. Gauging the company’s overall financial health, primarily by using key financial ratios such as the debt to equity ratio, current ratio, and interest coverage ratio 3. Identifying which products have the highest profit margin (and which have the lowest) This is a separate inquiry from the one listed above, as the product(s) that carry the highest profit margin may not necessarily be those that generate the greatest amount of total profit, e.g: Product A may carry a higher profit margin than Product B, but the company may sell substantially more units of Product B 4. Examining and evaluating the cost-efficiency of each department of the company, in light of what percentage of the company’s financial resources each department consumes 5. Working with individual departments to prepare budgets and consolidate them into one overall corporate budget 6. Preparing internal reports for executive leadership and supporting their decision making 7. Creating, updating, and maintaining financial models and detailed forecasts of the company’s future operations 8. Comparing historical results against budgets and forecasts, and performing variance analysis to explain differences in performance and make improvements going forward 9. Considering opportunities for the company to expand or grow. Mapping out growth plans, including capital expenditures and investments. Generating three- to five-year financial forecasts. 10. A company’s financial analysts are expected to provide upper management with analysis and advice regarding how to most effectively utilise their financial resources to increase profitability grow the company at an optimal rate and avoid putting the company at financial risk |
Having a strong financial planning and analysis function is a key to successful competition in a stressful market
Performing financial planning is critical to the success of any business. It supports the business plan and sets forth a process to ensure the objectives set are achievable from a financial point of view. Adequate financial planning and analysis create an understanding of how well you project your business will do and measures your success relative to that projection. The process is ongoing and should serve as a shrewd guide to running your business.
Furthermore, if funding or financing is needed, the FP&A function prepares you to present the financial section of your business plan in relatively short order. Whether you are seeking investment from private equity firms, venture capitalists, or angel investors, they are going to want to see numbers as evidence that your business will grow and that there is an exit strategy for them on the horizon, during which they can make a profit. Any bank or lender will ask to see these numbers, as well, to ensure loan repayment.
Most important, FP&A function picks up where accounting leaves off. Whereas a controller considers and records historical results, the FP&A function is future-focused. It links the strategy to a long-range plan and annual operating and capital budgets. It provides multiyear financial modelling and annual target-setting processes. It employs the process of interpreting the strategic targets into comprehensive annual operating and capital budgets. And it leads and oversees the financial management function to ensure delivery of annual budget results and to strengthen cash flow predictability.
Use the key FP&A processes to help your business plan its way out of COVID-19:
- Analysis is what enables FP&A professionals to translate raw numbers into insightful KPIs to share with decision-makers and form a holistic picture of an organization’s fiscal health. Analysis helps drive informed decisions throughout multiple departments and the business as a whole.
- Planning is crucial in determining what a company’s fiscal and operational goals will be. During this phase, FP&A teams work closely with executive teams and stakeholders to align departmental plans, creating a unified model of goals and expectations.
- Budgeting is the process of anticipating, deciding and documenting annual expenses and revenues in the best way to meet operational goals. Developed once a year, taking three to six months to complete, the annual budget is the cornerstone of traditional FP&A. The budget is also the first iteration of the forecasting process.
- Forecasting is the process of establishing and regularly updating a company’s expected future performance based on past results, as well as current and anticipated future conditions. Scenario forecasts account for expected changes in business conditions while rolling forecasts involve regular updates extending beyond the fiscal year. Compared to a static budget, forecasting helps companies better prepare for changing conditions and improve their ability to predict the future.
- Modelling is how FP&A teams use information from multiple sources such as accounting, business operations and finance to model new assumptions, run sensitivity analysis and test alternatives that predict how operational decisions might affect their companies’ financial future.
- Reporting traditionally refers to financial reporting, which shows past performance, often analyzed further by management and shareholders. Management reporting communicates analysis and insights to decision-makers, typically through self-service dashboards that allow users to drill into the details behind summary data. Regulatory reporting combines various data and analyses into reports required by law for public companies, banks and other regulated businesses.
- Financial close management involves reconciling accounts, reporting period-end results (actuals) and other financial management practices. Traditionally considered the purview of accounting, financial close processes are very much a part of modern or full-spectrum FP&A. Bringing the close process into the fold provides the actuals needed for FP&A purposes including variance analysis, re-forecasting, ad hoc management reporting and more.
The ultimate best practice is to align planned performance with actual performance. By implementing a software tool that incorporates the full spectrum of FP&A processes – from financial close management to budgeting and planning, to reporting and analysis – finance teams can align processes, plans and data across the organisation.
Modern cloud FP&A software empowers teams to manage the following processes and more:
Excel in these areas during economic bumps and dips like the current worldwide COVID-19 pandemic:
- Start-up estimations
- Market assumptions
- Revenue of the business
- Financial ratio
- Balance sheet
- Profit and loss statement
- Depreciation and tax
- Possible exit strategies
- Budgeting
- Financial close management
- Tax provisioning
- Consolidations
- Account reconciliation
- Allocations
- Regulatory reporting
- Dashboards
- Variance analyses
- Planning
- Forecasting
- Financial reporting
- Scenario modelling
Modern FP&A cloud solutions like IBM store financial data in a centralised cloud database, creating a secure, single version. Cloud architecture offers on-demand scalability for any number of accounts, entities and transactions, allowing finance and business teams to access and share information instantaneously, and bringing teams into alignment across an organisation.