Traditionally, the chief financial officer (CFO) is responsible for tracking the company’s past and present financial situation and ensuring on-time and accurate financial reporting.
Today, the CFO informs strategic decisions that drive the success of the company. This function is called financial planning and analysis (FP&A).
When hiring your first CFO, it’s important to understand the FP&A function and how it can help your business. If you want to improve your understanding of what FP&A is, and why it's so important - keep reading!
In this article, you'll discover...
- How FP&A functions differ depending on the size of the company
- What is financial planning and analysis?
- Key responsibilities of FP&A
- Things that startups should consider when hiring a CFO
FP&A functions - from startups to large corporations
Depending on the size of the company, the FP&A function can look very different. Here's a brief overview of how FP&A functions look in various sized businesses:
- Large corporation: CFO has a Director of FP&A and a Controller as direct reports, each with a team of analysts. The CFO focuses on company-level strategic planning and building a relationship with investors.
- Medium size company: CFO has a Controller as a direct report to handle the day-to-day financial operations and reporting. The CFO takes on the responsibility of FP&A.
- Early-stage startup: Focused on finding product market fit. They tend to have limited financial information to work with. The CEO outsources accounting to a third-party accounting firm and may conduct simple FP&A.
When enterprise startups reach Series B stage, they achieve a revenue level and customer base that is complex enough to justify hiring a CFO.
What is FP&A?
Financial planning & analysis is a corporate function that uses financial information to make forward-looking recommendations, evolving from a number cruncher to a strategic partner.
FP&A provides data and intelligence to key decision-makers so they can make data-driven decisions.
Having visibility of the financial health and activities of the company, FP&A can reduce risk exposure and identify growth opportunities.
How does it differ from the Controller?
Let’s break down the organization structure: The CFO reports to the CEO. The director of FP&A and the Controller both report to the CFO.
- The CFO is the financial mastermind of the company. They have oversight of major projects, expansions, reorganizations, fundraising, and other strategic initiatives. The CFO needs to have the financial acumen to manage the Controller and FP&A functions.
- The Controller handles accounting and financial reporting. The Controller is responsible for generating the three main financial statements. They also must ensure these statements comply with GAAP and other regulatory requirements.
- FP&A handles strategic planning, decision support, and financial modeling. The FP&A function helps all groups within the company make better decisions by taking historical data, forecasting future performance, and running sensitivity analyses.
Key responsibilities of FP&A
FP&A is the financial liaison of the company. FP&A teams connect the CEO, CFO, Sales, Engineering, and Operations divisions. With a strong understanding of the company strategy, FP&A facilitates the exchange of financial information to support all relevant personnel in fulfilling the strategic plan.
The key roles and responsibilities of FP&A are four-fold:
- Strategic planning
- Financial forecasting
- Monitoring progress
- Project management
Depending on the nature of your business, you may set a 3-year, 5-year, or 10-year strategic plan. This plan conveys the direction of the company and the methodology of how it will deploy resources to get there. It starts with setting the vision, followed by determining the strategic initiatives to achieve that vision.
We won’t get into detail on how to set up a strategic plan (that would be an essay in and of itself). The main point here is that FP&A should be in the room when senior management lays out the multi-year strategic plan.
By running sensitivity analysis, FP&A can build financial models that show a bull case, base case, and bear case. If the returns do not look favorable, FP&A can take this model to the various stakeholders and adjust the business plan.
If the cost structure is too high, the business may need to build in greater efficiency or source cheaper raw materials. If the sales projections aren’t robust enough, FP&A can work with sales and marketing to see if they have ideas to increase sales volume. If cash flows are not favorable, FP&A may need to work with purchasing to negotiate better collection terms.
While the CFO will always have a pulse on the financial health of the company, FP&A should have a deeper understanding of the root causes of financial stability and distress.
In reviewing the financial statements and division updates, FP&A should be the first to raise questions about why certain trends are occurring.
Why are cash balances changing more than in previous quarters? Why are financial ratios improving or worsening? Observing trends is not enough. FP&A must analyze to understand why those trends are occurring and how it ties back to the strategic plan.
This is similar to financial forecasting, except we’re modeling individual projects rather than the entire company. For new projects, FP&A may step in to model out cash flow and returns.
As FP&A may not have a deep knowledge of the various groups involved, FP&A will need to work with the department heads to ensure the model includes all the necessary information:
- Sales and marketing will inform sales.
- Operations and purchasing will quantify the cost of goods sold.
- Product and engineering will estimate product development costs.
- Senior management will gauge overhead and other G&A expenses.
Once the scenarios are set, FP&A evaluates the various options by looking at several metrics. These metrics include NPV, IRR, and payback period.
How startups should think about hiring a CFO
The office of the CFO has evolved from mere information collecting to financial analyses.
The FP&A role requires financial expertise, sound business judgment, and an ability to work across various functions. But the FP&A function cannot exist without the Controller. The first step is getting good financial reporting. The second step is to use those numbers to drive the business forward.
“People used to think the CFO was there to tell you there isn’t enough budget when you needed something or to simply report financial results after the fact.
Today’s CFOs must break away from the number-cruncher stereotype and think of themselves as strategic players in the company. CFOs today need to be creative, understand best practices, and know how to create more value for the company.
There will always be a need for someone to balance the books, crunch the numbers, and perform critical routine tasks but the CFO role is much more dynamic today.” — Bill Tobia, LLR Partners’ Managing Director of Strategic Finance
At the beginning of this article, I noted that pre-Series B startups do not have the business complexities that would justify paying for a CFO. This may not always be the case. To help you make this decision, I advise thinking about the specific financial tasks (ordered from simplest to complex):
- Financial reporting
- Financial planning
- Strategic planning
To handle transactions, bookkeeping, and financial reporting, most startups use a few software tools and an outsourced accounting firm. Popular software tools include Bill.com for billing and invoicing and QuickBooks for accounting and reporting.
The outsourced accounting firm typically comes with a controller and CFO to do light financial modeling.
When the business grows to the point where financial reporting begins to get complex, that’s a good point to start thinking about bringing on a CFO. It’s a good signal that there is enough business activity for a dedicated executive to extract meaningful insights from the financials.
If you'd like to read more insightful finance articles written by Alex Lee (co-founder & CEO of Bluelight), check out his other articles published here.