Organizations rely on financial planning and analysis to support the financial health of the company.

But…how does FP&A support major decisions of the CFO and other C-Suite members? And, what are the main responsibilities of an FP&A professional?

In this article, we’re taking it back to the basics of FP&A. So, if you want to find out what FP&A is, what it does, and why it’s so important, keep reading!

Topics covered in this article:

What is FP&A?

Financial planning and analysis involves performing budgeting, forecasting, and analysis to support senior management with decision-making. And by 'senior management,' we're talking about the CFO, CEO, Board of Directors, etc.

When the C-Suite have questions, they look to the FP&A manager (and their team) for answers. Or, at the very least, enough data to make major corporate decisions with confidence.

To do this, FP&A teams collect and analyze past and present data. This data includes (but isn't limited to):

• Financial investments

• Cash balances (and data from balance sheets)

• Operational data

• Fixed and capital assets

• Income and expense data

• Investments

• Market trends

…and more.

Once the finance team collects the data, they create accurate financial reports. Their reports identify business challenges and propose solutions to overcome them.

Think of it as creating a financial roadmap for the future of the company. With the report supplied by the FP&A team, executives can see where the company is now, and where it's headed. From there, they use financial projections and reports to determine the best strategies to improve figures next quarter (and beyond).

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Why is financial planning & analysis so important?

Financial planning and analysis is vital to ensure the growth and success of a business. After all, FP&A supports the business plan. And, it's responsible for creating strategic plans to meet financial goals.

FP&A helps leadership understand where the business is now, and where it’ll be in the future. This information is important to help senior management (and other departments) take the right steps to reach and maintain business profitability.

The finance team also helps businesses lock down financing and funding opportunities. By providing important data, finance teams can help secure funding. Some funding options include venture capitalists, private equity firms, angel investors, and so on.

(Read this blog post to learn more about securing funding for businesses - How finance professionals can help businesses get external funding)

Most importantly, FP&A professionals provide financial insights to help the C-Suite make better-informed decisions for the future of the company.

What do FP&A teams do?

Although FP&A teams have a lot of different responsibilities, they can be broken down into three key areas:

1. Financial planning

FP&A teams use data analysis to create realistic forecasts, budgets, and strategies to help reach financial goals.

2. Decision-making support

FP&A teams must present KPIs, historical financial analysis, current forecasts, etc., to help senior management mitigate risk and support growth.

3. Specific projects

Finance teams often assist other departments when specific financial situations call for it. For example, market research and planning for transitions to new systems or software, etc.

Above everything else, FP&A teams must drive profitable business decisions.

Here's a brief overview of some of the main responsibilities of FP&A teams:

• Assessing the financial health of the company. FP&A teams rely on key financial ratios and key performance indicators to determine the existing financial health of the organization. These financial ratios include things like the current ratio, debt to equity ratio, and interest coverage ratio.

• Ensuring the organization’s existing investments (and other assets) are the best use of excess working capital. An FP&A expert combines the evaluation of return on investment (ROI) and how the organization leverages cash flow.

• Evaluating the cost-efficiency of departments within the company.

• Identify core business challenges and help create solutions on an ad-hoc basis.

• Provide FP&A financial support to the CFO and other executives. They also support the accounting team (particularly when it comes to productivity, reporting, demand planning, and metrics).

• Partner with individual departments and collaborate to prepare budgets, income statements, management reporting, and so on.

• Collecting data and preparing internal reports, financial models, and detailed forecasts for executives to support their decision-making.

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What skills does an FP&A expert need?

Skilled FP&A experts are problem solvers at heart. They manage risk with ease and support leadership in making strategic decisions for ultimate growth and profitability. They evaluate past and present financial data and understand the ‘story’ behind the numbers. Namely, they use data to predict the success of future investments and can communicate this to key stakeholders and executives.

Finance teams must reduce financial risk and optimize cash flow to improve the performance of the business.

But... what skills does an FP&A professional need to be successful?

Here are some of the key skills required to do the role justice:

• Good communication and interpersonal skills

• Problem-solving skills

• Variance analysis and reporting

• Ability to understand business strategy and models

• Technical skills (experience with Microsoft Excel and dashboards is usually a must)

• Ability to create reports/presentations, budgets, forecasts, financial statements, etc.

How to do FP&A: A step-by-step process

Financial planning and analysis can be a very complex process. However, the FP&A process can be broken down into four basic steps…

Step 1. Collect data

Internal data is collected from data warehouses, ERP systems, revenue, equity, losses, investments, and various business solutions. But the data collection doesn’t stop there.

FP&A teams take it a step further and venture outside of the company to collect data. A few examples of external data include current market trends, economic data, and so on.

Once the data is collected, it’s time for consolidation and verification. This is a very important step. After all, the accuracy of forecasts, plans, budgets, and analysis relies on the quality of the data used.

The downside is that it’ll take quite a lot of time to do this yourself. This is another reason why teams introduce automation to help align processes and move things along.

Step 2. Planning and forecasting

Using the data as part of the planning process, FP&A analysts create insightful financial forecasts. These forecasts reveal predictions on the future performance of the business. A financial forecast model includes insights on things such as cash flow projections and sales forecasts.

Financial plans aren’t only used to gauge whether the business is on the right path for growth. They also determine the potential outcome of various scenarios. Doing so helps the team come up with the right action plan to reach business goals. A few examples of financial planning methods include predictive planning, driver-based planning, and multi-scenario planning.

Step 3. Budgeting

Budgeting is a huge part of financial planning and analysis. FP&A professionals create accurate budgets that estimate the required expenses to execute a plan. They're also responsible for allocating expense budgets for each function within the business. They’ll also determine the expected generated revenue and cash flow from each business unit.

Step 4. Performance monitoring and analytics

The final step is to provide decision support to senior management (including the CFO). FP&A professionals must continue to analyze and track data and performance. Therefore, they must stay on top of things like business sales, expenses, profit, cash flow, and other important KPIs.

Techniques used by modern FP&A teams

The role of a modern FP&A professional consists of four activities:

  • Forecasting
  • Planning
  • Budgeting
  • Analysis

FP&A teams use a range of techniques to carry out these four activities, some of which include:

Rolling forecast

One of the most important activities in the FP&A process is forecasting. Specifically, creating and utilizing a rolling forecast.

Rolling forecasts use historical data to predict future figures. We're not saying it's a crystal ball technique, per se. But, a rolling forecast has proved to be a useful tool for organizations.

A rolling forecast allows FP&A teams to plan 4-8 quarters. Gone are the days when FP&A teams relied on static plans for each calendar year. With a rolling forecast, you can stay ahead of the curve, predict changes, and plan accordingly.

Using a rolling forecast allows finance teams to create continual forecasting for optimized financial planning and even better results.

Scenario planning

Financial scenario planning evaluates risks, uncertainties and opportunities for potential future outcomes. This planning technique creates a more flexible FP&A process.

It's often used for sensitivity analysis. Scenario planning collects data in real-time. Then, it projects multiple on-demand scenarios based on event modeling and trends.

The best part is that financial scenario planning prepares alternative action plans. This means that businesses can enact any of the action plans to avoid further risk. Of course, it depends on how the situation unfolds and whether it calls for an action plan at all.

Risk-adjusted planning

Organizations need to move quickly in times of crisis or extreme change. To do so, FP&A teams must incorporate risk-adjusted planning into their growing list of responsibilities.

But what is a risk-adjusted plan, and why is it so important?

Risk-adjusted plans allow timely and proactive reactions to many possible scenarios. They give companies the financial ability to react to unexpected events in a pre-planned manner. This allows organizations to manage internal and external risk efficiently and effectively.

Zero-based budgeting

Rather than using a historical 'anchor' number for building budgets, zero-based budgeting begins new periods with a return to zero.

Organizations that use zero-based budgeting don't rely on the previous year's numbers as justification for the existing year's. Instead, they start from a 'zero base'. Each business function's budget is assessed based on the department's needs and costs.

How FP&A teams are structured - image of four people (graphic style art)

How are FP&A teams structured?

FP&A teams are usually structured in a very similar way and involve three main roles:

1. CFO

2. Director of FP&A

3. FP&A analyst (or financial analysts)

Let’s dig a little deeper into these roles. FP&A analysts are responsible for data collection. They do the bulk of the work when it comes to collecting and reviewing historical data. It's also their responsibility to utilize data to create accurate projections of the business’s financial performance.

They collect and review data, create financial models, forecast future trends, and relay this information to the C-Suite. The C-Suite members then use this information presented by the finance team to make better-informed decisions.

Not every company has a Director of FP&A and they’re usually more common in larger organizations. Nonetheless, if a Director of FP&A exists within a company, the entire finance team reports to them. Since it’s a senior management role, the Director of FP&A is in charge of the day-to-day operations. They usually report directly to the CFO.

At the top of the metaphorical ‘food chain’ sits the CFO (Chief Financial Officer). The CFO communicates with other key members of the C-Suite such as the CEO and other major stakeholders.

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