Imagine you’re the CFO of a startup that has only just turned the corner. There are good times ahead, but you’re working month-to-month to keep the train on track.
Then, your finance team gets sidetracked for a few days as they prepare for a regulatory change, and you only receive last month’s profit and loss (P&L) report on the 15th. The numbers send a chill down your spine.
A sudden reversal in profitability, unexpected costs, dwindling sales, financial indicators missed by a mile, and your runway just shortened by half, all adding to the growing list of worries.
This scenario is the stuff of nightmares for a CFO. The importance of effective Financial Planning and Analysis (FP&A) becomes starkly evident in critical moments like this.
With proper financial tools in place, you could have anticipated or mitigated all of these problems. FP&A functions as the financial radar of a business and arms your team with insights so you can pivot and make changes that will steer the company back on a profitable course.
How do you get there? It’s a complicated process, but one that this article aims to demystify.
What is FP&A?
Financial Planning & Analysis, or FP&A, is a critical process function within an organisation’s finance department that involves budgeting, forecasting, and analysing a company’s financial reports and business strategies.
At its heart, FP&A is the prism through which a company’s financial health is assessed, combining detailed operational data and high-level financial information. It blends them to construct forecast models that will enable decision-makers to foresee the financial future of a business realistically.
1. Financial Planning
Financial planning involves drawing up detailed budgets for the upcoming fiscal year and financial forecasts generally for a three to five year period.
Best practice forecasts outline expected revenue, expenses, cash flow, and other financial markers based on key operational KPIs and forecast macroeconomic trends.
This process requires FP&A professionals to work closely with all departments to gather information and understand the business deeply.
2. Financial Analysis
On the other side of the same coin, financial analysis is fundamentally about understanding the operational drivers of financial performance.
A core function of FP&A is to conduct deep dive analysis to determine the root cause of discrepancies between planned and actual results. Through understanding profitability by unit, product or client segment and associated cost drivers, FP&A seeks to improve operational efficiency by reducing or eliminating unnecessary spending.
FP&A combines quantitative techniques with strategic thinking. This requires a holistic understanding of the business operations and ecosystem to translate financial and non-financial data into actionable insights.
Why is FP&A Important?
The FP&A function is instrumental in steering a company’s strategic direction, financial stability, and overall business performance.
Its significance becomes even more prominent in the dynamic business environment of the Asia Pacific (APAC) region as organisations grapple with challenges such as fluctuating currencies, drastic geopolitical and commercial changes, digital transformation, and intense competition.
A 2021 study from TCS found that 60% of financial leaders “consistently fail to derive aligned and robust budgets.” Teams are falling short when it comes to data quality and risk management.
Informed, strategic decision-making requires a solid understanding of current and future financial conditions. This is precisely what FP&A provides—it creates a structured roadmap of the company’s financial future, enabling businesses to make decisions confidently that balance immediacy with long-term sustainability.
FP&A Structure and Roles
The structure of an FP&A team can vary from organisation to organisation depending on factors such as the company’s size, complexity, industry, and strategic goals.
A startup won’t have the same infrastructure or resources an enterprise-level corporation can leverage. However, here’s a typical structure outlining the key roles within an average FP&A team:
1. Chief Financial Officer (CFO)
The CFO typically oversees the FP&A function. They are responsible for the company’s overall financial strategy, making high-level financial decisions, and are typically the primary recipient of the FP&A team’s reports and insights.
2. Head of FP&A
Reporting to the CFO, the Head of FP&A coordinates the team’s activities, defines FP&A strategy, works with other departments to gather data, and drives the financial planning process. They also play a key role in presenting financial insights to the executive management.
3. FP&A Manager
The FP&A Manager is often responsible for building forecasts and budgets as well as conducting financial analysis. They are typically hands-on in data analysis and often work on developing financial models.
4. Financial Analysts
Financial analysts are the backbone of the FP&A team. They are involved in gathering and validating data, performing financial analysis, assisting in budget creation, and preparing financial reports. They work closely with the FP&A Manager and may specialise in different aspects of FP&A work, such as budgeting, forecasting, or reporting. Some organisations may also have dedicated roles for systems analysts or data scientists, particularly in larger or more complex operations.
These roles are specialised to manage the FP&A’s technology needs or advanced analytical needs. Despite varying structures, all these roles contribute towards the central aim of FP&A: providing strategic financial insights to drive effective business decisions.
FP&A Responsibilities
FP&A teams wear many hats within a company, playing a significant role in driving financial efficiency and long-term business success.
Here are key responsibilities that fall under the purview of FP&A:
1. P&L Management
FP&A typically reviews profit and loss (P&L) statements and provide critical insights into revenue, and expenses necessary for senior leaders to communicate with shareholders and prospective stakeholders.
By tracking and analysing these elements, FP&A professionals can help identify ways to enhance profitability through strategic changes or organisational restructuring.
For example, Proctor & Gamble underwent a massive shift and reorganised under six industry-based Sector Business Units (SBUs) that each had “direct sales, profit, cash, and value creation responsibility.”
It was FP&A that helped drive this decision, with CFO Jon Moeller taking on a larger role and helping to push P&G’s product-led growth strategy.
2. Profitability Analysis
A primary role of the finance team is to conduct profitability analyses on different aspects of the business, whether it be analysing by:
2.1. Product: A beverage company finds its energy drink line generating lower profits than soda due to its higher production costs and lower sales figures.
2.2. Geography: Rural stores might generate less revenue for a retail chain than urban ones due to less foot traffic or particular local preferences.
2.3. Client segment: Business clients yield a higher profit margin than individual consumers for a telecom because they pay for more extensive service packages.
2.4. Business unit: A multinational corporation realises its electronics division is less profitable because of supply chain restrictions and stiff competition.
This exercise provides valuable insights that can influence strategic decision-making and improve overall profitability.
3. Cash Flow Management
FP&A typically takes the lead in coordinating a company’s annual budgeting process. They work with various all major departments like production, HR, sales, marketing, etc. to collect data, consider past performance, predict future revenues and expenses, and to create a comprehensive and realistic budget.
They also regularly monitor the actual performance against the budget and report on any variances, suggesting corrective actions as needed as well as improving forecast capabilities.
For example, finance teams will track:
3.1. Revenue Streams: The different sources of income for the company, both from its primary business operations and secondary sources like investments.
3.2. Operating Expenses: Fixed and variable operational costs. Monitoring these expenses accurately allows the team to identify areas where cost savings are possible.
3.3. Capital Expenditures: These are significant investments that a business makes towards fixed assets or improving its existing ones. Risk assessments on new capital investments, tracking ongoing ones, and monitoring their impact on the company’s financial health all fall under FP&A.
3.4. Accounts Receivables / Payables: Finance departments help in correctly estimating the time it takes for customers to pay their bills (receivables) and when the company will be paying its debts (payables).
3.5. Inventory Management: An important part of cash flow management is managing the company’s inventory efficiently. Excess inventory can tie up cash, leading to shortages.
Cash flow management can sometimes seem like an art, but with the right analyses and tools, CFOs can anticipate changes, strategize, and minimise risks to their company’s liquid assets.
4. Budgeting
Finance teams handling FP&A typically take the lead in coordinating a company’s annual budgeting process.
They work with all major departments like production, HR, sales, marketing, etc. to collect data, consider past performance, predict future revenues and expenses to create a comprehensive and realistic budget.
They also regularly monitor the actual performance against the budget and report on any variances, suggesting corrective actions as needed as well as improving forecast capabilities.
5. Scenario Planning
One of the advanced functions of FP&A is scenario planning. This involves creating financial models to forecast the impact of various scenarios on the company’s financial health. It could include situations like:
- A sudden spike in raw material costs
- A major change in market demand
- A new competitor entering the market
- The potential impact of a global economic event
These models assist in preparing the company for potential future outcomes and developing contingency plans accordingly.
The Future of FP&A
The future of FP&A appears vibrant and dynamic, marked by technological advancements, evolving methodologies, and an increased focus on sustainability.
1. Increased Automation of FP&A Cycle
The FP&A process traditionally has been manually intensive, but recent technological leaps have changed that. Advanced financial analysis software like Bunker is helping automate and streamline several elements of the FP&A cycle. Financial metrics such as Gross Margin, Gross Profit, OPEX, etc can be surfaced easily through dashboards within Bunker.
Manual and time-consuming tasks like data gathering, report generation, and even complex analysis can now be completed in mere minutes, saving time and reducing the potential for human error. FP&A teams can now focus more on strategic planning rather than data wrangling.
This creates a more efficient FP&A process and ensures that financial insights are timely, up-to-date, and thoroughly reliable, enabling quicker and more informed business decisions.
2. Enhanced Predictive Capabilities Through Data Science
The infusion of data science and machine learning capabilities into FP&A is set to revolutionise financial forecasting. These techniques can analyse large volumes of data, spot patterns that might be missed by the human eye, and make highly accurate financial decisions.
Data science can also assist in stress-testing financial forecasts against various scenarios. This gives CFOs a more rounded perspective of potential risks and allows them to better prepare the business for future eventualities.
In 2020, Gartner released research on “xP&A,” or Extended Planning & Analysis, which focused on connecting all departments and leveraging data from every corner of the organisation. Cloud-based data repositories made this possible, eliminating silos and other obstacles.
3. Strategic Alignment of FP&A with Sustainable Business Practices
Sustainability is gaining prominence in business strategy, and FP&A is no exception. As organisations strive to become more environmentally and socially responsible, CFOs and finance teams are tasked with integrating sustainability into financial planning and analysis.
This may involve planning for investments in sustainability initiatives, budgeting for eco-friendly business operations, or analysing climate change’s financial impacts. The FP&A function will be key in helping businesses achieve their sustainability goals and ensure financial viability.
Conclusion
Despite his insistence on making decisions with his “gut,” the first part of Jeff Bezos’ famous quote still reads:
“If you can make a decision with analysis, you should do so.”
Analysis cannot be overstated. Too often, young or early CEOs and CFOs overlook that key insight and try to guess at things that could be easily measured with the right FP&A tools in place.
As businesses continue their journey towards a technologically integrated and data-driven environment, the evolving capabilities and responsibilities of FP&A only underline its significance.
As such, smart investments—from people and processes to tools like Bunker—can reap great dividends. Top-performing FP&A functions hold the key to driving sustainable and profitable business growth in today’s intensely competitive marketplace.
