Mastering the Art of Financial Planning and Analysis: A Comprehensive Guide

In corporate finance, very few, if any, companies can be consistently profitable and grow without careful financial planning and cash flow management. The job of managing a corporation’s cash flow typically falls to its financial planning and analysis team and its Chief Financial Officer (CFO).

These teams play crucial company roles by performing budgeting, forecasting, and analysis that support major corporate decisions of the CFO, CEO, and the Board of Directors. This article covers everything businesses need to know about the FP&A process and the responsibilities of FP&A teams.

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Table of Contents

    What is Financial Planning and Analysis?

    Financial planning and analysis (FP&A) refer to the processes designed to help organizations accurately plan, forecast, and budget to support the company’s major business decisions and future financial health.

    These processes include planning, budgeting, forecasting, scenario modelling, and performance reporting. FP&A is not merely accounting, but accounting is foundational to the process. Chief financial officers purchase specialized FP&A software to help them perform these critical tasks.

    A Financial Planning and Analysis director forms an integral part of any organization that can help make futuristic decisions for the company based on the analysis of the data. Budgeting, Forecasting, Analysis, and Planning are the primary functions of the FP&A, which draws a fair picture for senior management like the chief financial officer or CEO to make any major corporate decision.

    FP&A Skills

    An FP&A analyst or director needs to excel at math and have an appetite for crunching numbers. It’s therefore no surprise that many people in this role are former accountants. But professionals in this field also need to be comfortable diving into complex and varied data sets from sales, marketing, human resources, and operations.

    Spreadsheets are an essential tool in analysing that data, so FP&A employees need to be skilled with Microsoft Excel spreadsheets or a similar tool. They need to know the formulas and processes that will allow them to aggregate and manipulate raw data to produce key reports. They should understand how this software can automate reporting and assist with more complex reporting and analysis.

    Since FP&A management team members need to communicate and collaborate with colleagues from across the organization, they should have strong business partnering skills. Business partnering skills include the ability to work well with others and understand their business priorities and goals, build a deep knowledge of the company and its processes, and turn droves of information into easily understood reports.

    Finally, FP&A demands exemplary problem-solving skills, as these employees must overcome the challenges inherent in consolidating and reconciling historical financial data.

    Purposes

    Let us understand why large companies dedicate a significant chunk of their time and resources in hiring a financial planning and analysis director by understanding the purpose of the same. 

    • This can be used to analyse financial data or data analysis to forecast the economic trend and implement the company’s financial policy by analysis professionals. 
    • Since this is done through the financial data, it depicts the financial numbers for the company by analysing financial statements like cash flow statement, balance sheet, and income statement.
    • There are several purposes for doing financial analysis for any company, like in corporate finance for analysing the NPV or IRR of any project or in an investment analysis. Setting where the numbers can be used to analyze the investment.
    • The most general way to analyze the data is to do the ratio analysis. And compare the same with industry standards or evaluate the historical records.
    • A periodic analysis of the financial data by analysis professionals will help the entity to maintain the data through data analysis and analyze the trends to make any managerial decisions for future advancements.

    Importance

    The financial health of an organization is the prime concentration point for any organization for obvious reasons. The financial planning and analysis software gives them important insights that help them make better decisions in terms of their growth plans or other developmental aspects. Let us understand the importance of completely understanding the concept’s intricacies.

    • The financial analysis sets a good base for any company to succeed by setting the financial and business plan; adequate planning leads to a better understanding of how the business is performing than the projections.
    • In case of financing requirements where the company needs to borrow funds for future advancements, FP&A will try to present a separate finance section in front of the board in a very brief manner. Also, the lender would want to see the numbers before lending out money.
    • Accounting and FP&A are two different methods to analyse financial statements; in the place where a company’s financial accounting ends, FP&A takes over. In short, accounting focuses on historical numbers, and FP&A focuses on forecasts and future numbers.
    • FP&A strategy links the long-term plans with annual reporting and capital budgeting; with further analysis, it also helps develop financial models and assists in the annual target setting process.
    • Consistency and stability are very important in any business. A reliable FP&A process will help get this stability and, at the same time, include reliable information for the management teams to make sound decisions.
    • Most organizations have a dedicated team for FP&A, which continuously tries to improvise and maintain the numbers in the pursuit of many strategic objectives, and finance teams are becoming stronger and stronger by generating effective analysis by analysis professionals to create more economic benefits for the organization.

    Financial Planning and Analysis Responsibilities

    Profit & loss

    The FP&A team is responsible for putting together profit and loss statements, board reports and management reports such as variance reports, which track budget vs. actual spend by department, and cash flow statement. Finalizing these statements requires collecting data from different departments by business leaders and then verifying and consolidating that information. The FP&A team uses that to calculate key financial indicators that will appear in these statements like debt-to-equity ratio and current ratio.

    Profit Margins

    FP&A professionals often dig into financial statements to understand which product lines or services have the highest profit margin or contribute the most to net profit. Similarly, they may break down the cost and revenue or profit generated by each department within the company.

    Budgeting

    More forward-looking responsibilities of FP&A include planning the budget and financial forecasting the company’s future financial performance. Budgeting requires parsing through financial reports to determine how to allocate money. Financial Forecasting requires creating financial models that account by business leaders for trends within the business and in the broader industry and economy that may affect revenue and profit. 

    Scenario Planning

    One type of financial modeling is scenario planning or scenario analysis, a process in which FP&A employees map out best-case, expected, and worst-case scenarios by plugging in different numbers for sales and order volume to see how it would impact the company’s financial position. Based on those results, the management team can identify steps it would take in response to different outcomes, better preparing a business for the future extremely or very effective” FP&A teams were more likely to have predictive capabilities or financial forecast, according to a survey from AFP/APQC. 

    Ad-hoc reporting

    These on-demand reports, typically requested by the chief financial officer, often provide a more detailed look at a certain KPI or business department. An analyst may need to pull numbers from various broader reports to uncover the specific information the executive wants. This reporting and modelling, especially if it’s done frequently, gives the FP&A team the information it needs to provide timely, accurate and actionable recommendations to senior management or senior executives.

    Building an Effective FP&A Team

    Every business has an accountant, but many don’t have someone dedicated to FP&A. FP&A team structure varies greatly at a small company, this function could be just one aspect of one person’s job, like the controller, while a larger organization might have dozens of FP&A employees.

    Three Roles of FP&A Teams

    Although job titles and roles of FP&A team members will vary by company, from the corporate financial analyst that analyses corporate financial plans to FP&P manager to the director, here are their common respective responsibilities:

    Corporate Financial Analysts

    • Financial analysts analyse financial data analysis and use financial models for forecasting.
    • Corporate financial analysts typically help to support management decisions by providing actionable financial information. They monitor financial statements, expenses, taxes, and other financial details to cull out where the company makes money.
    • Track revenue and gross margin by business unit and expenses by cost centre.
    • Financial analysts prepare reports on financial performance tailored to the needs of leadership.
    • Evaluate financial performance by comparing and analysing actual results with plans and forecasts.
    • Study and analyse trends and forecasts to inform recommended actions.
    • Policies and procedures that guide cost are analysed by the financial analyst.

    FP&A Manager

    • Work closely with the leadership team to formulate short- to long-term financial and corporate strategy.
    • Analyse financial and operational results to better understand the company’s overall financial health.
    • Evaluate previous budgets and collaborate with business unit leaders to build their annual budgets and forecasts.
    • Communicate results and recommendations to senior management that will lead to revenue generation, cost reduction and more efficient operations.

    Director of FP&A/Vice President of FP&A

    • Own the process for preparing financial statements and financial models, including scenario planning or scenario analysis.
    • Define processes for monthly, quarterly, and annual financial budgeting, forecasting and long-range planning.
    • Drive and improve existing management teams to be more accurate and timelier.
    • Analyse financial results to determine key takeaways and recommendations for senior management or senior analyst.
    • Lead ad hoc financial modeling and reporting for special projects.
    • Partner with IT and the broader organization to improve forecasting through automation and system optimization.

    Financial Analysis and Planning vs. Business Analysis and Planning

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    Both these concepts are often misunderstood for one another. Let us understand the difference in their fundamentals and implications through the comparison below.

    Both these concepts are often misunderstood for one another. Let us understand the difference in their fundamentals and implications through the comparison below.

    • Finance-related arrangements are centred around planning and determining inside a financial year, concentrating on meeting the quarterly target. Other functional teams intend to reduce expenses instead of foreseeing upcoming business issues.

      The analysis is centred around record revealing and standard reports joined with worthless models. Reports and data are regularly obsolete and not adjusted to key business drivers. The business analysis approach includes exercises from capacities critical to pushing the business ahead  for example, marketing, sales, and operational management  all lined up with the organization’s key vision.

      As opposed to focusing on only budgetary or financial valuation, the organization coordinates key useful regions that straightforwardly impact business results.
    • While evaluating the financial numbers, reflect the financial picture of any company. However, some executives feel that the reality of new and changing business trends is not included in these numbers.

      This puts out a whole picture for making any management decision for the company. It is based on available data, and Business analysis helps the management know the vibe in the market about any business.
    • Some corporates are also of the opinion to change the FP&A to Business planning and analysis due to the wide horizon it covers for analysis; numbers from financial analysis might help any company decide. Still, it might be from a short-term perspective, while business analysis will create a more realistic report based on the ongoing trends in the economy.

    Understanding the FP&A cycle

    When FP&A is performed properly, it helps CFOs and corporate financial analysts answer many important questions about a business. Should we raise debt or equity financing? What impact will an acquisition or divestiture have on the bottom line?

    How much should be invested in property, plant, and equipment and when? What is our break-even point? If revenue declines by 10%, will the company still be profitable? If revenue increases by 15%, will net income increase by the same percentage?

    While often tied to accounting systems, FP&A software complements accounting software by providing management insights in addition to financial and operational data. In other words, accounting systems operate the day-to-day transactional activity and FP&A systems manage the business analysis, understanding, and reporting on the business performance.

    The software has evolved to manage all types of enterprises by linking financial and operational metrics to insights ultimately driving strategies, plans, and execution across the organization.

    With FP&A software, finance leaders and operational managers, through operational data can drive improved performance by monitoring financial reports and results against forecasts and using analytics to recognize key business trends and predict outcomes.

    Business value of FP&A software agility is the key.

    In an environment of constant change, new competitors, and economic uncertainty, FP&A offers a framework for organizations to manage their businesses in an agile way. With the CFO at the helm, FP&A software, i.e., financial modeling, budgeting, planning, reporting, and analysis, can help enterprises understand their data and use it to make better business decisions.

    Planning and budgeting

    Make better decisions by creating goal-oriented, driver-based plans. Get immediate insight to your performance with interactive dashboards and reports and leverage predictive planning to recommend the best path forward.

    Scenario modelling

    Model multiple complex financial and operational what-if scenarios with large-scale, free-form ad-hoc modelling. Use predictive planning features to validate assumptions and reduce the risk in your decisions.

    Cash flow management

    Model cash flow across operating, investing, and financing activities with fully integrated cash-flow planning for short, medium, and long-term time horizons.

    Profitability and cost management

    Discover which customers, products, and other segments of your business are profitable and which are not, allowing you to invest resources accordingly.

    Connected planning

    The digital economy demands more than spreadsheets and department-oriented planning processes. Connect every part of your business on a planning platform that is fully integrated across finance, operations, and lines of business. With connected planning, you can immediately analyse the impact of changes across your business and see the financial impact of any changes to operational plans.

    Tax reporting

    Changing tax laws are causing global organizations to plan and manage their tax affairs very differently than they have to date. Modern FP&A software connects the processes, data, and metadata that tax and finance share, such as financial planning, financial close, and regulatory reporting, streamlining tax reporting and providing better visibility and compliance.

    Pro forma financial statements

    Accurate financial forecasts, profits, cash flow management, are at a gross margin by adding dimensions for specific drivers related to your business. See the full picture by integrating balance sheets fully with income statements and cash flow.

    Reporting and analytics

    No matter how many internal and external reporting standards you must comply with, you want to be sure that the data you provide in your reports is accurate, complete, and the most current information available.

    FP&A software reduces the need for multiple reporting systems and allows them to spend more time acting on the anomalies, bias, or hot spots in the data and truly partner with the business to carry out the strategy.

    Recap

    Financial planning and analysis (FP&A) is the process of budgeting, analysing, and forecasting the financial data, which can help any organization to be aligned to its financial goals and support major corporate decisions of the company.

    It also helps an investor to know if the company is stable and profitable enough for the investment. FP&A therefore forms an integral part of any firm’s operations; with this kind of analysis and forecasting helping the business know the historical trends and anticipate the upcoming trends.