It’s hard to plan when everything is constantly in flux. For organizations, this is where the FP&A department comes in- financial planning and analysis is meant to help firms deal with the changing tides, whether it be micro or macro events that impact their organization.
The 21st century has presented budgeting and planning with novel challenges. According to Accenture, only 11% of companies are fully satisfied with their planning procedures. And according to CFO magazine, 70% of survey respondents were not able to see more than a quarter ahead. That’s quite a limited perspective. Spreadsheets still rule when it comes to planning and budgeting. But there’s much that FP&A teams can do to improve their planning processes while still sticking with the platform they know and love. More on that later.
FP&A is a critical component to any successful business. Recent progress in technology has led to an increase in sophisticated product offerings that enhance how finance professionals carry out FP&A activities and have even led to the development of tools that integrate FP&A practices across an organization.
What Is FP&A?
According to Acca Global, financial planning and analysis is the budgeting, forecasting, and analytical processes that support an organization’s financial health and business strategy. FP&A professionals are responsible for providing management with the financial analysis and information they need to make operational, financial, and strategic decisions.
The meaning of FP&A is that there is a dedicated team that is involved in running the annual budgeting process and producing regular forecasts that help organizations plan for the future. They’re involved in analyzing business trends, advising on company performance, and exploring potential growth scenarios.
Ultimately, the definition of FP&A is that there is someone looking out for the organization well into the future.
Gartner defines financial planning and analysis as a conglomerate of four functional business activities that are intended to support the financial health of an organization. The four activities that comprise FP&A are:
- Planning and Budgeting
- Integrated Financial Planning
- Management and Performance Reporting
- Forecasting and Modeling
Understanding how each of these activities is carried out will help to provide a more complete picture of financial planning and analysis and how it is used to carry out the goals of an organization. When conducted in succession, the four activities that makeup FP&A are the actual process of carrying out FP&A.
Planning and Budgeting
Planning and budgeting is the practice of setting targets and generating a budget to give management a foundation on which to evaluate business activities and financial targets. The two terms are separate actions, where planning involves identifying the goals of the organization and budgeting focuses on the resources needed to accomplish those goals. This means that any budget is shaped by the plans of an organization.
The process of planning and budgeting starts with defining the objectives of the organization over the planning period. Clear objectives are then supported with a plan. For example, the objective might be to grow revenue by 10%. The plan would then include clear steps on how to achieve this, perhaps through targeted marketing campaigns, aggressive sales tactics, or incentives. A budget would then be drafted to support the plan. EPM systems can be used to automate such processes.
Integrated Financial Planning
Integrated Financial Planning is a term used to describe the process of aggregating various financial plans from the different functional areas of a business and combining them into one cohesive plan. The process is often confused with integrated business planning, which is actually an expansion of sales and operations planning (S&OP). The two are separate processes entirely, whereby a sales and operations plan might be a component of an integrated financial plan.
Oftentimes in FP&A practice, integrated financial planning is the most difficult of the activities to complete. The reason is that the various functional areas of the business might not have a standardized method of communicating their goals with one another. The result is that it can be difficult to integrate each plan into one cohesive plan because the metrics aren’t transferable or there is no easy way to build a single financial plan that incorporates all of the other plans.
Recent developments in software capabilities have allowed for significant advancements in carrying out integrated financial planning. In the future, integrated financial plans will likely be far more autonomous than they have been in the past.
Management and Performance Reporting
Once a plan is established and a budget has been created to support the plan, they are communicated to the various departments. Each department then takes those budgets and creates its own plan to accomplish the individual goals that it has been tasked with. Those goals are then integrated into one cohesive financial plan, and metrics are identified to ensure that the plan is being followed.
These metrics are used in a process that involves collecting and communicating information and progress to the managers of various functional areas of the business.
FP&A Top Responsibilities
FP&A professionals play a key role in helping organizations determine their financial position and direction. Their core responsibilities include:
1. Preparing budgets, consolidating information, and establishing a holistic corporate budget
2. Understanding and communicating an organization’s financial stance and health
3. Looking into cost efficiencies and how to establish them
5. Comparing budgets to actuals in order to see where the company stands
6. Performing various analyses such as variance analysis or ad-hoc analysis
7. Considering growth and expansion plans, and generating financial forecasts
FP&A is changing its focus. While annual planning was once common, today organizations need agile and continuous planning processes in order to survive and thrive. Today, many businesses are relying on quarterly or even more frequent budgeting and planning. Among the key questions finance professionals are considering are:
· Should we transition from annual planning to a rolling forecast?
· Can we digitize and accelerate any of our processes?
This is the time to challenge traditional business planning- FP&A has the opportunity to play a greater role in planning with greater agility. With more demands being put on the FP&A function, CFOs are looking towards technology to help them scale efficiently- this is where more automation and cloud computing come in.
FP&A and Technology
Technology can free up time for strategic work and improve accuracy of work. Advanced analytics such as DataRails FP&A software have the power to transform FP&A processes by managing risks and running scenario analyses and what-if forecasting models. Analytics such as DataRails can help improve the performance measurements of the organization, without changing how finance professionals work. Finance professionals keep working as they’re used to in Excel, while leveraging the robust analytics capabilities and automation that DataRails has to offer.
What Is FP&A Software?
FP&A software is the link between forecasting, reporting, budgeting, and planning. The goal of modern FP&A software is to make it easier for all of these functions to take place. Because of the massive amount of time that this once took, FP&A software shortens the amount of time, for example, creating a forecast requires. FP&A software streamlines these processes and is often cloud-based. This allows firms to take advantage of everything modern FP&A software offers without having to invest deeply in customized solutions that take a great deal of time and effort to install and deploy.
Management and performance reporting is at the forefront of modern FP&A software advancements as ERPs and CRMs have allowed for better monitoring of performance metrics. Software applications are beginning to offer real-time data analytics that gives advanced insight into how departments are performing with respect to their plans. Historically, management reporting has taken a great deal of time, but new software applications are granting more flexibility to users and how they interact with data. Customizable dashboards and data management tools are creating better ways for departments to monitor their own performance and make ad hoc adjustments when needed.
Forecasting and Modeling
As with the previous activities, forecasting and modeling define two uniquely separate functions. Forecasting is the process of considering and preparing for the future by attempting to outline expectations of future results. Financial modeling is the process of breaking down the assumptions used in a forecast and quantifying them into values used in financial reporting.
Every forecast made has an impact on various functions of the business, the most common being the sales forecast, which extends beyond the expectations of future sales into expenses and other considerations that are impacted by sales growth. A forecast is intended to behave as a sort of corporate crystal ball, giving leadership an idea of the current trajectory of a business.
Every forecast must be incorporated into a model in order to be used to its maximum potential. A financial model is always flexible and should include the assumptions of a forecast, allowing them to be changed in a dynamic way to visualize the outcome of decisions.
FP&A Scenario Planning
While historical data is indeed useful for forecasting and planning, it has always been the case that this form of planning is insufficient in the modern business world. Because of the massive amount of unknown information available that can make a powerful impact on a business in the future, scenario planning has evolved to deal with so-called “unknown unknowns” and to make changes in forecasted scenarios as these uncertainties become more clear.
The difference between forecasting and scenario planning is that scenario planning takes place in real-time, takes into account real-time changes to a business and a business’ environment, and creates a variety of scenarios that are then used to make decisions quickly, making a business more agile and allowing it to pivot quickly as new information comes to light.
Forecasting, on the other hand, mainly uses historical data and looks far into the future. The problem is that the farther into the future one looks, the more likely it is that these forecasts will become essentially useless as the situation evolves over time. Scenario planning is the method by which these uncertainties, or “unknown unknowns” are dealt with as they become known over time.
What’s The Point of FP&A?
The most important function of financial planning and analysis in an organization is to take the historical results recorded in the accounting process and convert them into quantifiable future expectations. FP&A can be viewed as the final product of accounting.
Any ship without a destination or map will get lost at sea and is subjected to the whims of the ocean. In this way, FP&A acts as the map for businesses to navigate their respective environments. It is the way management identifies its path to achieve the goals they outline and the means by which to measure the performance of the business. Good FP&A results in plans and analysis that allow leaders to adjust the sails of their organization as needed to follow the map to their goals.
Standards in FP&A
Like all business functions, there are some best practices that all effective FP&A incorporates. Here are five best practices in financial planning and analysis:
Convert Goals Into Actionable Plans
In order to effectively execute the strategy of leadership, it is critical to create clear, actionable plans directly from the strategy. This ensures that every plan is realistic, achievable, and directly related to accomplishing the organization’s goals.
Integrate Operations and Financial Planning
Understanding how the financial plan interacts with operations is critical. The more the two functions are integrated with one another, the greater the chances of executing a plan successfully.
Ensure Data Validity and Accuracy
At the core of every plan is data. Data ensures that the plan is realistic and achievable. Data is used to measure adherence to the plan. Data is used to report to management for adjustments on the plan. Ensuring accuracy and completeness of data, as well as keeping data current, is imperative for a successful FP&A process.
Develop Meaningful KPIs
Developing meaningful key performance indicators is important for management to measure the success of a plan and whether adjustments to a plan are needed. Ensure that all KPIs aren’t just relevant to your industry, but also ensure that KPIs are relevant to your organization.
Create Dynamic Plans
Creating plans that can be adjusted with ease will allow for better adaptation and less time spent on adjustments. Each subsequent plan will be faster and more efficient, shifting the focus to higher-reward tasks, like the analysis.
What Do FP&A Analysts Do?
FP&A professionals might vary across organizations, but the role has some central themes that are static regardless of the industry. Analysts are often expected to provide senior leaders with analysis and input on how to maximize efficiency and best utilize an organization’s resources.
Some of the more common roles that FP&A analysts take on include measuring the financial health of an organization through various metrics, determining the best use of assets and debt, evaluating the financial efficiency of departments, and preparing budgets for both departments and the corporation as a whole.
FP&A analysts often create and maintain financial models and forecast and perform actual vs budget analysis on an organization’s adherence to a plan or budget. They are usually always tapped to make performance reports for management and often work on special projects to ensure they align with business goals.
FP&A is gaining more and more traction as organizations realize its importance, particularly during these turbulent times. The collection, preparation, and analysis of financial data from across the organization is a key part of determining the direction of an organization. FP&A can and should leverage the technologies available today to improve their work processes and in turn increase the value they provide organizational decision makers.
Learn How DataRails Can Help Your Organization Create More Agile FP&A Teams
DataRails can help your company implement automation that can help your FP&A team operate more efficiently and effectively. DataRails is helping FP&A teams all over the globe reduce the time they spend on traditional reporting and planning.
By replacing spreadsheets with real-time data and integrating fragmented workbooks and data sources into one centralized location, you can work in the comfort of excel with the support of a much more sophisticated data management system behind you. Build beautiful budgets, track and monitor business performance, and give users stunning and easy-to-use dashboards with DataRails.