Financial planning and analysis (FP&A) is comprised of four main parts- planning and budgeting, financial planning, management and performance reporting, and forecasting and modeling. As FP&A is a critical part of determining an organization’s financial health, it’s important to consider the different disciplines that can enhance this function. One such discipline is accounting. Often reduced to the creation of financial statements and tax returns, the accounting function is so much more than that. Accounting is, in large, about transactions. There are three main areas of accounting that finance professionals should consider.
Tax accounting refers to the filing of tax returns, tax planning, and conducting tax research. These are all important elements to FP&A. But how exactly do they come into play?
Firstly, tax planning is about minimizing liabilities. Tax liabilities have an effect on the cash disbursements that companies make, and cash disbursements are a core part of FP&A. This is because they effect liquidity and solvency. Adopting a top-down planning approach with tax planning is a great way to think about how tax liabilities can be minimized.
On the flipside, a bottom-up approach that comes in the form of tax research is also necessary. Tax research is responsible for finding solutions to tax problems. In terms of FP&A, tax research is important for figuring out how the internal revenue code can be used to minimize tax liabilities.
To summarize, in FP&A, tax accounting’s role is to consider how the internal revenue code can be utilized to minimize tax liabilities, and in turn cash disbursements.
Managerial accounting is all about ensuring communication to all for better organizational decision making. For FP&A, there are three particular elements of managerial accounting that are especially relevant. The first is cost behavior. Cost behavior examines the relationship between volume and cost- some costs are affected by changes in volume, while others are unaffected. Recognizing which are affected can serve as a bottom-up approach to FP&A.
Incremental analysis is another element of managerial accounting that is relevant for FP&A. Incremental analysis is all about changes, which is relevant for FP&A as the field addresses concerns such as expanding or reducing operations.
By far, budgeting is the most important topic in managerial accounting for FP&A. Budgeting is relevant for many aspects of financial statements including sales, COGS, SG&A expenses, current assets, and current liabilities. Budgeting expands into FP&A in two particular areas: variance analysis (how reality differs from expectations), and performance measurement (determining the effectiveness of decision making in financial planning). Modern systems such as EPMs can help in automating such important tasks.
Financial accounting refers to the process of identifying, recording, and communicating transactions. The goal of financial accounting is to help people outside the business understand the financial health of the organization. Income statements, balance sheets, and statements of cash flows are all integral parts of FP&A.
Once separate functions, today the two go hand in hand.
An accountant must be familiar with the realms of accounting standards, regulatory requirements, and internal controls. But today, more than that, they must also be familiar with the business and the numerous metrics and drivers behind it. This is where the worlds of accounting and FP&A collide. FP&A professionals today must know the fundamentals of accounting, and must simultaneously work on realigning their mindsets and developing skills that help them transition into becoming a true business partner.
FP&A and accounting teams today must work hand in hand, otherwise they’ll end up wasting valuable time each month. Accounting teams tend to focus on the balance sheet, while FP&A teams tend to focus on the P&L. So while FP&A teams may account for a transaction one way, the accounting team may account for it as another. This requires the two teams to accurately communicate their efforts to ensure recorded transactions don’t get lost.
Improving coordination and collaboration between accounting and FP&A will allow workers to focus their time and energy on high-value analysis, instead of reconciliations.
While it appears that accounting has taken a back seat in FP&A due to advancements in technology, it’s not wise to ignore the role of accounting in the FP&A field. The aforementioned elements of accounting- tax accounting, managerial accounting, and financial accounting- are and will continue to be vital aspects of FP&A.
Datarails is an FP&A solution that allows for the connection and centralization of all organizational financial data from various systems (ERP, GL, CRM) alongside Excel spreadsheets and operational data. It also allows for the creation of automated reports (P&L, cash-flow, budgets, etc.), as well as a thorough analysis of consolidated data for the creation of business and financial insights.