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A Guide to Financial Planning and Analysis

Financial analysis is an integral part of any business activity. It helps managers understand their companies’ performance, identify areas for improvement and make better-informed decisions. 

The purpose of financial analysis is to examine past performance, forecast future performance, determine where improvements can be made, and help business owners make informed decisions about their companies’ finances.

This guide covers financial planning and analysis to help propel your career or move your current business forward.

What Is Financial Planning & Analysis?

Financial Planning and Analysis (FP&A) is the process of identifying, planning, and analyzing the financial aspects of a business. Financial planning helps organizations make intelligent business decisions by providing insight into how they perform financially. This can include assisting leaders in understanding how to improve their company’s performance or deciding whether to buy or sell assets.

FP&A professionals use their financial knowledge to improve an organization’s financial performance. They work with other departments such as sales, marketing, and operations to provide businesses with accurate and timely information on their financial performance. 

They are essential in managing company cash flow by forecasting future revenues and expenses, determining budgeting needs, performing economic analyses, and benchmarking against competitors. They are often responsible for preparing budgets and forecasts and monitoring actual results. They also provide information on the performance of different business units and new investments based on past performance.

FP&A professionals may be involved in several different areas, including:

Budgeting: Producing detailed forecasts of future revenues and expenses to plan how much money will be available for spending each year. Budgeting includes long-term planning based on historical trends and short-term predictions based on current conditions.

Cash flow forecasting: Producing forecasts for cash inflows and outflows. These forecasts analyze whether a company’s current assets will be sufficient to meet its liabilities when they come due.

Capital analysis: Determining whether a proposed investment makes sense from a financial perspective. This analysis might include comparing returns from proposed investments with those from alternative assets, such as bonds or other securities offered by companies with similar risk profiles.

What Is the Difference Between FP&A and Accounting?

FP&A and accounting are two different functions within an organization. 

Accounting professionals are responsible for preparing financial statements, including balance sheets and income statements, and complying with government regulations related to taxes, auditing, payroll, etc. They also generate reports based on the information gathered from various systems within the company.

FP&A uses accounting information but goes beyond it by looking at how the data and trends affect future performance and how changes in prices, costs, or investments will affect the business over time. The FP&A team analyzes the data, generates reports, and makes recommendations to senior management based on their findings.

The role of FP&A is to provide insights into how changes in business processes or strategies will impact future performance. This allows management to make better-informed decisions about strategy and resource allocation.

In addition, FP&A professionals typically have backgrounds in finance or accounting but also possess strong analytics skills because much of their work involves analyzing data. Some companies even hire people with backgrounds in industrial engineering or information technology.

What Is the Structure of an FP&A Team?

Financial planning and analysis (FP&A) teams comprise people from various backgrounds and skill sets. This diversity is essential because it affords the team members a more comprehensive view of the business. Many companies have FP&A teams divided into several different areas, each with its responsibilities.

Although FP&A teams can vary in size and structure from company to company, there are some common elements that most FP&A teams have.

The company’s chief financial officer (CFO) is the senior executive directing a company’s financial actions and initiatives. Team leads report to the CFO directly or through a VP of finance or COO, depending on the company’s organizational structure. 

Below those leaders are individual contributors who work in specialized roles such as analysis, forecasting, auditing, and forecasting. These people take information from various sources to build reports for decision-makers within their functional area.

Accounting

The accounting department is usually the most significant part of an FP&A team. Accountants are responsible for ensuring that all financial data is recorded correctly by generally accepted accounting principles (GAAP).

They also prepare reports used by management to make critical business decisions such as budgeting or determining whether or not to pursue a course of action. This also includes internal auditors who monitor finance departments for compliance with accounting standards.

The accounting department has several different roles and functions, including:

  • Accounts payable: The department that handles invoices and payments.
  • Accounts receivable: The department that collects money from customers.
  • Audit: The department that checks the company’s books to ensure they’re accurate.
  • Controller: A high-ranking executive who oversees accounting functions in a company. Controllers typically manage many different departments, such as accounting and finance.

Treasury and capital market

This is where you’ll find professionals focusing on investments, cash flow, and capital markets. This team oversees the company’s cash flows, including short-term debt funding, long-term financing, and capital investments.

It also manages the company’s relationship with its investment banks and compliance with regulatory requirements.

FP&A

The FP&A team is the hub that drives the financial performance of an organization. The team is responsible for collecting, analyzing, and reporting financial data to ensure all stakeholders have the necessary information to make intelligent financial decisions for the company.

FP&A teams typically consist of a chief financial officer (CFO), controllers, and analysts. In larger companies, FP&A teams may also include other finance professionals involved in planning, budgeting, or forecasting.

The team’s responsibilities may include:

  • Developing the annual budget
  • Planning and tracking projects
  • Analyzing revenue and expenses
  • Managing financial risk
  • Identifying opportunities for investments
  • Supporting other departments with their day-to-day needs

FP&A also has a strategic role in helping companies make decisions that affect their long-term financial health. These decisions may include pricing strategies or investments in new products or services.

What Does a Financial Planning and Analysis Team Do?

 A financial planning and analysis (FP&A) team are responsible for helping businesses make decisions about a company’s financial health. This can be done through forecasting, reporting, budgeting and forecasting, expense management, and other tasks.

The team gathers financial information from various sources, analyzes it, and presents the findings to management.

FP&A teams are typically found in companies with many employees and multiple departments or divisions. The team’s efforts can help ensure that each department works toward the goals and objectives. In some companies, the FPA team reports directly to senior management or the board of directors.

Accounting is often focused on looking backward, whereas FP&A is focused on the company’s future. They do this by leveraging financial management software, especially tools for budgeting, scenario planning, forecasting, and corporate performance management. 

That said, most of their obligations fall into one of three categories:

  • Financial planning
  • Decision support
  • Specialized support

Financial Planning

The financial planning and analysis team is responsible for managing the budget and analyzing the financial statements. 

Financial planners develop budgets and forecasts, which help managers decide how much to spend on different business areas. They may also evaluate capital investments and make recommendations regarding these expenditures. 

Financial analysts review financial statements to ensure that they are accurate. These professionals analyze trends in sales, costs, assets, and other factors to identify problems before they become serious. They also compare actual results with budgets and plans to determine whether the company is performing as expected or if any issues need to be addressed.

To pursue these ends, the FP&A team must constantly run through three critical financial statements:

  • P&L (income statement)
  • Balance sheet
  • Cash flow statement

These three documents help the team account for key financials like gross profit and net income margin, the cash balance on hand, monthly cash burn, and various ratios.

Decision-Making Support

FP&A teams don’t just focus on forecasting and planning. Financial planning and analysis teams are also responsible for helping companies make decisions about their future. The team’s primary goal is to help businesses grow by analyzing data and forecasting financial results.

One of the main questions they must ask is, “Is the company’s current assets and investments delivering ROI, or is there a better way to utilize cash flow?” To help solve these issues, they may seek to identify areas to invest in or generate cash flow while also analyzing the cost-efficiency of each department.  

Depending on the company, many FP&A teams are in charge of creating a monthly “CFO book,” which provides key metrics, including:

  • Current forecasts, listing both the risks and the opportunities within the current plan
  • Historical financial analysis 
  • Key performance indicators (KPIs)

This book can empower upper management or the CFO, helping them identify opportunities for investment and optimization.  

Specialized Support

Depending on the business, an FP&A team may be pulled into various other roles for which they have specialized expertise. 

Businesses need accurate data to make intelligent decisions about their operations. This data can come from numerous sources, including sales reports, inventory databases, and customer information.

However, it takes someone with specialized training to gather all this information and turn it into valuable numbers that management can use.

The FP&A team gathers data from every department within the company, including finance, accounting, and marketing. They also use independent research firms for outside sources of information such as industry trends or economic forecasts.

The result is a complete picture of how well your business is performing financially and what areas need improvement. This information gives you an edge over competitors who may not have access to this type of data or don’t know how to analyze it correctly.

FP&A Teams’ Three Primary Statements

The primary responsibility of FP&A teams is to provide insight into what happened in the past and what is happening now so that executives can make informed decisions about the future. To do this, FP&A teams use three main statements:

  • Profit and Loss (P&L) Statement
  • Balance Sheet
  • Cash Flow Statement  

On their own, each serves a unique purpose, but together, they make it possible for FP&A teams to perform financial modeling and forecasting.  

Profit & Loss Statement

Also known as an income statement, the profit and loss statement measures the business’s profitability over time. It has two major parts: income and expenses. These components allow the FP&A team to calculate how much money was gained or lost in the intervening time. 

This is the most popular financial statement because it shows whether a company made or lost money during a specific period, like a month or year. The profit and loss statement shows you what happened to your money over a period (typically a year). In contrast, the Balance Sheet is concerned only with where your money is at any given moment.

One of its purposes is to help investors gauge how well a company is performing by comparing expenses against revenue. If a company has more expenses than revenue, it loses money; if it has more income than expenses, it makes money.

By analyzing a P&L statement, an FP&A team can better gauge the company’s overall financial health.

Key Features of the Profit and Loss Statement

The profit and loss statement is a document that summarizes the revenues and expenses of an organization over a given period. You’ll find three key features on it: revenue, fees, and net income. These three features show how well your company is financially doing over a given period.

Items Included in the profit and loss statement include:

Revenue: The total income of a company refers to the total amount of money brought into the company. It represents all sales generated in a given period, such as one quarter or one year. Revenue includes all money a company receives from its customers, whether it’s cash, checks, or other forms of payment. 

Expenses: Expenses are the costs incurred while generating revenue. Expenses can be broken down into four main categories:

Cost of Goods Sold (COGS): After subtracting its direct costs such as materials, labor, and shipping, this is the profit a company makes.

Operating Expenses: This covers payroll, rent, utilities, and other things that aren’t directly related to production or sales. These are generally fixed costs that are relatively consistent from month to month.

Balance Sheet

The balance sheet is a snapshot of a company’s financial position at any given moment — it reports what a company owns (its assets), what it owes (its liabilities), and its net worth (assets minus liabilities). The balance sheet is also sometimes called the statement of financial Position.

This statement tells you how much money the company has on hand and how its financial situation compares to when it was last examined.

The balance sheet is the heart of a company’s financial statements because it tells you if it is in good shape or in danger of bankruptcy.

Key Features of the Balance Sheet

When looking at a balance sheet, you will see three key features: assets, liabilities, and equity. These three sections contain information about your company’s financial position on a given day. 

Items Included in the Balance Sheet include:

Assets: The sheet’s asset side shows various things that belong to your organization. Assets are grouped into current assets and noncurrent assets. Existing assets are resources that can be converted to cash within one year, such as cash on hand, accounts receivable (i.e., money owed by customers), inventory, and prepaid expenses (e.g., insurance). 

Noncurrent assets are resources with values lasting beyond one year and include long-term investments, fixed assets (e.g., machinery), intangible assets, and deferred charges.

Liabilities: Liabilities are the debts and obligations of a business, such as loans, accounts payable, and accrued expenses. Liabilities can be short-term or long-term.

Current liabilities are debts that must be paid within one year. Examples of current liabilities include accounts payable, interest payable, income tax payable, and short-term loans.

Long-term liabilities are debts that mature more than one year in the future. Long-term liabilities include bonds payable, mortgages payable, and long-term notes payable.

Equity: Shareholders’ equity is the net difference between assets and liabilities. After accounting for everything owed, the equity section sums up assets minus liabilities and shows what you own. Equity can be damaging if liabilities exceed assets, called a deficit.

Cash Flow Statement 

The cash flow statement looks at how cash moved during a particular period — usually over one year. It shows cash changes from operating, investing, and financing activities. It offers an overview of how well a company generates money to fund its operations, pay its debt, and support its investments.

For investors, the statement of cash flows can be significant, as it shows how much actual cash moved in and out of the company during the reporting period.

The information is intended to give investors and other stakeholders an idea of how well a company is using its money, and it’s also a good way for companies to stay accountable to their shareholders.

Key Features of the Cash Flow Statement

The statement of cash flows groups cash-related activities under three main sections: operating, investment, and financing. These sections tell you the overall state of your company’s cash flow. 

Empower Your FP&A Team

 Your FP&A team is the backbone of your finance organization. They’re responsible for collecting and analyzing data to help you make sound business decisions.

As the leader of your company, it’s up to you to empower your FP&A team with the tools they need to succeed. That includes educating them on your strategy, empowering them with the right tools and technology, providing them with access to data, and building trust among all team members.

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