What is financial planning and analysis? Commonly referred to as “FP&A” for shorthand, financial planning and analysis encompasses several key office of finance activities that collectively help an organization manage its financial strength and business strategy over time. The overarching goal of FP&A is to keep the operational and financial sides of the organization in lockstep. The tighter the coupling between finance and operations, the better it is for both sides — and the organization as a whole.
Effective and impactful FP&A requires expertise in both quantitative and qualitative analysis. You must be able to acquire and analyze various types of hard data from across the organization — including financial projections and results over time and across business units, for example — as well as from outside the organization — such as macroeconomic, behavioral and technology trends.
FP&A teams track and combine all of this data to gain insight into what happened in the past, what is happening in the present and what is likely to happen in the future. They focus considerable attention on the third category — the future — and often perform extensive scenario planning exercises to help executive leaders think through the space of possible outcomes for important business decisions before making them. This is what most people envision when thinking about what is FP&A.
An FP&A team is responsible for helping an organization be a good steward of its operational finances and long-term capital base. It closely monitors and inspects financial statements for data including cash flow, operational records, historical data and profitability models in search of relevant trends, anomalies and other correlations that could positively or negatively impact the company’s bottom line (in the near term) and the good standing of its capital base (over the long term).
More specifically, FP&A teams typically oversee the following:
- Profit and loss reporting: One of the primary functions and responsibilities of FP&A teams is overseeing the creation of profit and loss (P&L) statements. Arguably the most important report a company creates, the P&L statement shows net profit or loss after accounting for income and revenues minus expenses and other costs.
- Financial analysis: Another key responsibility for FP&A teams is analyzing financial statements and reports to create a forecast of how the business will perform, and then making strategic recommendations based on their findings. Profit margin analysis is a good example — i.e., reviewing various products and services an organization offers to identify the ones with the highest and lowest profit margins.
- Budgeting: To keep business operations in lockstep with finances, FP&A teams are also regularly engaged in the planning and budgeting process. The goal here is simple: helping business and team leaders see and understand how much money is needed, available and being spent in the coming month, quarter or year. In addition FP&A teams continuously track variance reports and compare actual expenditures with budget allocations.
- Scenario planning: FP&A teams are responsible for helping executive leaders look into the future and make strategic bets on where to focus, when and to what extent based on probabilistic outcomes. In this type of financial model, FP&A teams predict different outcomes such as a base-case, best-case and worst-case scenario to inform planning and investment decisions. Business and financial mistakes can be costly and FP&A teams help executives avoid the worst of them. For business opportunities, the opposite is true and FP&A teams help executives make the most of them.
- Reporting: In addition to P&L statements, FP&A teams are also responsible for reporting on the financial health of a company in a variety of other ways. Some of these reports are routine (i.e., cash flow statements, budget vs. actuals, etc.), while others are ad hoc requests from executive leadership (typically CEO or CFO) with a more narrow focus — i.e., reports on specific KPIs (key product indicators), new questions that don’t have a model or metric, etc.
Building an effective team
FP&A teams come in various shapes and sizes depending on a multitude of factors, including the size and growth ambitions of the organization it supports. The larger the organization and the greater its ambitions, the more people and specialties are needed to build an effective team.
Since the FP&A team operates at the very center of the organization and their work impacts everyone from executive leadership to the front lines of business, it pays to have a versatile team. In addition to having the analytical skills required to intuit both quantitative and qualitative data, the team must also be ready and able to jump in and help with solving cross-functional business challenges and capitalizing on business opportunities. For example, it’s not uncommon to have people on the FP&A team with special expertise in real estate or mergers and acquisitions. The more well-rounded the team, the more effective they can be.
Roles of teams
In recent decades, the role of FP&A has changed quite significantly. In the past, these teams were mostly focused on tracking and reporting financial results and performance. Fast-forward to today and FP&A teams are increasingly being seen as strategic partners to the business. That’s because companies today are operating in a world of unprecedented urgency and uncertainty. They need to be strategic, make sound financial decisions and be high data driven about it as well. According to Gartner®, 75% of finance functions are now providing reports to the C-suite on at least a weekly basis, with over 40% doing so multiple times a week.
Key roles include:
- FP&A leader: At mid- to large-sized companies, a CFO typically leads the FP&A team. The CFO works at the intersection of all departments and functions in many respects, and is the primary liaison between department heads and the FP&A team. The CFO function extends beyond FP&A, however, and some organizations therefore also have an FP&A director who oversees these specific tasks and reports to the CFO.
- FP&A professionals: The core FP&A team primarily includes financial analysts, as well as managers to help keep everyone on track. In general, these individuals help with financial planning, analysis, forecasting, modeling, budgeting and reporting.
- IT experts: Today, it is increasingly common for FP&A teams to include some degree of embedded IT support. These individuals enable the FP&A team to perform its core functions by managing the technology required to do it. For example, finance IT experts are typically responsible for the data and analytics aspects of FP&A — i.e., determining what data is needed, where it is located, how to access the data sources, how the data is structured, how frequently the data is refreshed, and so forth. Common source systems for business data include enterprise resource planning (ERP), enterprise performance management (EPM) and customer relationship management (CRM), to name a few.
- Data scientists: With so much data available today, the rise of data science in the office of finance (in general) and on FP&A teams (specifically) is remarkable. These individuals are experts at large-scale statistical analysis and predictive analytics. They can have a profound impact on an organization’s ability to make strategic forward-looking decisions.
What is FP&A in finance? Financial planning and analysis is one of many critical functions within the office of finance. While important, it is part of a larger set of business processes that all work together to maintain the financial health, stability and prosperity of an organization.
The FP&A function is primarily focused on strategic financial planning and forecasting. The team also tracks financial progress, develops reports and helps business leaders answer complex strategic business questions with data.
Specifically, FP&A teams are responsible for:
- Building and maintaining detailed financial models and forecasts
- Strategic scenario planning and predicting the financial impact of future decisions
- Tracking and reporting the overall financial health and investments of a company
- Partnering with teams to solve cross-functional business challenges and capitalize on business opportunities
- Managing financial risks and opportunities
Modern technology is making it easier for FP&A teams to perform their duties for an organization. As those duties expand and the urgency around them grows, the need for technology increases as well.
Advances in cloud computing, data analytics and machine learning in recent years are enabling today’s FP&A teams to see further and more clearly into the past, present and future — in turn, making them even more important and impactful strategic partners to the business.
With Incorta, the key components of a modern FP&A technology stack include:
- Analytics Data Hub for Finance: An end-to-end self-service platform for real-time analysis of all financial and operational data by connecting multiple, disparate data sources to various data destinations for end users, and do so without compromising data integrity or data security.
- FP&A solutions that move the organization to adopt a more automated process for planning, forecasting and budgeting. This enables FP&A teams to alter plans and adjust forecasts in a real-time fashion and expand integration with other parts of the business.
- Data access and governance controls to ensure the right people see the right data and at the right time.