Today’s business world is data-driven and fast-moving. Companies must be able to anticipate changing trends and pivot quickly to compete and thrive. Here, FP&A is key. Its core purpose is to maximise business performance by using financial data to make better decisions, analyse risk, and drive value. These data-centric insights allow businesses to be agile and build resilience.
Primary FP&A functions typically include strategic planning, budgeting and forecasting, monitoring performance, decision support, risk management, and resource allocation. By understanding the role of each of these processes, organisations can strengthen their operations throughout.
Six reasons FP&A can support a business
There are six key areas in which FP&A can help an organisation stay focused on its goals and strategy, operating with optimal efficiency, and knowing when to change trajectory.
1. Strategic planning
FP&A can inform strategic planning initiatives. This allows the finance department to draw on data and insight from multiple areas, from everyday activities such as cash flow analysis and financial reporting to more strategic initiatives such as budgeting and forecasting.
Mark Moseley, Sales & Marketing Director for garden machinery wholesale distributor Handy, says FP&A is integral to the company’s strategic planning.
“It supports purchasing with a clear view of monthly stock requirements, which can be planned and converted to the level of investment required to support that plan.” He adds that FP&A “can also flag any risk early on which can be proactively accounted for, such as agreeing bank overdrafts.”
2. Budgeting and forecasting
Budgeting involves estimating how much money is needed to carry out a company's plan based on expected income. An organisation can then allocate an expense budget to each business department or function, considering the revenue and cash flow they expect to generate.
Simon Cole, CFO at Molewood Consulting, which advises organisations in sectors including hospitality and technology, says that in a simple scenario, the CEO of the business would agree with the Board that it wants to hit £5m revenue with a 10% EBITDA next year. These are the North Star targets everyone in the business steers towards.
“Use the past numbers as a guide to understand the future, what worked and what did not," says Cole.
"The qualitative plan and narrative of where the business heads is underpinned by the numbers."
While budgets are created to meet a goal, such as annual growth, forecasting examines whether the budget's target will be met during the proposed timeline, and how, by estimating past, current, and projected financial conditions.
Budgeting and forecasting allow you to take control of your business's cash flow and stay prepared for financial ups and downs. The American Express® Business Platinum Card comes with payment terms of up to 54 days, which may help with cash flow management¹.
3. Monitoring performance
Performance monitoring involves the analysis of financial data to continually track areas such as sales, expenses, profit, working capital, cash flow, and other key performance indicators (KPIs) to ensure they are improving. Monitoring the right KPIs and setting attainable goals can also help a business make decisions that drive value and profitability.
As Cole says, KPIs can be internal, like sales targets, or customer-facing, like Net Promoter Scores (NPS). “There is a lot of data and information and a tremendous amount of noise, but the good analysts will blast through the clutter to get to the meaningful trends and information.”
To communicate a company’s progress against KPIs, it is important to build reports to ensure that every department is informed about company performance.
4. Decision support
Business owners rely on FP&A data to make decisions such as how to improve performance, minimise risk or harness new opportunities. This insight must be trusted, timely, accurate — and actionable.
This means information must have context. For example, if a particular product line has poor gross sales but healthy margins, this could be a result of the impact of an external factor such as foreign exchange rates or a sales force underperforming.
Cole says FP&A can help with wide-ranging decisions relating to when to hire, how much the company can afford to pay, and the pricing of a product, for example. “The parts will mean the business can build up and out and towards the targets set.”
5. Risk management
Being prepared for unexpected events allows companies to be proactive in mitigating damage. The comprehensive view of a business’s finances afforded by FP&A allows it to anticipate potential threats and execute timely interventions and strategic adjustments.
Moseley cites the repeated occurrence of global supply chain issues as a risk that FP&A has enabled it to minimise, supporting the decision to invest in two warehouse extensions. “Bringing stocks in earlier means we have the stock on hand when our customers need it. Furthermore, while this may have implications on cash flow, which will have been planned, it means we can meet our customers’ requirements, the budgeted sales numbers, and stay ahead of our competitors.”
6. Resource allocation
Successful businesses must be able to balance competing demands, prioritise projects, and align resources with objectives. Budgeting and forecasting data can help businesses optimise resource allocation by prioritising investments and initiatives that maximise value and hit strategic goals.
As Moseley says, FP&A plays an important role in planning resources. “The goods-in and warehouse team can plan, and coordinate staff accordingly to cope with multiple containers arriving. A clear trend of increased workload can be seen from the development of the forecast and budget, which in turn supports a clearly defined delivery schedule months in advance. This helps to identify when outside labour may also be required to cope with the increased workload.”
Basic steps
Gather and validate financial data
This involves collaborating with each department to gather operational data. This can include sales volumes and strategic data, for example, relating to product launches. This will be key to financial analysis, forecasting and decision-making. Validating this data demands that it is cross-verified against other sources, with numbers reconciled, and any anomalies identified and explained.
Analysis and insights
Turning raw data into meaningful insights involves sorting, segmenting and analysing to understand the context of the numbers and identify the differences between forecasted/budgeted figures and actual results. This drives strategic decision-making.
Developing budgeting and planning strategies
Forecasts and insights must be transformed into actionable strategies. A budget can be compiled using forecasts from various departments, estimating expected revenue and expenses and outlining a financial plan to support strategic goals.
Forecasting and communicating
Insights must be effectively communicated to key stakeholders. This can be achieved using reports and visualisations highlighting key financial information, and this can drive strategic decisions and financial planning.
Pros and cons of FP&A
Pros
FP&A can help companies to be agile and proactive by making data-informed decisions. Its processes enable the swift creation of precise reports and financial statements and ensure comprehensive financial control. FP&A can also help an organisation to maintain liquidity, maximise profits and increase value.
Cons
Gathering the data needed to perform FP&A can be time-consuming. Forecasting can also be complicated in an unpredictable economy. Communicating insights to relevant stakeholders can be challenging, as different roles demand different data, while continually changing financial regulations and standards can present compliance difficulties.
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