What Is Financial Planning and Analysis (FP&A)? A Guide

A business of any size needs to understand where its financial resources stand at all times. Whether you own your own company or are part of a larger organization, it’s essential to manage your firm’s financial health.

The process for doing this is called financial planning and analysis (FP&A). By using financial information to create financial statements for senior management, the FP&A team helps ensure the company’s success.

What’s involved in financial planning & analysis? Here’s what you need to know.

Here’s What We’ll Cover:

The Process of Financial Planning and Analysis (FP&A)

The Responsibilities of the FP&A Team

What Financial Statements Do FP&A Teams Use?

Equipping Your Financial Planning & Analysis Team

The Process of Financial Planning and Analysis (FP&A)

FP&A is a complex process that has four basic components. The team is responsible for planning and budgeting, which helps the organization fund its priorities. Whether that’s a new marketing plan or an expansion into a new niche, the FP&A team can help create the financial statements to budget for and support success.

FP&A also works on financial planning that includes all the variables the business currently faces. The purpose of this plan is to take the company from where it is today to the goals it wants to reach. Many goals are connected to others, and sometimes there are industry or market factors to take into account as well. Without a clear plan, a company can’t meet their objectives.

The team also needs to present financial statements that help management understand the financial performance of the company in different areas. Each department should be evaluated against its financial goals, and leaders in these areas might need to adjust their strategies.

Finally, FP&A experts help a company with forecasting and modelling. These tasks help a business understand the possible impact of a future plan. Given that businesses have a variety of options on how to grow, forecasting is essential to choose the best path forward.

The Responsibilities of the FP&A Team

The goal of FP&A analysts is to consider economic and business trends, past company performance, tax obligations, and potential obstacles as they forecast the business’s future financial results. These professionals don’t just keep financial records, they analyze and evaluate them to map out the financial future of the business.

Some of the daily tasks of the FP&A team include:

Looking at the use of working capital and deciding if the use of assets and investments are bringing in the best return on investment. Analysts look at whether using the money in a different way could create better financial performance and help the business grow.

Measuring the financial health of a business by looking at financial ratios. These include debt to equity ratios, current ratios, and interest coverage ratios. When the company is healthy it can take action to grow. However, if it’s struggling the first step is to regain financial stability.

Noting the top products and services that bring in the majority of the company’s profit, as well as which ones have the best profit margin. This can help senior management make decisions about where to invest additional funds, as well as where to cut programs. If a product begins to drop off, the management can decide whether to revitalize it or to move away from it toward a new offering.

Measure efficiency in the use of resources both by department and for the company as a whole. This can help leaders understand which departments are running lean and which currently need more resources. This financial analysis can be a way of evaluating business unit leaders as well.

Creating budgets for each department and for the company as a whole. The budget helps hold everyone accountable for how resources are used. If a department needs more funding or has a new initiative, this can be accounted for in the overall business budget for the year.

Maintaining financial models to predict the company’s future growth and success, while anticipating pitfalls. Company leaders use these detailed forecasts to predict future operations and profits, which can help them decide on new projects going forward.

Creating growth plans that predict growth over three or five years. The finance team creates a cost-benefit analysis that predicts the costs and advantages of future projects. By using rolling forecasts to predict the results of a variety of paths forward, the FP&A team helps leadership make a decision on how to grow in the future.

What Financial Statements Do FP&A Teams Use?

One of the key skills of an FP&A analyst is understanding financial documents. These documents provide a snapshot of the company’s current financial health and allow the team to forecast the future.

The balance sheet helps you understand how a company is doing at a point in time. This report shows the company’s assets, liabilities, and owner’s equity. A balance sheet often includes both short-term and long-term assets, from bank accounts to major equipment. There are also short-term and long-term liabilities, from the cost of goods to business loans.

A profit and loss statement helps an analyst understand business revenues and expenses over a period of time, often a quarter or a year. This can help business leaders understand if the company is on track to meet its goals. Short-term losses may be normal during an expansion or new product launch, but long-term losses are a significant concern.

Accounts receivable and payable help financial analysts understand how much money they can expect to come into and out of the company in the near future. However, the older these debts are, the less likely they are to get paid. The risk of old accounts receivable means that the amounts need to be discounted for an accurate forecast.

Finally, a cash flow statement forecasts your expected revenue and expenses over a period of time. This helps the business leadership understand if the company is in a sustainable position or if changes need to be made to stay viable. 82% of the small businesses that fail do so because of cash flow issues.

Equipping Your Financial Planning & Analysis Team

Whether you’re a small business owner or a member of a large company, it’s important to have a skilled FP&A team that can help the company move forward successfully.

Equipping this team means making sure that they have the financial documents they need. FreshBooks can help. We provide a variety of financial statements for your company any time you need them.

Head over to our Resource Hub for more small business articles.

---

RELATED ARTICLES