Financial Planning and Analysis

Last Updated :

21 Aug, 2024

Blog Author :

Wallstreetmojo Team

Edited by :

Ashish Kumar Srivastav

Reviewed by :

Dheeraj Vaidya

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What is Financial Planning and Analysis?

Financial planning and analysis (FP&A) is the process of budgeting, analyzing, and forecasting the financial data, which can help the organization to be aligned to its financial goals and also support strategic business decisions of the company; it also helps an investor to know if the company is stable and profitable enough for the investment.

Financial Planning and Analysis

FP&A forms an integral part of any firm's operations; this kind of analysis and forecasting helps the business know the historical trends and anticipate the upcoming trends. This is a pure number-driven process where business analysis also provides some qualitative output for the management; depending on the need and requirement, the company can decide which analysis needs to be considered.

Financial Planning and Analysis Explained

Financial planning and analysis is the process of budgeting, planning, and executing the financial roadmap to the company’s daily expenditures and overall growth plan. A financial Planning and Analysis director forms an integral part of any organization that can help make futuristic decisions for the company based on the analysis of the data.

Budgeting, Forecasting, Analysis, and Planning are the primary functions of the FP&A, which draws a fair picture for senior management like the CFO or CEO to make any major corporate decision.

Cash flow management and FP&A prove to be pillars for the company's growth, which eventually will generate profits year on year.

Data used to analyze here can be either Quantitative or Qualitative, based on which the analysis can be carried forward to evaluate the company's progress towards the set goals and objectives.

It considers business and economic scenarios and historical trends to anticipate future potential obstacles and, simultaneously, forecast the company's financial results.

Purposes

Let us understand why large companies dedicate a significant chunk of their time and resources in hiring a financial planning and analysis director by understanding the purpose of the same.

  • This can be used to analyze financial data to forecast the economic trend and implement the company's financial policy.
  • Since this is done through the financial data, it depicts the financial numbers for the company by analyzing financial statements like cash flow, balance sheet, and income statement.
  • There are several purposes for doing financial analysis for any company, like in corporate finance for analyzing the NPV or IRR of any project or in an investment analysis setting where the numbers can be used to analyze the investment.
  • The most general way to analyze the data is to do the ratio analysis and compare the same with industry standards or evaluate the historical records.
  • A periodic analysis of the financial data will help the entity to maintain the data and analyze the trends to make any managerial decisions for future advancements.

Importance

The financial health of an organization is the prime concentration point for any organization for obvious reasons. The financial planning and analysis software gives them important insights that help them make better decisions in terms of their growth plans or other developmental aspects. Let us understand the importance to completely understand the concept’s intricacies.

  • The financial analysis sets a good base for any company to succeed by setting the financial and business plan; adequate planning leads to a better understanding of how the business is performing than the projections.
  • In case of financing requirements where the company needs to borrow funds for future advancements, FP&A will try to present a separate finance section in front of the board in a very brief manner. Also, the lender would want to see the numbers before lending out money.
  • Accounting and FP&A are two different methods to analyze financial statements; in the place where accounting ends, FP&A takes over. In short, accounting focuses on historical numbers, and FP&A focuses on forecasts and future numbers.
  • FP&A strategy links the long-term plans with annual reporting and capital budgeting; with further analysis, it also helps develop financial models and assists in the annual target setting process.
  • Consistency and stability are very important in any business. A reliable FP&A process will help get this stability and, at the same time, include reliable information for the management to make sound decisions.
  • Most organizations have a dedicated team for FP&A, which continuously tries to improvise and maintain the numbers in the pursuit of many strategic objectives, and finance teams are becoming stronger and stronger by generating effective analysis to create more economic benefits for the organization.

Financial Analysis and Planning vs. Business Analysis and Planning

Some factors differentiate these two ideologies. Both these concepts are often misunderstood for one another. Let us understand the difference in their fundamentals and implications through the comparison below.

  • In this, finance-related arrangements are centered around planning and determining inside a financial year, concentrating on meeting the quarterly or YoY target. Other functional teams intend to reduce expenses instead of foreseeing up-and-coming business issues. The analysis is centered around recorded revealing and standard reports joined with worthless models. Reports and data are regularly obsolete and not adjusted to key business drivers. The business analysis approach includes exercises from capacities critical to pushing the business ahead – for example, marketing, sales, and operational management – all lined up with the organization’s key vision. As opposed to focusing on only budgetary or financial valuation, the organization coordinates key useful regions that straightforwardly impact business results.
  • While evaluating the financial numbers, reflect the financial picture of any company. However, some executives feel that the reality of new and changing business trends is not included in these numbers. This puts out a whole picture for making any management decision for the company. It is based on available data, and Business analysis helps the management know the vibe in the market about any particular business.
  • Some corporates are also of the opinion to change the FP&A to Business planning and analysis due to the wide horizon it covers for analysis; numbers from Financial analysis might help any company make a decision. Still, it might be from a short-term perspective, while business analysis will create a more realistic report based on the ongoing trends in the economy.

Recommended Articles

This has been a guide to what is Financial Planning and Analysis. Here we discuss the purpose of FP&A, its importance, and differences between FP&A and BP&A. You can learn more about it from the following articles –