What is Financial Planning and Analysis (FP&A)?
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 to 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 form an integral part of any organization which can help to make futuristic decisions for the company based on the analysis from the data.
- BudgetingBudgetingBudgeting is a method used by businesses to make precise projections of revenues and expenditure for a future specific period of time while taking into account various internal and external factors prevailing at that time., Forecasting, Analysis, and Planning are the primary function of the FP&A, which draws a fair picture for senior management like CFOCFOThe full form of CFO is Chief Financial Executive, and he or she is a top level executive of the firm who is responsible for the firm's overall finance functions and has the authority to make financial decisions for the organization. or CEOCEOChief Executive Officer is the full form of CEO. He is the most senior member of a corporate organization, an executive who oversees the whole administration and operations of the company and reports directly to the board of directors and chairman, with the sole purpose of generating wealth for the company's stakeholders and shareholders. to make any major corporate decision.
- Cash flow management and FP&A prove to the pillars for the growth of the company, 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 progress of the company towards the set goals and objectives.
- It considers business and economic scenarios, historical trends to anticipate future potential obstacles and, at the same time, forecasting the company’s financial results.
- This can be used to analyze financial data to forecast the economic trend and to implement the financial policy for the company.
- Since this is done through the financial data, it depicts the financial numbers for the company by analyzing financial statements like cash flowCash FlowCash Flow is the amount of cash or cash equivalent generated & consumed by a Company over a given period. It proves to be a prerequisite for analyzing the business’s strength, profitability, & scope for betterment. , balance sheetBalance SheetA balance sheet is one of the financial statements of a company that presents the shareholders' equity, liabilities, and assets of the company at a specific point in time. It is based on the accounting equation that states that the sum of the total liabilities and the owner's capital equals the total assets of the company., and income statementIncome StatementThe income statement is one of the company's financial reports that summarizes all of the company's revenues and expenses over time in order to determine the company's profit or loss and measure its business activity over time based on user requirements..
- There are several purposes of doing financial analysisFinancial AnalysisFinancial analysis is an analysis of finance-related projects/activities, company's financial statements (balance sheet, income statement, and notes to accounts) or financial ratios to evaluate the company's results, performance, and trends, which is useful for making significant decisions such as investment, project planning and financing activities. for any company, like in corporate finance for analyzing the NPV or IRR of any project or in an investment analysisAn Investment AnalysisInvestment analysis is the method adopted by analysts to evaluate the investment opportunities, profitability, and associated risks in their portfolios. In addition, it helps them to determine whether the investment is worth it or not. setting where the numbers can be used to analyze the investment.
- The most general way to analyze the data is to do the ratio analysisRatio AnalysisRatio analysis is the quantitative interpretation of the company's financial performance. It provides valuable information about the organization's profitability, solvency, operational efficiency and liquidity positions as represented by the financial statements. 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 analyzing the trends to make any managerial decision for future advancements.
Importance of FP&A
- The financial analysis sets a good base for any company to succeed by the setting of the financial and business plan; adequate planning leads to create a better understanding of how business is performing as compared to the projections done.
- 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 statementsFinancial StatementsFinancial statements are written reports prepared by a company's management to present the company's financial affairs over a given period (quarter, six monthly or yearly). These statements, which include the Balance Sheet, Income Statement, Cash Flows, and Shareholders Equity Statement, must be prepared in accordance with prescribed and standardized accounting standards to ensure uniformity in reporting at all levels., 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 budgetingCapital BudgetingCapital budgeting is the planning process for the long-term investment that determines whether the projects are fruitful for the business and will provide the required returns in the future years or not. It is essential because capital expenditure requires a considerable amount of funds., with further analysis, it also helps to develop financial models and assist in the annual target setting process.
- Consistency and stability are very important in any business. A reliable FP&A process will help to get this stability and, at the same time, include reliable information for the management to make sound decisions.
- Most of the 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 to the organization.
Financial Analysis and Planning vs. Business Analysis and Planning
There are factors that differentiate these two ideologies, let us discuss them further in our article:
- In this, finance-related arrangements are centred around planning and determining inside a financial year, with a concentration on meeting the quarterly or YoY target. Other functional teams intend to reduce expenses as opposed to foresee up and coming business issues. The analysis is fundamentally centred around recorded revealing, and standard reports joined with worthless models. Reports and data are regularly obsolete and not adjusted to key business drivers. Whereas, in business analysis approach includes exercises from capacities that are 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, it reflects the financial picture of any company. However, some executives feel that the reality of new and changing business trends are not included in these numbers. This puts out a whole picture for making any management decision for the company. Basically, it is based on available data, and Business analysis helps the management to 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 to make a decision, but 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.
FP&A forms an integral part of any firm’s operations; this kind of analysis and forecasting helps the business to know the historical trends and can also anticipate the upcoming trends. Having said that, 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 type of analysis needs to be considered.
This has been a guide to What is Financial Planning and Analysis & its Definition. Here w discuss the purpose of FP&A and its importance along with differences with business planning and analysis. You can learn more about from the following articles –