Last editedApr 20222 min read
Financial planning and analysis (FP&A) can benefit all businesses, from the smallest of startups to multinational corporations. It supports various activities including financial planning, management reporting, forecasting, and modelling. You might be wondering how this process might fit into your business model – but what does financial planning and analysis do and how does it differ from accounting? Here’s a closer look at the FP&A meaning and how it relates to decision making.
What is FP&A?
Financial planning and analysis, or FP&A, describes the forecasting and budgeting processes a business undertakes to support its overall financial strategy. There’s a wide range of activities included as part of FP&A, including data analysis and business modelling. By organizing and analyzing financial data, businesses can make more informed plans for growth. The FP&A meaning not only refers to analysis of internal sales data, but also the evaluation of wider demographic and economic trends.
Many businesses will have a dedicated FP&A team within the finance department to tackle these tasks. FP&A professionals help with budgeting and forecasting, creating projected financial statements to assist senior management. By analyzing the company’s previous strategies and investments, they can help management better predict which strategies will pay off in the future.
How and why FP&A differs from accounting
Although accounting and FP&A both form components of a business’s finance department, they serve different roles. Accounting focuses on detailed record keeping and financial reporting. These financial statements serve as the jumping-off point for financial planning and analysis. The FP&A team takes statements prepared by accountants and then uses them as the basis for their own forecasting and modelling.
Imagine working capital analysis as an example of how accounting and FP&A work together. A business’s accounting team will record current liabilities and current assets when preparing the balance sheet. The FP&A analyst can then calculate working capital using these figures, looking for trends over time. The analyst might notice a downward trend in the company’s working capital, providing concrete ways to improve the figures over the next quarter with a sensible budget.
What does financial planning and analysis do?
A business’s FP&A analysts take on numerous tasks related to forecasting and analysis. These can be broken down into three main categories:
1. Financial planning: An FP&A team finds ways to meet stakeholder targets with realistic budgets and strategy. Forecasts and models use data analysis for better goal setting. They run various scenarios as part of statistical modelling to see how they impact the core financial statements over time.
2. Decision-making advice: In addition to creating detailed budgets, forecasts, and models, FP&A teams then use these to help management mitigate risk and promote growth. They will present key performance indicators and metrics to the chief financial officer, including a historical financial analysis and current forecasts.
3. Specialty projects: When specialty financial situations arise, FP&A provides modelling and support as well. This could include things like mergers and acquisitions, market research, and efficiency during transitions to new systems.
Why FP&A is important
While accounting is a fundamental component of any organization’s financial department, FP&A is equally important. It’s one thing to simply generate financial statements for accounting and tax purposes; it’s another to use these for smarter decision-making. This is why there are multiple benefits to implementing FP&A processes into your business.
By analyzing past performance and current trends, a good financial planning and analysis team will help find ways to improve cash flow and promote growth. FP&A also ensures that a business is appropriately mitigating risk and effectively allocating resources. This in turn makes the business more attractive to investors, who can see that decisions are rooted in fact-based forecasting.
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