A Guide to Financial Planning and Analysis
Financial planning and analysis (FP&A) teams, also referred to as strategic finance teams, play an integral role in most midsize and enterprise businesses, helping to budget, forecast, and analyze finances. They’re typically structured by accounting (reporting on past financials) and FP&A (projecting future financials).
Thanks to their work, the company’s executive management team can make the most informed decisions to propel the company forward. Despite their strategic importance, many companies don’t have or fully utilize FP&A. In fact, according to Gartner, “Only 3% of companies have strategic, operational and financial planning processes that are fully aligned and integrated.”
Wondering whether your company needs to incorporate financial planning and analysis into its business model? To better understand FP&A, we’ll discuss:
- What is financial planning and analysis?
- What does a financial planning and analysis team do?
- What are the three financial statements?
What is Financial Planning & Analysis?
FP&A is a group within the company’s finance department that supports senior management, helping them forecast the company's financials and operating performance over the next quarter, as well as the next few years—often starting with a projected P&L (profit and loss statement).
They help management:
- Analyze the results of previous strategic plans and investments, and predict what might need to change within the entire business unit.
- Build budgets, both on a business-wide level or by department.
- Create and update forecasts of the business’ future analytics and expected performance.
FP&A plays a fundamental role in an organization’s success, allowing your executive team to better manage their cash flow, financially plan for the future, and allocate capital. It’s their job to ensure that the organization is moving in the right direction to meet their strategic financial goals.
As ACCA Global notes, “For publicly listed companies, the FP&A role is particularly important. As well as allowing the organization to accurately allocate resources, management teams often provide revenue and net income guidance to shareholders based on the analysis from the FP&A team, which has a direct and immediate impact on a company's share price.”
Put simply, FP&A is the key to driving profitable business decisions.
The Structure of an FP&A Team
A company’s chief financial officer (CFO) is the senior executive in charge of directing a company’s financial actions. They’re tasked with tracking cash flow, budgeting, financial planning, and analyzing the company’s financial health. In order to do their job optimally, a CFO must rely on his or her FP&A team to guide their financial decisions.
Although it depends on the size of the business, a finance team will typically be broken down into three main functions:
- Accounting - led by the Controller – As the name implies, the controller is charged with managing (controlling) the company’s financial accounting. Their main focus is the documentation and organization of the books and ledger. They oversee financial reporting, regulatory requirements, and tax reporting.
- Treasury and capital markets – The treasurer is responsible for managing the company’s cash, debt, and equity. Their primary role is to ensure the company is liquid and its financial investments savvy.
- FP&A – The FP&A team is a group of financial analysts tasked with analyzing the company's financial health, and helping it forecast future financial scenarios. As analysts, their chief concerns are planning, budgeting, and forecasting. However, a financial analyst may also include other analytical tasks such as determining pricing or evaluating strategic investments.
Together, all three parts of the finance team report to and work with a company’s CFO. And to do their job well, the FP&A team must have a clear understanding of the company’s historical financial performance and a deep grasp on the trends or assumptions that could impact its performance in the future. For this to happen, they need to leverage automated accounting tools and stay in constant contact with all the major departments, including accounting, marketing, sales, and the treasury.
What Does a Financial Planning and Analysis Team Do?
The analysts within an FP&A team have a variety of roles and responsibilities involving financial planning, forecasting, reporting, and analysis. As CFO Edge notes, their role goes far beyond simple number crunching:
“It encompasses everything involved in the creation of an organization’s long-term financial strategy. This includes the generation of management reports, analysis of financial trends, forecasting of sales and earnings, establishment of budgets, and calculation of the financial effects of decisions made at all levels of the company — but especially the executive level.”
Accounting is often focused on looking backward, whereas FP&A is focused on the future. They do this by leveraging financial tools, especially software for budgeting, scenario planning, forecasting, and corporate performance management.
That said, most of their chief obligations can be broken down into one of three categories:
- Financial planning
- Decision support
- Specialized support
An FP&A analyst’s main job is to take senior management’s “strategic plan,” gauge its viability, and then (if possible) advise on how to pursue it.
Oftentimes, executives set high-level targets in regards to revenue, income, and investment plans in the coming years. The FP&A team then must develop an operating and financial plan to see how the company can achieve those goals. Other times, executives look to the FP&A team to provide guidance for conservative and aggressive financial scenarios for the business. This can be further broken down into two categories:
- Strategic planning and analysis – Taking the strategic objectives set by senior management and generating analyses of action plans the company should pursue to attain those goals. Much of this involves building, updating, and maintaining a financial model and forecast.
- Budgeting and operational financial planning – Working with specific departments to prepare more detailed budgets and then consolidating them into the overall business budget.
In order to pursue these ends, the FP&A team must constantly run the numbers of various scenarios, and see how they impact the three financial statements:
- P&L (income statement)
- Balance sheet
- Cash flow statement
These critical documents help the team account for key financials like gross profit and net income margin, cash balance on hand, monthly cash burn, and various ratios (debt to equity, current interest coverage, etc.).
FP&A teams don’t just focus on forecasting and planning. They also must take the historical and current financial data to provide management with advice on how to best push the company forward in terms of mitigating risk, increasing efficiency and performance, and finding new opportunities for growth.
One of the main questions they must ask is, “Are our company’s current assets and investments delivering ROI, or is there a better way to utilize cash flow?” To properly answer this, they seek to identify the products or services with the highest profit margins while also analyzing the cost-efficiency of each department.
Depending on the company, many FP&A teams are in charge of creating a monthly “CFO book,” which provides key metrics, including:
- Current forecasts, listing both the risks and the opportunities within the current plan
- Historical financial analysis
- Key performance indicators (KPIs)
This book can empower upper management or the CFO, helping them identify opportunities for investment and optimization.
Depending on the business, an FP&A team may be pulled into various other roles for which they have specialized expertise. These include:
- Mergers and Acquisitions (M&A) – The team may be commissioned to identify potential opportunities for acquisition, integration, or divestiture.
- Capital allocation – Determining how much of and where financial resources can be best utilized.
- Market research – Analyzing the potential opportunities within a market, listing the leaders, laggers, and market size.
- Process optimization – Finding ways to increase efficiency across departments, systems, and tools utilized by the company.
FP&A Teams’ Three Primary Statements
In order to do their job, FP&A focuses on building out three key financial statements:
- P&L Statement
- Balance Sheet
- Cash Flow Statement
On their own, each serves a unique purpose, but together, they make it possible for FP&A teams to perform financial modeling and forecasting.
Profit & Loss Statement
Also known as an income statement, this document summarizes a company’s profitability. It shows the company’s net income or loss over a specific time period. This includes both the revenues and expenses occurring within this window, which allows the FP&A team to calculate how much money was gained or lost in the intervening time.
A P&L can be broken up into three categories:
- Revenue – All of the revenue generated by the business during the specified period. This not only includes money made by selling products and services, but also encompasses the sale of investments, property, tax refunds, etc.
- Expenses – The second section of most income statements are typically broken down into two sections. There’s the cost of goods sold (COGs), which covers all of the costs that are directly related to the production and selling of a product. The second is operating expenses, which refer to expenses indirectly associated with the cost of goods or services such as salaries, rent, utilities, etc. There are also other expenses that need to be considered, including taxes, depreciation, and amortization.
- Profit or loss – By subtracting operating cost of sales from revenue, you find your gross profit. Then by subtracting operating expenses from gross profit, as well as other expenses such as taxes and depreciation, you’re left with the net income. Once this is finished, you’ll see whether you’re operating in the black or the red.
Ultimately, the metric that matters most is bottom line. By analyzing a P&L statement, an FP&A team can better gauge the company’s overall financial health.
Note: If you want to know how to build a P&L statement, we have you covered.
The Balance Sheet
While income statements show operating financial results over a determined period of time, the balance sheet provides a snapshot of what the company owns and what it owes at the end of the reporting period. In other words, it tells you how much the business is worth at a given time.
Like an income statement, a balance sheet is broken down into three categories:
- Assets – This section covers what the business owns of value which could eventually be liquidated. Balance sheets list assets (both current and long-term) by order of liquidity—i.e., how easily they could be converted into cash. Current assets include: cash and cash equivalents, marketable securities, accounts receivable, inventory, and prepaid expenses. Long-term assets include: fixed assets, long-term securities, and intangible assets (e.g. patents, copyrights, etc.).
- Liabilities – Liabilities are the money the company owes to others. This can also be broken down into current and long-term categories. Current liabilities include: rent, utilities, payments on payroll, interest payments, and short-term debts. Long-term liabilities include: long-term loans, pension fund liabilities, and deferred income taxes.
- Shareholders’ Equity – This figure represents the amount of money the business generated compared to the amount of money infused into the business by owners or shareholders. It’s calculated by subtracting total liabilities from total assets.
As the name implies, a balance sheet must always be balanced. The total value of assets needs to be equal to the combined values of liabilities and equity. When they are in equilibrium, the document is in balance.
While there are many takeaways to be had from a balance sheet, it provides three key insights into the business, namely its liquidity, efficiency, and leverage.
Note: If you want to know how to build a balance sheet, we’ve written about it here.
Cash Flow Statement
A cash flow statement tells you how much money is flowing in and out of the business, as well as how much cash you have on hand for a specific period. They provide three essential functions:
- Demonstrate liquidity – Let’s the business know how much operating cash flow it has in case it’s needed. This helps you determine what you can and can’t afford to spend your money on or invest in directly. Having liquidity is important because it allows a business to weather a market shock or a major unexpected expense.
- Show changes in assets, liability, and equity – This is measured by cash being held, cash flowing out, and cash flowing in. Together, those metrics allow your FP&A team to measure the company’s financial performance.
- Predict future cash flow – Cash flow statements are the basis for creating cash flow financial projections. These make it easier to plan future business liquidity.
A cash flow statement relies on the financials found within the income statement and balance sheet. By adding the financial details within the income statement to those from the balance sheet, you’re able to determine the cash flow. Therefore, those documents must be accurate, or else the numbers within the cash flow statement will also be off.
Ramp: Empowering FP&A Teams
FP&A plays a critical role in safeguarding the financial health of a business, while driving the company forward according to the long-term financial strategy. To do their jobs effectively, FP&A teams require the most current and accurate financial data available.
For that, Ramp can help.
Ramp isn’t just a corporate card with high limits and instant cash back on every purchase. It also comes with a built-in automated expense reporting and accounting systems that track and then categorize company spend in real-time. Additionally, Ramp integrates with third-party applications and programs, including major accounting platforms such as QuickBooks or Sage Intacct.
The Ramp card empowers FP&A teams to work in confidence, knowing that they have the most accurate and up-to-date financial information possible.