Financial Planning and Analysis (FP&A) is a future-focused strategic activity involving planning, budgeting, forecasting, and financial data analysis to guide the company’s major business decisions and improve its overall financial health.
What is Financial Planning & Analysis?
FP&A activities aim to meet long-term organizational objectives through budgeting, forecasting, and monitoring actual business performance. Financial analysts generate actionable management reports and regularly update forecasts as part of this continuous process.
Using historical and current data as well as external market trends, finance teams also conduct scenario modeling and predictive analytics. Here, multiple scenarios are developed to predict potential outcomes and prepare for future uncertainties while minimizing the impact of risk factors.
Success in FP&A depends on the availability of accurate data. That’s why the FP&A function has taken on a collaborative role, requiring finance executives to frequently coordinate with other departments and use modern ERP software solutions to easily access cross-functional data and perform elaborate financial analysis.
Purpose of Financial Planning & Analysis
The growing need for businesses to continuously evolve and stay competitive makes financial planning and analysis an essential activity for modern finance leaders. The recent Deloitte survey noted that 67% of Indian CFOs are increasingly focused on growing revenue over costs while leveraging digital tools.
Given the amount of big data that needs to be collected and analyzed today, achieving transformational revenue growth goals is not feasible without modern, automated ERP systems. Such systems help predict profitable outcomes through advanced data analysis and by providing real-time insights.
Here are the core objectives of FP&A to look at:
- Make informed decisions to guide financial strategy, capital expenditures, and business expansion
- Track performance using historical/current data, and compare the budget with the actuals
- Develop detailed forecasts through financial modeling, scenario analysis, and predict future performance
- Optimize resource allocation and align resources with the strategic goals of the organization
Steps in Financial Planning and Analysis
Earlier, the primary goal of most finance teams was the analysis of historical financial data. Today, financial professionals have to go several steps higher and take into account business, economic, and market trends, identify risks, and project future performance of the company. They must track different Key Performance Indicators (KPIs) and find out what’s going well with the business and what needs to improve.
FP&A is a systematic process involving various steps as follows:
1. Data Collection and Validation
The finance team must collaborate with other departments like marketing, sales, operations, and R&D to get the financial and operational data they need to make budgets. These numbers must be consolidated to make the overall company budget. Accurate data sourced from various interconnected ERP modules provides a solid foundation for financial data analysis.
2. Forecasting
This step involves creating financial forecasts on earnings targets, expenses and and cash flow. Based on actual performance and changing business scenarios, forecasting models need to be constantly updated. The team must predict trends based on historical, cyclical, economic, and other data inputs. While forecasting, they must also make appropriate assumptions to ensure accuracy.
3. Budgeting & Planning
All expenses in a company revolve around annual budgets. Historical performance data and revenue target projections are crucial for making realistic departmental budgets. These budgets are aligned with business goals to keep costs under control and allocate resources efficiently. They serve as a pivot to compare the company’s actual vs planned expenses.
4. Management Reporting
Stakeholders need clarity on financial health, performance, and risks. The financial reporting and analysis has to be specific, meaningful, and with context. The FP&A team must be able to filter noise from the numbers and give concrete recommendations so that the whole exercise makes sense to the senior management and external stakeholders.
5. Continuous Monitoring
As business circumstances are constantly changing, FP&A has to be an ongoing activity. It requires continuous assessment of financial performance against the plans. The real-time insights delivered by your ERP software ensure that the team has up-to-the-minute information. They must also conduct variance analysis to explain the difference in performance and suggest improvements going forward.
FP&A Example
Check out these two examples that highlight the importance of FP&A in business:
Regulatory changes – When the government of India was working on GST 2.0 reforms, FP&A teams had to anticipate the impact of tax changes on working capital, cost of goods sold, cash flow, revenue, and profits. By projecting best-case and worst-case scenarios, they could timely guide the management on the best course of action after the reforms came into effect.
International trade – For businesses involved in imports and exports, the rolling forecasts help to determine how frequent currency price changes would impact sales and raw material purchases and, in turn, affect the financial statements. Changes in trade tariffs in the domestic and global markets, too, have a direct implication on corporate financial planning.
Challenges in FP&A
As the business grows in size and complexity, so does the amount of data generated across departments and software systems. Since businesses need to run more complex financial models to get a holistic view of the business, easy availability of accurate data is the basic requirement for conducting a satisfactory FP&A. And, if the teams are always busy aggregating data from different tools and spreadsheets, it not only leads to time and productivity loss, even the reports generated, as a result, are outdated.
To overcome this challenge, modern businesses are making ERP implementation a core part of their financial and IT strategy. By integrating all business functions and connecting with existing business tools, ERP creates a unified source of information, which can be easily accessed and analyzed on demand by the finance teams. Through automation of reporting, it builds a seamless system that enables fast, data-driven decisions across the entire organization.
Future of FP&A
With the advancement in technology, the FP&A function has evolved significantly from its early days of historical data reporting and manual processes. As cloud ERP software, machine learning, and AI-powered finance are being increasingly deployed to automate business processes, finance teams are better prepared to innovate and meet rising business expectations. Consequently, real-time cross-functional collaboration is touching new highs, making financial analysis more effective.
Instead of reacting to past results, now the teams can proactively predict future business performance by combining financial, operational, and external market data. They can offer suitable advice through sharper insights and provide a comprehensive view of the organization. Moving away from data silos, the modern finance department is more connected than ever to every other department in the company.
Conclusion
FP&A is an important financial process to assess, monitor, and improve the long-term financial performance of the business. For CFOs and other leaders, FP&A provides the foundation to drive core business strategies through accurate budgeting, forecasting, and in-depth performance analysis.
Sage X3 is the powerful ERP solution that simplifies financial planning by enabling advanced analytics. Through its integrated business intelligence, your finance team can plan scenarios, develop forecasts, and create multi-dimensional reports to support data-driven decision-making.
Financial Planning and Analysis FAQs
1. What are the Differences Between FP&A and Accounting?
Accounting is a routine financial process for recording business transactions and audit reporting in compliance with accounting standards. FP&A, on the other hand, is focused on improving future performance by analyzing and predicting financial results as well as aligning corporate budgets, financial forecasts, and financial models with the company’s strategic plans.
2. What are the Key Components of Financial Planning and Analysis?
The key components of FP&A are planning, budgeting, forecasting, performance analysis and monitoring, scenario modeling, and management reporting, in order to steer corporate strategy.
3. What Are the Benefits of FP&A?
FP&A helps finance and business leaders to drive revenue growth by supporting their decision-making through advanced analytics and generating real-time insights. It also helps them conduct profitability analysis, understand potential business outcomes, and stay prepared for risks and market uncertainties.
