Business leaders and decision-makers know just how crucial an organization's financials are. But underneath the umbrella term of “finances” are distinct branches of financial management. One of these areas is Financial Planning and Analysis (FP&A), which involves creating financial forecasts, budgets, and models to guide decision-making and strategic planning within an organization.
While traditional accounting and FP&A might seem similar on the surface (and even overlap on some goals), they actually serve different purposes. While traditional accounting typically tackles recording, reporting, and presenting financial transactions that have already occurred, FP&A is future-focused, and involves creating insights into how financial decisions can impact the company's future performance and help set financial goals and strategies.
Ultimately, understanding the nuances of FP&A (and the differences between FP&A and traditional accounting) is essential for organizations that want to master their finances today, and also plan for the future by leveraging powerful projections and analysis.
Understanding Financial Planning & Analysis
While FP&A might sound like a complex concept, you’re likely familiar with its different elements already. That’s because FP&A is a forward-thinking business concept that focuses on using financial forecasting and modeling to understand what might lie ahead for the business’s future.
FP&A typically consists of four different activities which are:
- Planning & budgeting
- Financial planning
- Management & performance reporting
- Forecasting & modeling
The purpose of these activities is to allow leaders to best anticipate what their organization's future might look like, consider different scenarios, and use that information to make data-driven decisions.
The Role of FP&A in Business
Some larger organizations may have a dedicated team responsible for creating regular reports on financial planning, budgeting, forecasting, performance, and modeling. In smaller or rapidly growing businesses, FP&A may be managed by the accounting or bookkeeping function.
Typically, FP&A helps decision-makers understand where their business is heading. For startups and other fast-growing businesses, these insights can be integral to the future success of an organization. That’s because startups are notoriously vulnerable to challenges and risks.
Data shows that it can take up to three years on average for a startup to become profitable, and less than 5% break even on cash flow, meaning that every dollar and cent is essential.
What are some of the differences between FP&A and traditional business accounting? Similarly to FP&A, standard accounting practices also operate with the company’s financial health in mind, but they provide stakeholders with an accurate picture of the company’s current financial performance. It deals with historical data and financial statements, such as balance sheets, income statements, and cash flow statements, to provide a snapshot of a business’s financial health over a set period of time.
Ultimately, using FP&A accounting to understand a business's expected future financial performance allows decision-makers to carefully architect exactly what that future looks like.
When Is It Used?
FP&A can be deployed at different times and frequencies, depending on the organization. Typically, it’s an ongoing process and might be conducted fairly frequently (especially compared to traditional accounting). For example, a traditional budget might be generated once a fiscal year, while FP&A reporting can be generated quarterly, monthly, or even more frequently.
Financial decision-makers often require frequent reports to ensure up-to-date insights. Reports can be created before meetings, audit prep, financial decisions, or investor presentations.
The Role of FP&A Accounting in Financial Analysis
The FP&A accounting function is a game-changer in financial analysis. In companies with an FP&A team, these rockstar professionals manage their own financial analysis. They dive deep into data, identify trends, and provide insights that shape strategic planning and impact future performance.
The FP&A function is no joke—it creates financial forecasts that predict the organization's future financial performance, relating to various financial metrics like revenue, expenses, and profits. The insights generated by these forecasts help organizations understand their future financial outlook and make some serious moves.
The FP&A function also performs scenario analysis by modeling various financial situations to assess their potential impact on the organization's financial health. They are masters of two critical analytical techniques, variance analysis and profitability analysis, which allow them to dive deep into financial data and provide even more valuable insights.
Variance Analysis in FP&A Accounting
FP&A accounting can encompass performing variance analysis, which compares actual financial performance against forecasts and budgets. By comparing these two sets of data, FP&A professionals can gauge how much the reality of a financial situation is deviating from what was forecasted.
A variance analysis can result in either a favorable or unfavorable variance. For example, your business might generate more revenue than expected, or find itself with lower costs, while the opposite can be true.
Variance analysis is a central part of FP&A accounting because it allows decision-makers to understand if their future projects are spot on or missing the mark.
Profitability Analysis in FP&A Accounting
Profitability analysis is another technique relevant to FP&A accounting. This technique looks beyond the end profits to dissect a more precise view of how an organization earns its money. For example, profitability analysis might provide insights into gross and net profits and return ratios.
Profit analysis aims to allow organizations to better understand their profits and identify exactly where their profits are coming from. Profitability analysis can uncover profitability drivers as well as areas of a business that might be less profitable than expected.
The role of profitability analysis in FP&A can extend to forecasting future profitability trends. Leveraging historical data, market trends, and industry benchmarks, FP&A professionals can craft financial models that predict potential shifts in profitability.
The Role of FP&A Accounting in Financial Planning
When it comes to financial planning, FP&A accounting is the backbone of decision-making, resource allocation, and goal alignment. It's not just about crunching numbers; it's about crafting a roadmap considering various scenarios, budgeting, and forecasting.
Startups can benefit immensely from this information in order to make informed decisions and achieve their desired future state. Basically, FP&A is the boss of budgeting and forecasting in the financial world, and we’ll explain how.
Budgeting and FP&A Accounting
Gone are the days of traditional accounting for budgeting. FP&A has revolutionized the process by contributing after the fact and estimating the necessary expenses for executing various aspects of the budget while analyzing revenue and cash flow.
FP&A collaborates closely with all relevant departments and stakeholders during the planning phase to ensure everything aligns with larger budgetary allowances. This cutting-edge approach to budgeting is a far cry from the budgeting methods of the past and is sure to make a lasting impact on the industry.
Forecasting With FP&A Accounting
Forecasting is a key aspect of FP&A accounting that differentiates it from traditional accounting services. While traditional accounting focuses on a business's past and present financial state, FP&A utilizes forecasting to gain insight into a business's future.
There are several types of forecasting that FP&A may conduct, including sales forecasting, cash flow analysis, scenario analysis, and risk management. Leaders then use the results of these forecasts to make informed decisions and create strategic plans, making them vital to long-term planning.
Need FP&A Accounting? Let’s Talk
You care about the future of your organization, and we know you do. That’s why you’re here in the first place. And to best understand where your business is heading financially and what its future looks like, you can turn to FP&A accounting practices.
If you think an additional accounting task is the last thing you need, allow us to introduce ourselves. We’re hHline, offering outsourced accounting services for startups and growing small businesses, including bookkeeping, CFO, tax, HR, and payroll services.
Plus, our financial reporting and analysis services supply the financial projects you need to formulate realistic and effective strategies like never before.
Interested? Contact us today to get started.
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