FP&A – A Comprehensive Guide to Financial Planning and Analysis
As per Gartner only 13% of organizations identify performance issues before they hit financials. And 81% of organizations take too long to remediate performance issues. This happens because most organizations attempt to operate their financial decision-making without proper systems and tools. Financial Planning and Analysis (FP&A) software is the software platform that enables enterprises to model, visualize, analyze, and predict their business and financial plans.
In this blog we will detail the FP&A process and how organizations can benefit by deploying FP&A solutions.
Understanding Financial Planning and Analysis Process
Financial planning for an organization starts with its business plan. Visualize it as a sum of planned investments and expected returns for a given period. Investments mean the cost the company will incur for people, machinery, operations, etc. And returns in the form of income, revenue, and profits. The period is normally a year broken into quarters and months, usually called the annual operating plan or AOP. The period could also be 3 or 5 years when the organization is conducting this for the long term (called long-range planning or LRP).
Step-1 in the process is budgeting, i.e., detailing the amounts available for each of the functions to carry out their responsibilities and deliver the business results. E.g., the sales department will be provided a budget of X Mn rupees, which they can use to onboard new sales team members, invest in marketing, or deploy CRM software. Similarly, the production department will be given a budget that they can use for their operations, across people, processes, and technology. HR, IT, and Finance each will be provided their respective budgets. These are normally further divided by territories (state, city) or segments (B2B, B2C, etc.).
The other side of the AOP will detail the expected revenues – by products, territories, segments, channels, etc. This becomes the organizational goal or target to be achieved in the given period. Obviously the two – investments (also called expenditure) and returns (revenue) are aligned such that they generate the expected profits. This budget thus lays down the numbers that the organization will spend during the given period in order to achieve the business results.
Once the budget is set the next step is to track the progress. This includes capturing the actual earning and expenses. The YTD actual performance data (sales, expenses, headcount, etc.) is captured from the core transaction systems (ERP, CRM, etc.). The objective is to capture the differences (also called variances) and compare it with the AOP plan.
The next step is forecasting. This process is also called the rolling, i.e., forecasting the performance for the remainder of the year such that the organization stays on course to meet or exceed the AOP.
The rolling forecast is usually done for a period of 1+3 months, i.e., the immediate next month and the following 3 months. The sales organization is expected to share their estimate of what will be the revenue performance in the coming period. Is it expected to be in line with the AOP plan or any different. Similarly, on the expense side, the expected spend is detailed and compared to the plan. If the sales numbers are expected to be lower, then the analysis will revolve around the key reasons for the shortfall and what interventions need to be brought in to go back to the plan-levels. The cost of these interventions will then flow back into the expense plan and the annual margin and profit target will be altered to reflect the new plan. This process is carried out at the lowest grain (product, customer, SKU) and across dimensions (territory, segment, salesperson) to identify which areas of the business are lagging and where are the tailwinds.
The final step of the process is this monthly analysis pack, which is reviewed by the management to understand the trends/variances, suggest remedies, and approve the interventions to bring the rolling forecast in alignment with the AOP.
How does Financial Planning and Analysis software, along with Financial Planning and Analysis services help organizations improve their FP&A processes?
Software can play a key role in helping organizations improve - accuracy of reporting, timely analysis, and prompt decision-making. Here’s how:
- Spreadsheet like user interface – Spreadsheets are the default tool organizations use for developing their financial plan. It has some very intuitive and useful features that aid business planning. Thus, from an end user perspective, FP&A systems with a spreadsheet like interface help in faster adoptions, ease of use, and a short learning curve.
- Multi-dimensional scenario modeling – While spreadsheets have some useful features, one of their fundamental drawbacks is the inability to do multi-dimensional analysis, i.e., you can have sales on the X-axis and year on the Y-axis, but if you want to see a third axis-Z e.g., product, one can’t do it on the same sheet. Users then end up developing multiple sheets for each of the third dimensions. This not only takes more time and effort but it’s also non-intuitive for analysis. Most FP&A solutions have a multi-dimension engine at the heart of their capability, which enables organizations to model and analyze financial data across multiple dimensions.
- Business logic implementation through non-code mathematical expressions – In order to develop the business, MIS FP&A analysts have to apply rules and assumptions across financial statements. Leading FP&A solutions make it easy for non-technical users to define the business rules. allocations, and formulae through non-technical spreadsheet-like programming syntax.
- Data processing capability – “Oh.. my spreadsheet has hanged!”. How often have we heard this? And especially when there is a stringent deadline to meet. Leading to re-work, information loss, and long nights at work. To overcome the data volume and processing challenge, FP&A solutions have a data processing capability that ensures that even if someone is analyzing historical data, across three dimensions, involving millions of cells, multiple versions, the system works and provides the analysis in a matter of seconds.
- Self-service reporting – What’s the point of having all the data if users can’t analyze it for making business decisions? While FP&A systems bring together all finance data in one place, they also provide built-in reporting, analysis, and dashboarding tools for users. So that the users – do not need to go ask for data every time, can do the analysis independently, and can analyze the data in the shape and form they need, and when they need it.
Conclusion
As per Gartner, high-quality financial planning and analysis can improve decision outcomes by up to 1% of sales. Whereas per Forrester, FP&A solutions can result in inventory value balance reductions of 10% to 20% and SG&A cost ratio improvements of 0.5% to 1.5% through better visibility into real-time forecast and budget data. Bringing in the right processes and technology and creating an efficient financial planning and analysis process thus becomes a key imperative for all organizations.
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