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 & Analysis (FP&A) software is the software platform which enables enterprises to model, visualize, analyze, and predict their business and financial plans.
In this blog we will detail the Financial Planning & Analysis (FP&A) process and how organizations can benefit by deploying FP&A systems.
Understanding Financial Planning and Analysis & FPA 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 for marketing, or deploy a CRM software. Similarly the production department will be given a budget which they can use for their operations, across people, processes and technology. HR, IT, 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 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. This gives the management a good view of how the business is trending for the year and what is the direction it is headed towards.
The next step is Forecasting. This process is also called the Rolling forecast 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 of 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, sales person) 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, suggest remedies, and approve the interventions to bring the rolling forecast in alignment with the AOP.
Benefits and Importance of Effective FP&A
The accuracy, frequency, and detail-level of the rolling forecast is the key to analyzing the performance and identifying the challenges or the growth areas within the business. The accuracy is compromised when the source data is unreliable. This usually happens when the organization is not following proper systems and processes. And instead relying on people and point solutions to source, collate, analyze and predict the business results and forecasts. Frequency of the process is also happened due to lack of enabling systems. This actually forces the organization to run the process at lesser frequency compared to the velocity of the business. E.g. many organizations still do quarterly forecasting even though the market dynamics are moving at a faster pace. If they had a system this could be done much faster as the input-output process would have been automated and reliable. Similarly, when attempting to do the analysis using legacy methods (viz. spreadsheets) analysts tend to forego details leading to poor decisions. Having FP&A systems enable superior decision making as they bring-in accuracy, reliability, and speed in the process so that analysts can spend more time taking business impacting decisions.
In addition, FP&A tools augment decision making through their functionalities of visibility and collaboration. Business leaders and management get a real-time, honest view of the business. Everyone if referring to the same version of truth. They can analyze the data by different cuts/ parameters to determine the exact nature/occurrence of the business issue and by connecting it to other areas identify remedial solution. The analysis can be instantly shared to the respective teams for further analysis and action. This can be tracked for updated and closure in the next review/cycle. As per Gartner, high-quality financial planning and analysis (FP&A) can improve decision outcomes by up to 1% of sales. Where as per Forrester, FP&A can result in inventory value balance reduction 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.
Roles & responsibilities of FP&A analysts
We can broadly classify the FP&A roles into analyst and a manager. The analyst is someone with a Finance background, sound understanding of business financials, and in absence of a tool, spreadsheet expert. His role is to develop the analysis required for decision-making by integrating data points, managing templates, co-ordinating with other stakeholders.
The manager’s role is to guide the analyst in the right direction in order to identify revenue, and cost saving opportunities. He also works with the business stakeholders in communicating and sharing the business trends and insights and identifying new strategies and tactics to meet the financial objectives.
Most FP&A teams are aligned by the business units or territories they are supporting e.g. men’s category, India West, Mid-market, etc.
Today most of the analysts spend 50-75% of their time in non-productive tasks such as data gathering/updating, version management, follow-up with other teams, updating macros, developing chart & dashboards, etc. Majority of these tasks can be easily automated allowing the analysts to focus on analysis and fact-finding.
Key features & What to look for in FP&A Software
While FP&A solutions come in different shape and form some of its key capabilities include:
- Spreadsheet like user interface – Spreadsheets is the default tool organizations use for developing their financial plan. It has some very intuitive and useful features which aid business planning. Thus, from an end user perspective FP&A systems having spreadsheet like interface helps in faster adoptions, ease of use, and short learning curve.
- Multi-dimensional scenario modelling – While spreadsheets have some useful features one of their fundamental drawback is the inability to do multi-dimensional analysis i.e. you can have sales on X-axis and year on 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 dimension. This not only takes more time and effort but it’s also non-intuitive for analysis. Most FP&A solutions have muti-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 – Most users fear adopting new systems because it involves new learning which is technical in nature. They are not trained for this neither is it their core competency. Thus leading FP&A solutions make it easy for non-technical users to define the business rules and assumptions through non-technical English-like programming syntax. This shortens the learning curve and more important quickly gets the users on board.
- Ability to define business assumptions and drivers – All financial plans are based on certain assumptions which apply to the overall business plan. Similarly there are important drivers which enable the expected performance. The plan will continue to evolve, and the FP&A team will need the ability to define and change the core assumptions and drivers on an ongoing basis to be able to align the plan with the new scenarios e.g. economic headwinds, RM costs, etc. Thus the FP&A solution must have an easy to use functionality which lets the FP&A analysts capture the assumptions and drivers.
- 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 which ensure that even if someone is analyzing historical data, across three dimensions, involving millions of cells, multiple versions, the systems works and provides the analysis in a matter of seconds. Thus users do not have to worry about data processing speed and output.
- Self-service reporting – What’s the point of having all the data if users can’t analyze them for making business decisions. While FP&A systems bring together all finance data at 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 analyse the data in the shape and form they need, and when they need it. The right FP&A solution will enable the business teams to execute all of their business analysis and decision making by bringing together the necessary data and tools, without any dependency or reliance on other teams/functions.
With a FP&A solution one can expect the following outcomes – faster planning, reduced errors, significantly reduced efforts in data collation, clear visibility of the plan and the status to all stakeholders, and collaborative decision making across the organization.
Given the velocity of the business environment today, the speed in decision making is paramount. With FP&A solutions you can expect to get all the required data and analysis to make tactical and strategic decision at your finger tips. This dovetails into a core competitive differentiator in the market place.
Deflytics has more than 10 years’ experience in the domain of F&A and has implemented more than 55 projects across industries. The two FP&A solutions we partner are Anaplan and Workday Adaptive Planning. Once is the pioneer of the connected planning (xPA) paradigm where as the other was built grounds-up for the CFO office. Both together have more than 8000 customers globally including many Fortune 500 customers.
FP&A solutions allow you to model, analyze, and predict your financial plan in the minutest grain across (customer, SKU, project, etc) across various parameters (product, territory, segment, etc.). By including actuals and forecast information and leveraging the self-service analysis functionality the FP&A tools organizations can proactively track business performance such as variances, cash-flow, and P&L and take important strategic decisions (reduce margins, expand to new markets, introduce new products, etc.)
FP&A solutions are fundamentally equipped to model your financial plans. Thus, allowing you to develop goals and targets for every business unit in the organization. The multi-dimensional “what-if” scenario modelling capability of FP&A solutions enable organization to predict future scenario before actually taking the decision e.g. what if we reduce the margin on product-B by 2%? What will be the cost and benefit of expanding to a foreign territory? If we set-up a new plant by investing Rs 100 Cr, when will we start seeing the returns?
Through a FP&A solution, an organization will be able to proactively manage the health of its business. Some of the key analysis include real-time P&L at SKU, account, project level, Variance analysis, Revenue forecasting, and “what-if” scenario modelling.
By studying the current processes and templates and understanding the future-state requirements, we design the FP&A solution to meet individual client requirements. Deflytics has implemented more than 55 FP&A projects and we pull in that rich experience to establish best practices and analytical frameworks which help customers improve the process efficiency and analytics insights for strategic and tactical decision making.
Our consulting services along with the FP&A solutions we implement have helped organizations – reduce their monthly close process by 10-20%, improve the speed of the FP&A cycle by 20-25%, reduce forecasting errors by 30-40%, reduce the time for financial analysis by 40-50%, and deliver productivity improvements for the FP&A analyst team by 50-70%.