Financial Planning & Analysis
All activities that assess, plan, improve, and monitor critical business activities and initiatives.
Financial Planning and Analysis is the information engine of a business. FP&A has the responsibility to develop and present analysis and insights in an objective manner that reduces bias that would lead to less-than-optimal decision making. Because of this, FP&A and PM (Performance Management) need to be integrated with all other management processes. Accordingly, the FP&A department must therefore display competence in areas beyond finance, accounting, and analysis. Areas such as operations management, IT, HR, and economics all become relevant when presenting a total, unbiased picture of the business and corresponding processes. It is this wide scope that "makes or breaks" an FP&A department and it is why so many founders, owners, and executives feel their FP&A function is lacking.
Below, in the image, are just some of the activities that FP&A will be called upon to assist or lead in the final output. At the very least they will be asked to analyze and model data, draw insights, and create reports. FP&A will be required to interact with representatives of all areas of a company to gather complete information from those closest to the activities. As you look over the activities, you can see why it is crucial to have knowledge and competence of the whole company and its operations. But this isn't just the process mappings. FP&A must also be knowledgeable of benchmarks, KPI development, forecasting methods, key drivers for process data and many other tools that are used for the various activites.
Below, in the image, are just some of the activities that FP&A will be called upon to assist or lead in the final output. At the very least they will be asked to analyze and model data, draw insights, and create reports. FP&A will be required to interact with representatives of all areas of a company to gather complete information from those closest to the activities. As you look over the activities, you can see why it is crucial to have knowledge and competence of the whole company and its operations. But this isn't just the process mappings. FP&A must also be knowledgeable of benchmarks, KPI development, forecasting methods, key drivers for process data and many other tools that are used for the various activites.
The lack of broad-based understanding in areas such as operations management, IT, marketing, and economics and the lack of well-developed capabilities with data are just a few of the reasons many companies are left wanting for strategic decision-making information that would come from a capable FP&A department. This is why most companies’ founders, owners, and CEOs end up with a second controller or treasurer at the CFO position and a team of processors throughout the accounting department.
Frankly, the very base of the responsibilities of the CFO is the ensuring of smooth financial operations for the cash cycle, period closes, and reporting rests with controller. The CFO oversees and monitors these base processes to ensure that all is flowing to plan. Certainly, the CFO is responsible for developing and signing off on the processes and controls, but the CFO should not be tied solely into the completion of the accounting department’s regular tasks. This is just one area of the finance department. Far too many CFOs rest within this area of the period close, cash cycle, and reporting.
FP&A is the area required for any future planning, implementation, and execution of strategy.
Frankly, the very base of the responsibilities of the CFO is the ensuring of smooth financial operations for the cash cycle, period closes, and reporting rests with controller. The CFO oversees and monitors these base processes to ensure that all is flowing to plan. Certainly, the CFO is responsible for developing and signing off on the processes and controls, but the CFO should not be tied solely into the completion of the accounting department’s regular tasks. This is just one area of the finance department. Far too many CFOs rest within this area of the period close, cash cycle, and reporting.
FP&A is the area required for any future planning, implementation, and execution of strategy.
What do you need, at a minimum, from FP&A?
- credibility of forecasts
- dispassionate, hard-headed analysis
- balance: cost models and growth models
What does FP&A model?
- Operating Plans and Budgets
- Forecasts and Outlook
- Strategic Endeavors and Long Range Forecasts
- Revenue Projections
- Cash Flow and Liquidity
- Tactical Plans and Product Cycle Forecasts
- Capital Investments and Budgeting
- Compensation and Incentive Plans
- Business Valuations
- M&A
One of the most overlooked requirements for an effective FP&A department is that of the design of the team and its capabilities. In order to get the most out of your team attention needs to be given to their training and competencies just as you would for employees focused on accounting, IT, or operations. Making training, source reference materials, and documentation available to your FP&A team is just one way to create an environment of success for your FP&A team.
Consider developing data flow mappings, documentation during model development, bookmarking sources for macroeconomic data for consistency, the maturity of the business and immediate needs of the decision makers, and sharing information and methods amongst your team.
Consider developing data flow mappings, documentation during model development, bookmarking sources for macroeconomic data for consistency, the maturity of the business and immediate needs of the decision makers, and sharing information and methods amongst your team.
Building and Developing Your Team
- Formal training
- Reference materials
- Collect and study others’ work and analytics
- Credibility and objectivity
- Maturity of the business
- Maintain repository of analytical tools
On occasion, the FP&A team is called in to assist with accounting activities. This is often the case during the period close and almost always at the year end close. While the close is necessary, using your FP&A department is not in your best interest. The FP&A department is used for analytics, operational measurement, and future projections.
If you find that your FP&A people are getting pulled into the day to day consider evaluating your processes. Pin point the bottleneck. If you are having trouble with subledger audits, such as the AR and AP subledgers, perhaps develop models to assist in the early identification of mismatches or utilize a specialized AP/AR application. Some areas that you can examine for process stalls are listed below.
If you find that your FP&A people are getting pulled into the day to day consider evaluating your processes. Pin point the bottleneck. If you are having trouble with subledger audits, such as the AR and AP subledgers, perhaps develop models to assist in the early identification of mismatches or utilize a specialized AP/AR application. Some areas that you can examine for process stalls are listed below.
Creating Some Slack for Your FP&A Activities
- Eliminating reworks, redundant activities
- Eliminating reports that are not effective, redundant, or not utilized
- Closing and reporting cycle
- Transaction processing, payables, payroll, invoicing, receivables management
- Budgeting, planning, forecasting, especially reducing multiple iterations
- Build financial literacy for nonfinancial management
In my opinion, the defining and most important capabilities of the CFO are those of strategic finance, financial planning, and data analytics. The reasoning is that no company wants to rest. The entire point is to grow. Any growth requires the ability to analyze data and acquire a deep financial understanding of current operations, current industry conditions, and current economic conditions so that forecasted financials, CAPEX investment, strategic planning and risk conditions can be presented to the CEO.
Limited resources demand that investment be targeted to the opportunities with the highest probabilities of success and return.
Limited resources demand that investment be targeted to the opportunities with the highest probabilities of success and return.
Performance Management
One might wonder why performance management is correlated with FP&A. Since FP&A is tasked with data analysis, modeling, and reporting, it is not a far stretch to see where this activity could be used to create performance measures and associated monitoring tools.
A method that is highly recommended by the IMA, Institute of Management Accountants, for developing performance measures is the Balanced Scorecard. The Balance Scorecard integrates well with the Strategy Map and the corresponding critical success factors and objectives that are developed to determine the success of strategic execution. The Balanced Scorecard uses a range of areas to monitor the success of a company or strategy. The Scorecard uses the standard financial metrics, but success and performance should be based on more than just the financials. Other areas that the Scorecard measures are 'Customer', 'Operational Process', and 'Employee Learning and Growth' centric.
Customer measures might include surveys and new customer tracking.
Processes might measure reworks, on-time shipping, and throughput.
Employee Learning might measure courses and training hours.
Below is an example of a high-level layout of a Balance Scorecard metric with it strategic goal.
A method that is highly recommended by the IMA, Institute of Management Accountants, for developing performance measures is the Balanced Scorecard. The Balance Scorecard integrates well with the Strategy Map and the corresponding critical success factors and objectives that are developed to determine the success of strategic execution. The Balanced Scorecard uses a range of areas to monitor the success of a company or strategy. The Scorecard uses the standard financial metrics, but success and performance should be based on more than just the financials. Other areas that the Scorecard measures are 'Customer', 'Operational Process', and 'Employee Learning and Growth' centric.
Customer measures might include surveys and new customer tracking.
Processes might measure reworks, on-time shipping, and throughput.
Employee Learning might measure courses and training hours.
Below is an example of a high-level layout of a Balance Scorecard metric with it strategic goal.
Characteristics of effective Performance Management
- Achieving an organization’s initiatives, forecasts and planned results
- Projecting and modeling future performance
- Monitoring key value on business drivers
- Increase visibility into critical areas of business performance
- Deliver critical information to managers and executives
- Integrating into other management practices
- Identify, monitor, mitigate risks