Every organization irrespective of its size has vision & goals that they want to achieve and FP&A is the course of action in ascertaining how the organization would afford to realize the same.
Many organizations over the years have confined the finance function in bookkeeping (i.e., accounting) & basic cash management which is merely a facet of the domain. Finance is more than historical tracking and FP&A is one such facet which is forward looking and focuses on the business strategies, growth trajectory & its drivers.
Planning (The “P” of FP&A) is the base of FP&A where the analysis of the historical results and planning of the future happens through forecasting & budgeting. This is a rigorous process of breaking down the vision & goals into the time bound targets coupled with execution strategies and ascertaining the overall financial requirements to ensure that the business fundamentals & cash cycle remain intact over the years. The process covers reviewing & aligning every driver to the final goal including following key points-
- Topline growth & its drivers including channel, geographical & segment penetratation
- Profitability incl. Break Even, Gross Margin, Operating Margin, Sustainability etc
- Drivers of Pricing & Profit including the value proposition, key promotional strategies & spends
- Direct Costs including the sunk, variable, fixed cost and the sourcing / production pattern with the volumes growth
- Capital Requirements incl. fixed investments required to meet the capacities & demand
- Real Cash Flow & Cash Conversion Management including identified key stages of crisis, positive cash flow, key upsides / downsides etc
Analysis (The “A” of the FP&A) is the next level of providing a different yet most essential outlook to the strong foundation built through planning. It is not just about numbers, rather a holistic interpretation of those numbers to provide the right narrative in the form of business insights & hence it is imperative to have business knowledge & understanding to bring out insights which assist the executives in deciding future strategies and also in reviewing, correcting & aligning current & past decisions. The insights & analysis can talk about anything & everything which could affect business including-
- What drives customer to buy our product and prospect conversion cycle
- Predictive analysis of customer churn
- Review of real performance drivers & resources (Man & Money)
- Break even & sensitivity analysis incorporating macro & micro variables
- Expense to revenue correlation including optimizing & capitalizing promotional spends
Since, it is about analyzing business & its dynamics, there cannot be any exhaustive and pre-defined list of analysis as it needs to be nuanced and layered based on the nature of business and the respective organization’s SWOT. It is essential to note that organization size doesn’t decide the applicability as it is useful to implement for any organization with defined vision & goals.
Let’s take a case of new & emerging organization and how setting up the process in the beginning could be of great help. FP&A professional based on the discussion & vision of founder / executives can work on the growth trajectory over the long term horizon incorporating product wise volume growth planning with right pricing & Go-To Market strategy, staggered manpower planning to support the volume growth including geographical, product or channel expansion, structured resource review (target setting, reporting, review etc), market & competition analysis to ascertain the key drivers to close a prospect and aligning spends & strategies focusing only on those key drivers. The data backed analytics & planning could lead to focused action & spends avoiding drain of resources and speedy growth.
The budgeting & forecasting in planning coupled with apt interpretation & analysis could be a key business enabler & partner in growth which can also assist in averting the real cash management issues faced by many emerging companies confined by limiting the potential of finance to just about money.