By: Jarred Liscio, Senior Associate
Companies of different sizes and stages in their lifecycle employ the Financial Planning and Analysis (FP&A) function. As a company grows, it often reaches an inflection point where leadership recognizes the need to thoroughly understand financial performance in order to achieve desired success. FP&A solutions become relevant at this stage. Expanding companies have various investment options – new equipment, advanced software, etc. – but they choose to invest specifically in FP&A for several key reasons.
FP&A teams can be internal or supplemented by advisory firm resources. They typically provide a suite of deliverables, including budgets, forecasts, variance analyses, historical financial analyses focused on key performance indicators (KPIs), board packages, cash flow models, and customizable ad-hoc reports tailored to the business’s needs. These deliverables furnish essential financial insights to maximize profitability and minimize risk. This crucial support is why numerous companies elect to invest in FP&A services. While the enhanced foresight from FP&A offers countless benefits, four major advantages are:
- Enhanced visibility into business operations
- The ability to measure performance and assign accountability
- Improved decision-making
- Greater risk management
One of the greatest benefits of having FP&A team support is the enhanced visibility they provide into business operations. FP&A professionals aim to bridge the gap between financial performance and underlying operational data. For leadership, this brings the organization full circle and illuminates which parts have the most meaningful bottom-line impact. When building forecasts, the team should construct them ‘bottoms up’ – meaning the models would predict revenues and costs and capture operations. This highlights for executives the crucial relationship between daily activities and their translation into financial statements. An FP&A team can also prepare dashboards and flash reports that continually monitor performance and track KPIs. This allows leadership to identify both areas performing well in real-time and those needing more attention, enabling data-driven course correction. With comprehensive visibility across the business, management can more strategically guide the company forward.
The next significant advantage of having an FP&A service supporting a business is that it can measure performance and assign accountability. One of the most influential and time-consuming deliverables produced by an FP&A team is a company’s annual budget/plan. As mentioned above, these are built ‘bottoms up,’ so the businesses’ operational activities support the financial numbers. With a budget in place, management can set targets and outline their strategic goals over that year. Furthermore, it provides management with a picture of how to evaluate success in all business parts, equipping them to assign ownership to all units within the enterprise.
Next, with an FP&A function in place, management makes better-informed decisions. FP&A teams produce regularly updated forecasts of current assumptions and internal and external data. This empowers strategic decisions based on the latest market and operational trends – where to optimize costs and which growth levers to prioritize. Additionally, financial planning can track numerous KPIs so leadership understands exactly where adjustments may increase performance and profitability. However, an experienced FP&A team is invaluable in translating insights into tangible tactical and strategic changes that generate the most value.
The fourth significant benefit is more robust risk management. Skilled FP&A staff can develop sensitivity and scenario analyses that stress test under factors like interest rate shifts or cost inflation. Mitigation strategies can be formed to prepare for market fluctuations by identifying potential financial risks.
A key piece often misunderstood is that FP&A’s reports have little inherent value. Though much work goes into producing them, they are just numbers on a spreadsheet. Instead, skilled FP&A advisors use deliverables as tools to drive continual improvement. Rather than hindsight-based reporting, the function provides real-time insight and foresight to optimize profitability, manage risks, and guide data-backed strategy quarterly and year after year. With an experienced partner, companies can transform financial analytics into actions today that strategically position for long-term success.