Many folks may not be familiar with what FP&A is and how it changes everyday life in a business. So what is FP&A? This will be the topic of our FP&A Journal today.
Briefly, Financial Planning and Analysis (FP&A) is a set of activities that support financial management and improve decision-making. In other words, FP&A seeks answers to events happening today in order to understand their impact in the future. The result of such analytical & predictive activities is the annual budget and its related updates – recurring forecasts.
Let’s take a look at what FP&A is like in real life.
Budgets
It all starts with the analysis of your sales. By knowing the reasons for the level of sales this year, FP&A looks at how your sales will likely continue next year. Once sales are predicted, expenses and profitability will follow. These two items are closely interconnected. The more profitability is desired by the leadership/stakeholders of the company, the less funding for expenses will be available (and vice versa). Knowing the desired profitability gives FP&A the understanding of how much can be spent on all company expenses. Then it’s all about what the company spends money on. Expenses are typically analyzed in an itemized format and predicted depending on how the spending structure will change given the expected level of sales. That’s (very briefly) how budgets are done.
Forecasts
Now, how do you know if you are adhering to your budget? What are the reasons for the variances, and is there a concerning trend that may require immediate attention? These are some of the questions that are answered by recurring forecasts. Think of recurring forecasts as the update to your budget that allows you to act before it’s too late. It is also a great tool for expense accountability, as leaders of individual functions are fully responsible for adhering to their assigned budgets. Recurring forecasts typically improve this adherence as well.
Conclusion
Ultimately, FP&A gives everyone a clear understanding of what can be spent and what level of sales & profitability can be expected. It gives guidance on everyday questions, such as “can I hire more staff”, “what is the target % for annual raises”, or “how much inventory will I need given the expected sales/demand”. This is everyday FP&A.
(This article was also published on LinkedIn)
What is coming next in our Journal? The next topic will be The Importance of Forecasting. Until then, feel free to explore our previous article about the difference between Accounting and FP&A.
