FINANCIAL PLANNING AND ANALYSIS (FP&A)
Financial planning and analysis, often called as FP&A is the process of analysing, budgeting and forecasting the financial data which can help the organisation to be aligned to its financial goals and also to support strategic business decisions of the entity, and also assist an investor to know if the entity is stable and profitable enough for the investments.
UNDERSTANDING FP&A
- FP&A forms a significant and integral part of any entity which can assist to make futuristic decisions for the company based on the analysis and understanding from the data.
- FP&A and Cash Flow management prove to be the pillars for the growth of an entity which eventually will generate more profits on a year on year basis.
- Budgeting, Analysis, Planning and forecasting are the primary function of the FP&A, which draws a fair picture for senior management like CEO or CFO to make any major corporate decision
- It considers economic and business scenarios, historical trends to anticipate future potential obstacles and at the same time forecasting the company’s financial results.
Data used to analyse here can be either qualitative or quantitative based on which the analysis can be carried forward to evaluate the progress of the entity towards the set objectives and goals.
PURPOSE OF FP&A
- The most generic way to do data analytics is to do the ratio analysis and compare the same with the industry standards or evaluate the historical accounts and records.
- This can be used to do financial analysis to forecast the economic trend and to implement the financial policy for the entity.
- A periodic analysis of the financial data will help the organisation to maintain the database and analyse the trends to make any decision for future advancements.
- Since this is done through the data, it depicts the financial numbers for the entity by analysing the statement like Balance sheet, Profit and loss statement and cash flows.
There are several purposes and aims of doing FP&A for any entity, like in corporate finance for analysing the IRR or NPV of any project or in an investment analysis setting where the numbers can be used for investment analysis.
SIGNIFICANCE OF FP&A
- In cases where an entity needs financing to borrow funds for advancement and expansion, FP&A will try to present a separate finance section in front of the board in a very simple and brief manner. Moreover, the lender would want to see the numbers before lending out funds.
- The financial analysis sets a good base for any company to succeed by the setting of the business and financial plan. To the point planning leads to creating a better understanding of how a business operated as compared to the projections done.
- FP&A strategy links the long term planning with reporting and budgeting, with further analysis it also assists to develop financial models and help in the annual targeting setting process.
- FP&A and accounting are two different methods of analysing the financial statements, the place where accounting comes to an is where FP&A starts. In crux, accounting focuses on historical costs and numbers and FP&A looks ahead to forecast
- Stability and consistency are very significant in any kind of business. A reliable FP&A process will help to get this stability and at the same time, include reliable info and stats for the management to make a sound and informed decision.
Most of the entities have a dedicated and specific team for FP&A which continuously tries to improve and maintain the numbers in the pursuit of many strategic objectives and finance teams are becoming stronger and stronger every day by generating effective analysis to create more economic benefits to the organisations.
THE CRUX
FP&A forms an integral part of any firm’s operations; this kind of analysis and forecasting helps the business to know the trends and can also forecast about the upcoming trends. Having said that, this is a pure number game driven by a process where analysis also provides some qualitative output for the management, depending on the requirements and need, the company can decide which type of analysis needs to be considered.
