Importance of "Financial Planning & Analysis"

What is FP&A?

There is no specific definition for FP&A at the moment. Wikipedia defines Financial Planning as “the task of determining how a business will afford to achieve its strategic goals and objectives.”

FP&A provides decision support to the management in visualizing short term and long term objectives, assessing their viability and ensuring their fulfillment through continuous monitoring. FP&A is the function that helps management take important decisions pertaining to the profitability and other financial health of the organization. It also provides sufficient information to the management in envisioning the future.

Elements of FP&A:

The basic elements of FP&A are forecasting, budgeting, reporting and analysis. But it could also include other areas such as resource allocation, IT support, Operations support and HR support. Each of the individual elements is a subject in itself. However, let’s attempt to understand the core elements in brief with day-to-day examples.

Forecasting:

All of us have some amount of savings and we want to invest it somewhere. What do we do as the first step? We shortlist some companies based on their past performances, extrapolate their past performance and see what is the amount that we can make out of the money invested. This is akin to Forecasting – an integral part of FP&A.

In the context of a corporation, forecasting can be defined as the periodic prediction of future trends considering the current internal and external factors. Usually, this is done by analyzing and extrapolating the past results and applying known anomalies to past trends.

Budgeting:

We all budget our expenses. At the beginning of every month, we draw up our expense statements and determine the amount we can afford to spend what we’d like to save.

In a corporate scenario, budgeting involves drawing out a detailed financial plan and establishing a goal for the future period. It usually details the various financial elements and its drivers considering the capabilities of the business. This activity is done before the beginning of the year and is drawn out by month.

Reporting:

At periodic intervals, we all get appraisals at our workplace or we get to attend the PTA meetings at our child’s school. What we get to hear is a summary of past performances and our standing with respect to expectations.

In a corporate scenario, we engage in reporting to measure the events in a particular period. Reporting can be defined as providing of information at periodic intervals to various stake-holders that enables them to take important decisions. Stake-holders include management, business partners, investors, creditors and debtors. Information could be related to past performance, future plan, strategy, objective and market standing among others.

Analysis:

When we overspend, we try to see where we are over-spending, what expenses can be controlled, and how we strayed from what we initially planned. This is essentially an analysis of household expenses.

In a corporate world, financial analysis can be defined as assessment of the financial aspects of an organization including deployment of funds, profitability, investor protection, business viability and market standing. It usually involves the understanding of ratios, comparisons with Budgets and Forecasts and detailed study of the financial statements. This activity not only helps understand the problems and provide decision support, but also visualizes opportunities and ensures better performance.

FP&A in Corporate World:

In a corporate scenario, FP&A function usually comes under the direct purview of the Chief Financial Officer or the Director - Finance. The activity involves liaison with various departments, understanding their functions, their impact on the Business and providing support to take important business decisions.

The core FP&A team caters to various departments like the Finance, Operations, HR, Corporate, Procurement, Quality, Sales and Marketing etc. In short, FP&A function is that thread of every organization that beads various departments together and ensures achievement of their common goal. In addition to providing timely reports and analysis, FP&A also provides support for redesigning the systems used for accounting, reporting etc.

FP&A is set up by every Product and Line of Business in an organization. In some cases, it is also sub-divided by function and areas in which the business is carried on. In fairly large organizations, there are different people sourcing to different sub-divisions and conversely, in small organizations, one person caters to all divisions.

Why FP&A?

To summarize the points discussed above, a few important reasons why FP&A is required in organizations:

FP&A aids in -

Envisioning the short-term and long-term objectives

Driving performance

Meeting and overachieving Internal and external expectations

Timely identification and correction of financial or operational concerns

Understanding the reasons for variances to expectations

Strategic analysis

Identifying opportunities and providing decision support to capitalize them

Outsourcing FP&A:

FP&A is now being outsourced to other countries and there are fairly large organizations that now have their FP&A setup in India. FP&A function requires being closely associated with the Business and also requires involvement with many departments. Hence, FP&A in India is now becoming a little more than an accounting job, unless reasonable analysis is involved.

To overcome this, it is very important for the offshore FP&A Analyst to allocate quality time to analysis and to ensure that we do not get too caught up between deadlines and mundane activities. It is also imperative for the offshore qnalyst to maintain contacts with the business as proximity will be a challenge. Regular visits to the business concern, wherever possible, will help.

The advantages of having an offshore FP&A are numerous. Offshore FP&A activities not only ensure cost savings but also help in standardization. The assumptions underlying the financial reports are standard across all products and regions. Also, Forecasting and Budgeting are processes involving assumptions about future events. Catering to these requirements in a unified manner ensures that all the assumptions are standard.

FP&A is a very dynamic and interesting function of finance. It requires the analyst to be deeply involved with the business and to understand not only the numbers, but also the science of running the business. It is therefore, very important for the analysts to understand the business before jumping into the numbers in order to keep the essence of “A” in FP&A alive.