Chances are you do a decent amount of planning for your business. There’s also a good chance that you perform analysis on things like sales volume, revenue, profits and other key business and financial metrics.
But did you know that there’s a formal business exercise called financial planning and analysis, or FP&A for short? And this exercise isn’t limited to big corporations and Fortune 500 companies. Practically any sized business in any industry can benefit from the discipline of performing FP&A.
Going Beyond Standard Accounting
Financial planning and analysis sightedness several steps beyond standard accounting by approaching your company’s financial operations from a big-picture perspective. This all-encompassing overview of your business’ finances includes not just general bookkeeping, bill payments and receivables collection, but also budgeting, forecasting and management reporting. Other components of FP&A usually include:
- Financial, results and data analysis;
- Analysis of operational and financial trends; and
- Long-term financial and strategic planning.
One of the biggest differences between standard accounting and FP&A is the latter’s emphasis on looking forward and planning ahead instead of looking backward and measuring what’s already happened. A wide range of different financial tools are used to perform FP&A, including budgeting, forecasting and planning software and enterprise resource planning (ERP) platforms.
FP&A and KPIs
A key component of FP&A is the identification, measurement and monitoring of key metrics that are crucial to your company’s success. These metrics are sometimes referred to as key performance indicators, or KPIs.
KPIs can be used to measure practically any activity your company performs. They are most commonly used in the financial area to monitor and track such metrics as the inventory turnover rate, accounts receivable and accounts payable days, days sales outstanding (DSO) and the debt-to-equity and debt-to-net-worth ratios.
Viewed in isolation, KPIs have little value — they need to be compared to something else to reveal anything insightful. For example, you can benchmark your KPIs to previous time periods (such as last quarter or last year) to see how your performance is improving (or not) over time. Or you can benchmark your KPIs to other businesses in your industry to see how you stack up against the competition.
Shifting From a Short-Term to a Long-Term Focus
One of the biggest benefits of FP&A is that it can force you and your managers to shift your focus from achieving short-term results to laying a foundation for long-term success. Other benefits you could reap by performing FP&A include the following:
- Access to better data for decision making, which can lessen the tendency to make decisions based on “gut feelings” due to the absence of hard data.
- A sharper focus on strategic goals that will add long-term value to the business, as opposed to short-term results that may prove to be temporary.
- More accurate budgets and forecasts, which can improve cash flow and reduce the need to borrow money or raise investment capital.
- A better handle on the true financial and operational condition of your company.
Need Some Help?
Let us know if you have more questions about financial planning and analysis or need help performing FP&A. Judd Financial helps companies like yours reap the benefits of FP&A.