Financial Planning & Analysis – the backbone of a good business strategy?

Financial Planning & Analysis – the backbone of a good business strategy?

Introduction

In today’s dynamic business landscape, companies constantly seek ways to enhance their decision-making processes and drive sustainable growth. Here, Financial Planning and Analysis (FP&A) plays a crucial role in shaping an organisation’s future by supporting its decision-making. In this article, we will understand about FP&A, its functions, importance, and other aspects.

What is Financial Planning & Analysis?

Financial Planning & Analysis (FP&A) is the intersection of finance and strategy, serving as the financial backbone of an organisation. It comprises numerous functions such as financial planning, forecasting, budgeting, financial ratio analysis, and reporting. These activities enable FP&A professionals to support an organisation’s decision-making process and maintain a healthy financial position.

The financial planning & analysis process focuses on the evaluation of historical financial data, market trends, costs, revenue, and different scenarios that might impact the company’s financial health. It helps the top management gain data-driven insights and make strategic decisions for growth and sustainability. 

Functions under Financial Planning & Analysis

FP&A professionals, work on combining financial, external and organisational data to gain an understanding of the organisation and its business environment. For this process, FP&A professionals perform numerous functions as:

Financial Planning: FP&A professionals develop comprehensive financial plans aligned with the organisation’s strategic objectives and mission. It involves forecasting revenues, expenses, and cash flow statement to facilitate effective resource allocation. There are two approaches to financial planning.

  • Strategy-Based Planning: Strategy-based planning in FP&A involves aligning financial goals and objectives with the broader strategic direction of the organisation. It focuses on translating high-level strategic initiatives into actionable financial plans and budgets. FP&A professionals analyse market trends, competitive dynamics, and internal capabilities to identify growth opportunities and potential risks. By integrating strategic priorities into financial planning processes, organisations can ensure effective resource allocation to support strategic objectives and drive long-term success.
  • Mission-Based Planning: Mission-based planning in FP&A centres around the organisation’s mission and core values, guiding financial decisions and resource allocation in alignment with its broader purpose. FP&A professionals work with stakeholders to understand the organisation’s mission, vision, and values and incorporate them into financial plans and budgets. By emphasising mission-driven decision-making, organisations can prioritise investments that support their core purpose, drive social impact, and achieve financial sustainability and growth.

Budgeting: FP&A professionals primarily work on the organisation’s budgeting process. They work on presenting a detailed roadmap of the financial plan by setting objectives, strategies, measures and targets for the departments and the organisation. FP&A works on building a robust budgetary framework which involves operating, capital and cash budgets.

Forecasting: Accurate forecasting is essential for informed decision-making. FP&A analysts work on building financial models to forecast project performance, revenue growth, cashflows, etc. FP&A professionals utilise historical data, market trends, and predictive analytics to forecast future financial performance and identify potential risks and opportunities. Forecasting helps in running sensitivity and scenario analyses to understand the impact of financial decisions on the company’s KPIs.

Performance Analysis: Monitoring and analysing key performance indicators (KPIs) is a core responsibility of FP&A. By assessing actual performance against budgeted targets and benchmarks, FP&A professionals provide operational efficiency recommendations and highlight improvement areas.

Financial Modeling: FP&A professionals develop and maintain financial models to simulate various scenarios, budgeting, forecasting, and assess the impact of strategic initiatives on the organisation’s financial performance.

Reporting: FP&A professionals prepare regular financial reports and presentations for senior management, board members, and other stakeholders. These reports provide insights into the organisation’s financial health and performance trends.

Importance of Financial Planning & Analysis

The importance of FP&A in organisations is not limited to financial decision-making. Here are some key reasons why FP&A is necessary:

  • Strategic Alignment: FP&A ensures that financial objectives are closely aligned with strategic priorities, enabling organisations to pursue growth opportunities with clarity and purpose.
  • Risk Management: By evaluating different scenarios and sensitivity analyses, FP&A helps organisations identify and mitigate financial risks, safeguarding against unforeseen challenges.
  • Resource Optimisation: Through effective budgeting and forecasting, FP&A enables organisations to optimise resource allocation, ensuring that capital is allocated to initiatives that yield the highest return on investment.
  • Performance Monitoring: FP&A provides real-time visibility into financial performance, allowing organisations to track progress towards goals, identify performance gaps, and take corrective action when necessary.
  • Decision Support: Senior management views FP&A as a strategic partner that offers data-driven insights to support important decision-making procedures and promote company performance.

Skills of a FP&A Professional 

  • Excel: Excel proficiency is essential for FP&A workers because it makes data analysis, financial modelling, budgeting, and reporting easier. Because of its adaptability and strong features, which facilitate precise forecasting, dynamic modelling, and understandable data visualisation, it is an invaluable tool for overcoming the challenges of financial analysis and planning. These attributes also enable well-informed decision-making and strategic planning.
  • PowerPoint: Effective communication is central in the FP&A, and presentation skills are essential for conveying financial insights to diverse stakeholders. FP&A professionals must be experts at translating complex financial information into clear, concise presentations that the audiences understand. Through compelling storytelling and visually engaging slides, FP&A professionals facilitate informed decision-making and drive alignment across the organisation.
  • Financial Modelling: Excel proficiency is indispensable for FP&A professionals who use spreadsheets to build complex financial models and perform scenario analysis. From cash flow projections to investment valuations. Hence, mastery of financial modelling techniques enables FP&A professionals to simulate various business scenarios, assess risk exposures, and optimise resource allocation strategies. 
  • Communication: Effective communication is vital for FP&A professionals to convey financial insights and recommendations to stakeholders and the organisation. It includes the ability to present financial information clearly and concisely, as well as the capacity to collaborate with cross-functional teams and senior management. Strong interpersonal skills are also essential for building relationships and influencing decision-making processes
  • Financial Analysis: FP&A professionals conduct in-depth financial analysis to simplify complex data into actionable insights. Whether scrutinising budget variances, conducting profitability analysis, or evaluating investment opportunities, FP&A professionals leverage financial analysis techniques to uncover trends, identify opportunities, and mitigate risks. 
  • Collaboration: Collaboration is the essence of FP&A, as professionals work closely with cross-functional teams to achieve shared financial goals. Effective collaboration builds strong relationships, helps understand stakeholders’ needs, and facilitates open dialogue. By collaborating effectively, FP&A professionals create a culture of teamwork and drive collective success.

Roles of FP&A Professionals 

The roles of FP&A professionals vary depending on the size and structure of the organisation. A few roles and their responsibilities are as follows:

  • Financial analysts are in charge of gathering, examining, and interpreting financial data and statements to aid decision-making.
  • FP&A Managers work on the reporting, forecasting, and budgeting procedures to ensure they align with financial and strategic objectives.
  • Strategic Planners create long-term plans and evaluate how decisions on strategy will affect the bottom line.
  • Financial controllers oversee the financial reporting procedures and make sure internal controls and accounting standards are followed.

FP&A Tools 

Finance professionals use FP&A tools to build detailed financial models, identify revenue opportunities, predict the impact of financial decisions on profitability and cashflows, integrate financial strategy, etc. Here are a few FP&A tools used by finance professionals:

Cube:

Cube is a platform for financial planning and analysis (FP&A) that simplifies forecasting, reporting, and budgeting procedures. Advanced features including driver-based modelling, scenario analysis, and real-time collaboration are available. Finance professionals are enabled to boost organisational performance and make data-driven decisions using Cube’s sophisticated analytics capabilities and accessible user interface.

Workday Adaptive Planning:

Worldwide organisations rely on Workday Adaptive Planning, formerly Adaptive Insights, as their cloud-based FP&A solution. Finance teams can use it to predict various scenarios, analyse real-time performance metrics, and build dynamic financial strategies. Workday Adaptive Planning enables businesses to respond to shifting market conditions and promote strategic decision-making through adaptable reporting features and smooth connectivity with other enterprise systems.

Anaplan:

Anaplan is a top cloud-based platform for connected planning that helps businesses link operational and financial planning for every aspect of their operations. Finance professionals may use Anaplan to undertake intricate scenario analyses, work in real time with stakeholders, and construct integrated financial models that will help them make smarter decisions.

Relationship between FP&A and Share Price of a Company – Tesla

Financial Planning and Analysis is an integral part of a company’s management and can significantly influence a company’s share price. FP&A professional’s work on expected future cash flow, earnings forecast, financial performance analysis, strategic planning, etc of a company. These are then communicated to investors to maintain transparency and inform them about the company’s plans. The perception FP&A gives the investors on the company’s financial health, growth, market trends etc drives investors’ sentiments. These sentiments ultimately influence the trajectory of the share price. FP&A plays a big role in the company’s share price movement. It connects the company’s internal work with the investor’s sentiments to influence the overall market perception of the organisation. Hence, driving the share price.

This strategic move can be better understood with an example of Tesla:

Recently, the share prices of Tesla experienced high volatility. As the results of the first quarters were released, Tesla reported a drop of 9% in its actual revenue. The company was estimated to record a revenue of $22.3 billion but fell short at $21.3 billion. Despite this revenue miss, the share price of Tesla bulled by more than 10%. The question remains why?

financial planning & analysis Tesla

Here we can better understand the relationship between FP&A and investors & market sentiments. Tesla plans on launching affordable EVs in 2025, Tesla also expects continuous growth in the energy generation and storage segment. The company is working on an AI self-driving feature, combining the prior two strategies, we can see a boost in investors’ confidence but for a short duration. Looking at this, the company effectively communicated its prospects to influence investors’ sentiments and the share price swelled. However, these tailwinds cannot be sustained for the long term because of Tesla’s financial statements and analysis.

By looking at this example we can conclude that if the financial results align with the investors’ expectations, a company’s share prices rise. This explains how powerful FP&A is for a company.

Source: https://www.euronews.com/business/2024/04/24/teslas-stock-surges-on-optimism-for-musks-affordable-car-line-up#:~:tt=Tesla’s%20shares%20surged%20by%20more,would%20arrive%20earlier%20than%20expected

Conclusion  

Financial Planning & Analysis (FP&A) is crucial for driving strategic decision-making and evaluating the financial performance of an organisation. By utilising data-driven insights, advanced analytics, and technology-enabled tools, FP&A professionals empower organisations to navigate complex challenges, seize growth opportunities, and achieve sustainable success in today’s competitive marketplace.

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