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Owner of a lumber yardFinancial planning and analysis (FP&A) is the process businesses use to prepare budgets, generate forecasts, analyze profitability and otherwise inform senior management decisions of how to implement the company’s strategy most effectively and efficiently. The FP&A functions can be accomplished by an individual or a team working alongside other finance professionals such as the controller and treasurer and reporting to the chief financial officer (CFO). While FP&A is often performed by people with an accounting background, it differs from accounting by focusing primarily on forward-looking information as opposed to historical data.

Typical members of an FP&A team include financial analysts and one or more FP&A managers charged with coordinating the work of the analysts. In larger organizations, a director or vice president of FP&A oversees the overall process and strategic direction and communicates with the CFO, CEO and members of the board of directors.

FP&A Functions

To fulfill its function of providing information and insight connecting corporate strategy and execution, FP&A performs a wide range of activities. These can be divided into a few broad categories including planning and budgeting, forecasting and management reporting.

The central output of the FP&A process consists of long- and short-term plans. The job requires using financial and operational data gathered from throughout the company. A key part of the FP&A process is collecting and combining a wide variety of figures from operations, sales, marketing and accounting departments to produce a unified view of the entire business that can guide strategy decisions by senior executives and board members.

Producing budgets is a big part of the FP&A planning function. Budgets describe expectations for the timing and amounts of arriving income, cash generation, disbursements to pay bills and debt reductions. Budgets may be monthly, quarterly and annually. Often FP&A creates a rolling budget for the following 12-month period that will be reviewed, adjusted and extended at the end of each quarter. FP&A also creates income statements and cash flow statements.

One of the performance reporting functions of FP&A is identifying variances when actual numbers reported by business units don’t match up to the budgeted amounts. In addition to identifying and quantifying variances, FP&A can offer recommendations for strategies that could be used to bring actual results in line with expectations.

Reports and forecasts from FP&A may be presented to the board of directors, to the CEO or other senior executives or to outside stakeholders such as lenders and investors. At a strategic level, decision makers use these analyses to choose how best to allocate the company’s resources.

Public companies reply on FP&A to provide shareholders and analysts with guidance on revenue and profits for upcoming quarters and fiscal years. The accuracy of the guidance supplied to the markets can have a sizable effect on stock prices.

Decision Support

Boutique ownerAlong with the ongoing responsibility to produce budgets, plans and forecasts, FP&A may also be called upon to support specific management decisions. For instance, it might analyze a merger or acquisition proposal to enable management to decide whether to pursue it or not. Other special projects delegated to FP&A could include analyzing internal incompatibilities and bottlenecks and making recommendations about how to improve the company’s processes.

Initiatives to find ways to trim costs and make a business more efficient are also likely to involve input from FP&A specialists. Because it is in constant communication with all areas of the company in order to gather data for its budgets and plans, FP&A is well suited to optimization efforts.

FP&A’s responsibilities could extend to nearly any department in the company, from operations to marketing to finance. For instance, FP&A may conduct internal audits, research markets or evaluate individual customer profitability. FP&A could also be called upon to provide risk management insights or assess the financial impact of tax policy decisions.

Bottom Line

Woman does financial planning and analysis for her employerFinancial planning and analysis involves gathering financial and other data from throughout a business’s various departments and using that to generate projections, forecasts and reports to help executives make optimum business decisions. Annual and quarterly budgets and forecasts, profit-and-loss statements, cash flow projections and similar decision-making tools are all produced by FP&A.

Tips for Small Business Owners

  • Financial planning and analysis is a job best handled by an experienced financial advisor. Finding the right financial advisor who fits your needs doesn’t have to be hard. SmartAsset’s free tool matches you with financial advisors in your area in five minutes. If you’re ready to be matched with local advisors who will help you achieve your financial goals, get started now.
  • The 80/20 Rule can help businesses gain insight into issues and opportunities so they can respond more effectively and efficiently. By identifying elements contributing most to a given outcome, businesses can better target resources to remove obstacles and exploit openings.

Photo credit: ©iStock.com/kali9, ©iStock.com/Maica, ©iStock.com/Korrawin

Mark Henricks Mark Henricks has reported on personal finance, investing, retirement, entrepreneurship and other topics for more than 30 years. His freelance byline has appeared on CNBC.com and in The Wall Street Journal, The New York Times, The Washington Post, Kiplinger’s Personal Finance and other leading publications. Mark has written books including, “Not Just A Living: The Complete Guide to Creating a Business That Gives You A Life.” His favorite reporting is the kind that helps ordinary people increase their personal wealth and life satisfaction. A graduate of the University of Texas journalism program, he lives in Austin, Texas. In his spare time he enjoys reading, volunteering, performing in an acoustic music duo, whitewater kayaking, wilderness backpacking and competing in triathlons.
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