When you evaluate your company’s financial future, you are performing financial planning and analysis. This process involves the collection of data and turning that information into useful budgets, variance analysis and strategic finance decisions. FP&A is a critical part of business operation because it helps you determine how you can achieve your financial goals given your current circumstances. Access to real-time data insights and reporting helps you stay relevant despite changing markets and economic uncertainty. Technological innovations simplify data integration and reporting for you. This guide can help you understand the critical functions and applications of your corporate financial planning with tools that streamline the work.
FP&A Core Functions
At its core, financial planning and analysis involves the collection, analysis and application of financial data. This data can be organized into reports that corporations use to make strategic decisions about the company’s future. Common functions of FP&A in an organization:
- Data Collection: FP&A requires collecting data from various places, including in-house data repositories, ERP systems and outside sources. Data must be complete and verified for accuracy, so that the reporting and planning will be comprehensive and reflective of the current business.
- Budgeting and Forecasting: Corporations must set short-term and long-term operating budgets. These budgets and other data create the foundation for solid forecasting, including revenue and expense projections. With this information, companies can adjust their financial modeling based on company growth or market conditions.
- Variance Analysis: Sometimes the actual spending or revenue forecasts do not reflect the actual scenarios. Variance analysis allows the company to evaluate discrepancies and identify the causes, such as a change to the market or a cost overrun.
- Strategic Modeling and Scenario Planning: The wisdom of releasing new products or adopting different operating practices should be tested prior to launch. Strategic financial modeling and scenario planning help organizations to determine how significant changes to daily operations or business model could affect the company.
- Performance Tracking and KPI Development: Tracking performance helps corporations to evaluate how company progress measures up against financial strategy plans. The use of KPIs like EBITDA or ROIC gives the business performance metrics to measure, to determine success or failure.
Some of these functions happen daily, while others may only occur on a monthly, quarterly or annual schedule.
Data Integration & Technology in FP&A
Access to data is a key component of a viable system for financial planning and analysis. Corporations need real-time access to data as much as possible, so they can make informed decisions about the business, even during times of market fluctuation or other economic changes. These modern software solutions can help companies to ensure that their data is secure, centralized and ready for strategic planning.
Centralized data repositories
A centralized location for data allows everyone to look at the same information at the same time. Cloud-based platforms make it easy for companies to integrate and consolidate data from multiple departments, while retaining accessibility from nearly any location.
Automated dashboards & reports
Efficient teams enforce limits on manual data entry and other repetitive tasks, especially when software can manage the workload. With automation, a corporate FPA analyst can take data from various sources, such as sales or operations, and import this data into software that can generate insights and reports with minimal input from workers. Effective and timely financial reporting leads to up-to-the-minute insights, current financial modeling and accurate decision-making.
Predictive analytics & AI
Estimating where the business can go in the future takes a predictive financial model that many humans cannot achieve independently. Predictive analytics is a key benefit of AI systems. These systems, including data analysis, machine learning and scenario simulation, can help companies to spot problems in workflows or create more accurate financial forecasting.
Key Principles of Effective FP&A
Although virtually every business performs some level of financial planning and analysis, efficacy must be the chief goal of any FP&A strategy. These practices help corporations to use financial analysis and planning to create the most accurate and effective plans.
Cross-functional collaboration
While data integration from across the company is crucial, so is collaboration. The FPA manager may not be able to generate useful reporting without input from multiple departments. Any group with a stake in the company's future financial performance, from operations and sales to human resources, may have important points to share.
Continuous & rolling forecasts
Operating based on a static annual budget often leads to cost overruns and other discrepancies that can significantly hurt a company’s future projections. Outdated practices make it harder for companies to adapt, even if they are growing because of success. Continuous forecasting allows businesses to adjust reports based on the current needs and circumstances of the company with monthly or quarterly updates.
Scenario-based planning
Although companies may look for a specific desired financial outcome, multiple results may occur from the business’s strategic goals. An accurate planning process requires the financial analysis of the most likely outcomes, so that the organization can minimize risk and maintain a dynamic position in a volatile market.
Transparency & communication
The central tenet of accurate financial reporting is transparency. Key stakeholders need to have access to verified data and reporting, with an understanding of how the reporting works and what the numbers mean. Transparency and communication help to create educated decision-making that scales with the organization and reduces the likelihood of negative effects from misunderstanding.
Challenges & Common Pitfalls
Of course, the path to ideal financial planning has several obstacles that companies must clear or find ways to avoid. Many businesses have inconsistent processes or outdated technology, which can introduce errors in financial analysis or slow the speed of reporting. These common problems require modern solutions that can adapt to the dynamic needs of the organization.
Siloed data & manual spreadsheets
Companies waste hours using software or systems that silo data, preventing its integration across platforms. If someone must manually enter data in multiple places, they are more likely to make mistakes or slow the process. It can be time consuming to consolidate the data, but efforts are worth it. As such, data integration should be one of the biggest goals of financial planning and analysis.
Lack of real-time visibility
Outdated software may not be able to produce reporting at the speed that modern companies require. Older systems took longer to update data, which means that businesses might have to make decisions based on old or inaccurate information. Upgrading to software that provides real-time insights can minimize wait times and ensure that each stakeholder has the right financial information at their fingertips.
Inflexible budget cycles
Although businesses should update their budgets at least once a year, locking into such an interval can often exacerbate problems when forecasting fails. Global economic conditions can shift on a dime, requiring companies to use financial analysis to adjust their forecasts and expectations based on the market. Frequent budget cycling can help organizations to stay on top of demand while adjusting for risk.
Underestimated training and culture
Although many factors related to financial planning for businesses rely on automated and integrated software solutions, the human factor can still play a significant role. Employees need to understand the importance of accurate data, regular reporting and financial modeling as critical elements of business success, or they could hinder the process and affect financial results. Creating a culture of transparency and collaboration can simplify the path to accurate financial planning and analysis.
Leveraging DFIN Solutions for FP&A Efficiency
Your corporate financial planning and analysis deserves a solution that prioritizes company needs and financial factors. DFIN’s financial compliance software and analytics platforms can accelerate your reporting and planning, with the following advantages:
- Real-Time Data Consolidation: When everyone enters data into the same repositories, this information is easier to consolidate and present in real-time, with up-to-date KPI dashboards.
- Automated iXBRL Tagging and Reporting: The use of inline extensible business reporting language allows companies to create useful data for computers that is also readable by humans. Automated systems can generate these reports for review quickly and accurately.
- Collaboration and Version Control: Cloud-based software solutions allow you to work with multiple collaborators without having to worry about integrating multiple versions or keeping track of edits outside the system.
For FP&A to work as intended, it requires integration across platforms and departments. When everyone works together to achieve data accuracy and effective reporting, your company can create dynamic forecasts and achieve flexible strategic decision-making.
