Financial Planning and Analysis Basics for Better Performance Management

Achieve Operational, Financial, and Strategic Goals With Greater Financial Insights

According to the Bureau of Labor Statistics, only 25% of new businesses make it to the 15-year mark–and two of the main reasons for failure before that time are poor planning and financing. Whether your business is new or more seasoned, knowing at least the financial planning and analysis basics can put you in a better position for long-term success.

If you are hoping to remain in good financial health and continue to grow and scale, it is important to learn the basics of FP&A.

FP&A connects financial planning with operational planning so you’re doing more than just predicting positive results–you’re more accurately measuring progress toward meeting defined success targets.

What is Financial Planning and Analysis?

While the term “financial planning and analysis” seems fairly straightforward in meaning, there is a lot more to it. Just take a look at this definition from Gartner:

“Financial planning and analysis is a set of four activities that support an organization’s financial health: planning and budgeting, integrated financial planning, management and performance reporting, and forecasting and modeling. FP&A solutions enhance the finance department’s ability to manage performance by linking corporate strategy to execution.”

That definition is a bit of a mouthful, but it gives us a lot of valuable details to unpack. We’re going to explain the key components of FP&A activities defined in the Gartner definition, but first, let’s discuss why FP&A is such an important function for your business.

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Moving From Assumptive to Predictive Forecasting

The imperative for financial planning and analysis comes down to one word: Future.

Organizations are becoming increasingly forward-looking as a result of a faster pace of business, heightened competition, increasing customer demands, expanding technology capabilities, and influxes of rich data.

To bring greater predictability to the future, financial planning and analysis uniquely links finance with business operations; rather than rely on historical data to anticipate future sales or revenue, FP&A now enables insightful predictions and analytics that can directly impact business strategy.

This function of using data to predict future outcomes is really what differentiates financial planning and analysis from accounting, which uses historical data to determine a company’s present status. Accounting is important for overall business function, but FP&A augments that work to support business growth, identifying areas for greater efficiencies, investment, or savings.

Some benefits of financial planning and analysis include:

A modernized process. Financial planning and analysis software automates a previously tedious manual effort of recording data on spreadsheets and providing lengthy reports. Not only will you reduce the risk of human error, but your team will be freed up to focus on applying the data and driving better business decisions.
Action, not reaction. Disparate data leads to slow, reactive processes that cost businesses revenue and detract from the customer experience. When you have the information you need when you need it, you can act quickly and smartly on financial decisions.
Long-term growth. Predictive data gives you greater control over all business operations from marketing to warehousing. Define your desired business goals, and leverage FP&A to model business projections and outcomes across operations so you can see what will best support your goals and long-term growth. Increased productivity. FP&A software centralizes business planning processes to a single source of truth, which leads to greater productivity as teams spend less time chasing data.

Key Components of Corporate Financial Planning and Analysis

Gartner defines four core activities of FP&A, and we’re going to expand on those a bit to help you understand the direct impact financial planning and analysis activities have on your business.

Let’s first consider who–and what–is involved. Financial planning and analysis is a continuous cycle of data collection and analysis. When conducted using a single platform solution, it brings together your organization’s finance teams, finance management processes, and finance systems.

When your people, processes, and systems are connected, you can more effectively align them with your business goals.

This alignment is where the core activities of financial planning and analysis come into play. Each component focuses on an element of your business that can be mapped to your objectives.

And these FP&A activities are applicable whether you’re a small firm concerned with cash flow and debt management, or a large corporation focused on resource deployment and asset acquisitions.

1. Collecting, Consolidating, and Verifying Operational Data

Your business has a lot of moving parts, each generating heaps of data. The first step in a FP&A process is to collect that data from your different business solutions, data warehouses, and ERP systems.

That data then must be consolidated and verified to ensure it is actionable data that can drive financial planning, budgeting, and forecasting activities.

2. Planning and Forecasting

In short, planning and forecasting help align the cost of business operations with incoming revenue to enhance (and ensure) profitability. This step is where future-focused thinking again comes into play.

Your financial analysts will leverage the collected data to forecast future business performance and ensure operations are moving in the right direction for meeting stated objectives.

Forecasting is critical here to ensure planning is taking into account unexpected scenarios or variables that could throw operations off course. Planning ahead for unforeseen circumstances helps keep your business operations on course.

You may use one or more of these financial planning methods to model and forecast performance:

Predictive Planning: Using predictive analytics, AI, and machine learning to model data sets of past performance for the purpose of forecasting future performance.
Multi-Scenario Planning: Taking into account multiple assumed scenarios that could occur and assessing the financial consequences in order to adequately plan for each possibility.
Driver-Based Planning: Focusing solely on the core drivers of business success and creating a plan that addresses how those drivers would be affected by different assumed scenarios.

In any of these planning methodologies, rich, actionable data is paramount, which makes a solid argument for using an automated financial planning and analysis solution that creates visibility into your entire enterprise.

3. Budgeting

Not unlike budgeting in your personal life, this step aims to align the cost of doing business with anticipated revenue. Then, a budget can be assigned to each business function for both expenses and revenue generation.

Individual budgets then get rolled up into one corporate budget, which must be monitored and updated regularly as operations shift and change. Volatile markets and those unforeseen circumstances mentioned above can significantly affect budgets, pointing to the importance of conducting adequate planning.

4. Performance Monitoring and Analysis

Financial planning and analysis would be somewhat of a waste of time without this step, to be frank. Monitoring and analyzing performance–which includes expenses, revenue, capital, cash flow, sales, inventory, profit, and other KPIs–clearly show if the financial plan is matching up with business objectives.

Critically, monitoring and analysis also can identify problems with the financial plan that need to be addressed.

And, again, the future-focused aspect of financial planning and analysis is especially palpable here. Analytics can point to specific growth drivers to focus on, or problematic processes that may be causing revenue leakage.

For example, performance analysis might show a certain product or service to be generating more profit than others, which can dictate where to focus investments going forward. Conversely, you may uncover that your third-party vendor service is less cost-efficient than moving the process in-house, which can dictate a change in business operations over the next year.

The ongoing nature of financial planning and analysis demands a solution that can scale with your organization. Business growth, market fluctuations, and industry expansions all require greater data collection and analysis, which is essential to support long-term business success.

It’s a continuous cycle that can only be truly mastered using a single platform solution that automates FP&A activities and creates enterprise-wide visibility.

Contact us today to schedule a demo and learn more about our all-in-one solution for financial planning and analysis. Powered by the Salesforce Cloud platform, FP&A from Certinia enables teams to run a connected business and puts your customers at the center of everything you do.