Financial Planning And Analysis (FP&A) Beginner's Guide





Financial planning and analysis or in short FP&A is one of the most common career paths to becoming a Chief Financial Officer (CFO), before we get ahead of ourselves, there are lots of misconceptions and confusions about what an fp&a is all about.

In this article, I will be taking you through everything you need to know as a beginner who is looking forward to get in the industry. Firstly, we are going to take a brief review of what FP&P is, some key responsibilities of a financial analyst, the skills required, answering related questions about FP&A, such as, why does a company need an fp&a department?, What does fp&a teams do?


What is Financial Planning And Analysis (FP&A)?

FP&A is a set of planning, forecasting, budgeting and analytical activities which support a company's major business decision and overall financial well-being. Most companies, no matter the industry have an fp&a department that supports the company's strategic goals and assist the CFO, CEO and other key Executives to make an informed decisions.

Basically fp&a provides strategic decisions which ensures financial stability and drives sustainable growth for a company. 


Key Responsibilities Of Financial Analyst

How do fp&a professionals or experts actually achieve these goals?

They actually achieve all these through

1. Budgeting And Forecasting: FP&A professionals are responsible for creating and managing the company's annual budgets and monthly forecast. This involves analyzing historical data, understanding market and business trends and collaborating with various departments such as sales, marketing and operations to forecast future financial performance.

Accurate budgeting and forecasting are crucial for enabling the proactive management of revenues, expenses and cash flow.

2. Financial Modeling: Financial Analyst build dynamic financial models to stimulates different scenarios and predicts the impacts of various business decisions. These models helps in identifying risks as well as growth opportunities.

3. Variance Analysis: After successful creating the company's budget and forecast, financial analyst also compare actual financial results to these benchmarks to identify discrepancies and understand the reasons behind them, whether it is favorable or unfavorable.

This analysis helps to identify areas of improvement, cost-saving opportunities and operational inefficiencies. For example, if revenues for this month comes in lower than the budget or forecast, the fp&a team need to investigate the reason for this, were sales volumes for a specific product line lower than expected Or is it industry, as a whole facing headwinds due to macroeconomic factors?

It is important for an fp&a professionals to perform variance analysis and investigate the reason for the unexpected variances.

4. Managing Reporting: Financial Analyst helps in preparing a regular financial reports and slide decks for managements, key Executives and Board of Directors. Which provides insights and essential data for decision-making process.

The management team relies on the weekly and monthly reports to assess the financial status of the company, evaluates performance and make informed strategic decisions.

5. Strategic Planning: The fp&a professionals regularly collaborate with the senior management to develop long-term strategic planning initiatives. They provides financial analysis and insights to support strategic decision-making and ensure alignment with organizational goals.

For instance, if a company wanted to focus more on a direct-to-consumer model, instead of wholesale, the FP&A team will analyze consumer data and forecast how this shift in strategy would impact sales volume, profit margin etc.

6. Capital Allocation: Assessing Investment opportunities and recommending the allocation of resources to projects or initiatives is another responsibility of the fp&a team. 

This involves, evaluating the potential returns of large projects as well as the potential risks associated with them, often referred to as a Cost-benefit analysis. Whether it's evaluating Investment proposals, pricing strategies, or expansion plans, fp&a helps stakeholders to make an informed decisions based on data and analytics.

7. Performance Analysis: FP&A professionals also spend time analyzing the financial performance of different business units, products, or even regions to identify areas of strength and weakness. 

This includes profitability analysis, cost analysis, performance metrics tracking and a lot more. These types of analysis helps in optimizing resources allocation and improving overall profitability.

Depending on your role within the FP&A team, you may be in charge of all, a few, or just one of these responsibilities.


Skills Required As A Financial Analyst

When it comes to the necessary skills required to excel as a financial analyst, you will need to develop a good mix of both technical and soft skills.

1. You should be able to read and truly understand a company's financial statements, which are Balance Sheets, Cash Flow Statements, Income Statements, and in case of public companies, the shareholders' equity statements. A good analyst should not only understand the meaning and implications of each individual financial statement, but also sees the larger picture of how a company's total financial position is reflected by the combination of assets, liabilities, cash flow and income.

2. Proficiency in Microsoft Excel is also required, as MS Excel is a fundamental tool in budgeting, forecasting, financial modeling and also often used for data analysis and creating reports.

3. You will need to have experience with some intelligence tools like Tableau and Power BI preferably, as these tools help with data visualization and make it easier to analyze larger amount of data.

4. Strong analytical skills are also required in order to efficiently interpret financial data, identify trends and make quality financial decisions.

5. Finally, soft skills such as the ability to communicate a complex information in a clear and concise way is another essential skill.


Why does a company need an FP&A Department?

1. The fp&a team helps the CFO, CEO, and Senior Management make crucial business decisions.

2. The acts as a bridge between the different business teams and Senior Management.

3. The fp&a team collects information from the business teams and analyze that information and later presents it in a way that it will assist the senior management to make important business decision.

The fp&a function has evolved over the years and has become increasingly forward-looking. It does not only focuses on what has happened or what is happening but why it is happening and what is likely going to happen in the future.


What does the FP&A team do?

There are three (3) core functions or importance of an FP&A department in a company.

1. Budgeting: The fp&a team work with different departments in the company to prepare budgets and working on consolidating them to prepare an overall company's budget.

2. Forecasting: This involves creating, updating and maintaining financial models in Microsoft Excel and the detailed forecast of the company's future performance.

3. Management Reporting: This involves preparing internal reports for senior management, in order to support their decision making, comparing historical numbers against the budgets, the forecast and performing variance analysis to explain the difference in performance and make improvements going forward.



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