Why Financial Planning and Analysis is a Critical Component in Your Business

Financial Planning and Analysis
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Have you incorporated financial planning and analysis into your business yet? If not, it’s worth serious consideration because it’s an essential component of your financial department.

At first glance, it might seem no different from traditional accounting, but it’s actually quite different. Even though accounting gave rise to the distinction of FP&A, they operate differently.

Here’s why FP&A is essential to implement in your organization.

Financial planning and analysis focuses on the future

Financial Planning and Analysis for business
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Your accounting team is vital, but their focus is on the past. Accountants work with static data that only shows you where you’ve been and what your company has done.

Your accounting team generates statements and compliance disclosure documents regularly, but the information is always focused on the past.

According to Workiva, financial planning and analysis (FP&A) focuses on the future and is designed to help you make better decisions, analyze risk, and drive enterprise value.

An FP&A team uses data provided by your accounting team to make predictions regarding things like cash flow and how pricing will impact revenue.

The core functions of FP&A include:

  • Consolidating data
  • Analyzing data
  • Business planning
  • Financial forecasting
  • Analyzing profit and loss statements
  • Financial modeling

Your FP&A team will be focused on both performance and potential, and will be looking at what certain activities or decisions might do to the company’s revenue, including how certain implementations might improve overall profitability.

That’s much different from the functions performed by your accounting team.

FP&A supports your CEO

Your CEO is always striving to increase your organization’s value. They do this by cutting costs, analyzing new potential markets, and creating strategies to increase revenue.

When you have an FP&A team, your CEO can get all the data they need from them to make informed business decisions.

Data-driven decisions are always your best bet, but without FP&A, your CEO won’t have all the information to make optimal decisions.

FP&A challenges you might face

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Like any other department, there are some challenges associated with FP&A.

Finding talent can be difficult

Accounting professionals are easy to find, but FP&A experts are a little rarer. However, there is an official Certified Corporate FP&A Professional credential, and as more people become certified, the talent pool increases. It just hasn’t become the standard yet, and for many organizations, it’s a new concept.

You can place ads for talent who have this certification, but you might not get as many responses as you would like.

In this case, you may want to consider getting an existing team member trained and certified as an FP&A professional.

You might be surprised to know how many people from your financial team are willing to acquire a new certification to step into a higher role as a promotion. It would be easier and cheaper than onboarding a new employee.

The downside is that you won’t get expertise right away. However, the right person for the role will be excited about taking ongoing training courses and learning as much as possible in order to provide the most value to your organization.

Using outdated software decreases efficiency

Financial professionals love Microsoft Excel, and it certainly has its place. However, when it comes to FP&A, using Excel can actually hinder efficiency.

Thankfully, there are professional, cloud-based solutions that are much easier to use and extract insights from on a regular basis. Using this type of tool makes the FP&A process more flexible and dynamic.

Decision-makers love to follow their gut

Decision making in business finance
Source: entrepreneur.com

Some gut decisions end up being spot on, but a majority of them don’t. In fact, just because a gut decision doesn’t turn out bad doesn’t mean it was the optimal decision in the first place.

By following your gut over data, you’re selling yourself short on maximizing your potential results.

When people use their gut to make decisions, they often see patterns that don’t actually exist. There are some people who have a fairly accurate gut instinct for some things, like seeing red flags and identifying patterns, but even they aren’t correct all the time.

The human brain is wired to identify patterns, but it also will create patterns that don’t exist when there’s an attachment to a premise or idea.

Unfortunately, many decision-makers prefer to go with their gut over the data. According to one study, 25% of decision-makers ignore financial analysis when making decisions, and 61% of FP&A directors cherry-pick data to validate their existing gut instinct.

Worse, about half of decision-makers misinterpret data analysis. Those are concerning numbers.

If you do have an FP&A team, there’s a chance your decision-makers won’t use the data to make decisions and will go with their gut instead. This is a hard habit to break, especially with experienced professionals. You’ll need to address this, or you’ll miss out on the full value of FP&A.

This doesn’t mean you want to eliminate gut decisions completely. Some of the best decisions come from a combination of data and gut feelings, but only when those gut feelings are the result of many years of experience in the industry.

The newer someone is to your industry, and the less experience they have making decisions and mistakes, the less likely their gut instinct is correct.

Lack of budget

Lack of budget in Business
Source: medium.com

Now that many finance tasks and even entire roles are being automated and outsourced, organizations are cutting their finance budgets.

There’s nothing wrong with outsourcing and automating some of your accounting needs, but FP&A is different. It really needs to remain in-house because nobody on the outside will know your organization as well as you.

An outsider won’t have anything at stake, which means their analyses might be a little too removed from your actual needs.

Start implementing financial planning and analysis today

If you haven’t already incorporated FP&A into your business, now is the perfect time. Even when your budget is tight, it’s crucial to allocate capital for this important role.