Financial Planning & Analysis (FP&A)

Producing Financial Statements - in internal or external form - is the output of the Accounting cycle and the beginning of the FP&A Cycle.  You need to know how the business is performing, in a GAAP format, and how that compares to expectations and prior performance.  

Key features and potential issues here can include

• Compliance with GAAP (vs. Cash basis)
• Right level of depth 
• Variance analysis to ... budget, forecast, prior periods
• Correct cross-entity consolidation and eliminations (overlaps with Accounting - General Accounting)

Not only do you need to know how things look overall, you need to be able to drill down or up with confidence, or "pivot the cube", to see how totals break down, and details add up.  How are individual products performing?  Which clients, geographies, or sales channels are succeeding?  These are just a few deeper level questions a good FP&A process can answer.    

Key issues here can be

• Drill down/up that ties to overall totals
• Reporting aligned with organizational ownership
• "Pivot the Cube":  revenue or profitability by ... product, customer, geography, channel, lane, etc.
• Transparency in the Revenue Cycle (bookings, backlog, revenue, deferred revenue, receivables)
• Clarity in direct and overhead production costs
• Detailed SG&A reporting
• Analysis and insights from large data sets
• Visual representations such as "waterfalls", "bridges", or "heat diagrams" showing causes of change or portfolio element performance

Knowing what happened is important.  Knowing where you're going might be even more critical.  Good companies forecast how their year is going to end up based on what has happened so far (year-to-date actual results) and supportable trends for the remainder of the year (balance of year).  Some companies have longer rolling forecasts (18-24 months).  

Key issues

• Right level of depth
• Alignment with organizational ownership
• Top Down AND Bottoms Up views
• Forecasts supported by reasonable improvements - not "hockey sticks" 

Budgeting for the next fiscal year is how most organizations (a) set performance targets, (b) measure and reward performance, and (c) ensure that the strategic plan is achieved.  

Like with Forecasting and Strategic Planning, some issues here are

• Ensuring top down targets are grounded by bottoms up details and ownership
• Linking to the longer range strategic plans - both funding initiatives, and reaping their rewards
• "Sweet Spot" balance between achievable and challenging goals 
• Setting performance and bonus targets to reward while not demotivating 

Forecasting, Budgeting, and Strategic Planning are all forward looking "estimating", distinguished by the time horizon, and level of depth.  While Forecasts and Budgets are shorter term, and ideally bottoms up, Strategic Plans are longer term, 3-5 years generally.  Their focus is less on the detailed numbers that add up correctly, and more about providing high level financial output metrics associated with growth and operational initiatives.  

Key Features and Issues

• Longer time horizon allows for "thinking big"
• Focused on growth and profitability:  new products, geographies, channels, partners, or acquisitions; or lowering costs through scale and new production capabilities or sources
• Include significant discussion and planning of the initiatives to achieve those strategies

A world class Finance function helps the business bridge lofty strategic plans with the realities of current performance.  It highlights where things are humming along, and where improvements are required.  And it acts as the business partner to help the business achieve its objectives.

Key Features here are

• Identifying and measuring Key Performance Indicators (KPI's), both the Output metrics (Y's), and the Process or Input metrics (X's) that lead to the desired Outputs
• Presenting KPI performance in simple to follow Scorecard or Dashboard formats
• Funding, Staffing, and Managing a set of Strategic Initiatives that will deliver the capabilities and changes to achieve strategic plans