For any business owner, one of the key areas of focus should be the company’s future. Financial planning is a vital part of that plan, helping business owners leverage growth and expand their operations. If a business owner hasn’t focused on this aspect, they need to understand what it is, what it does, and how it differs from regular accounting.
FP&A, or financial planning and analysis, is a set of activities that look into a company’s financial future. It can include multiple elements, such as budgeting and forecasting, annual planning, and financial modeling and reporting. This process uses income statements, balance sheets, and other financial business records, going beyond the initial review to analyze the in-depth numbers to develop a company forecast.
The purpose of FP&A is to allow businesses to monitor current performance and generate predictions for future performance. During monitoring, the analyst also creates reports to support the business and help it prepare for the expected outcome. Essentially, FP&A looks at the past and predicts the future to help companies make solid business decisions.
If company executives plan to hire an accounting firm to perform FP&A services, they may wonder what those services include. FP&A encompasses four aspects of a business.
Descriptive Analysis. Using data from the past, descriptive analysis shows what has happened in the business. The analyst will look at the financial statements and any reports generated to determine how the company has performed.
Diagnostic Analysis. A diagnostic analysis goes deeper into the past by explaining the why behind the what. It looks at trends in the industry and decisions the company has made over time.
Predictive Analysis. The central focus of predictive analysis comprises looking to the future. Therefore, this service predicts what will occur based on the business’s past and current decisions.
Prescriptive Analysis. A prescriptive analysis starts with a goal and shows what is required to attain it. The analyst may use different scenarios to show what needs to happen to reach that goal.
Regular accounting services focus on recording expenses and revenue to ensure a business meets requirements and stays afloat. Reports are designed to show what has happened in the past and how the activity matches the budget.
On the other hand, FP&A services look to the future, using forecasting and financial planning to create a strategy that moves the business forward. While accounting tells what is happening with the company, FP&A answers the question of why it’s happening.
FP&A must also adapt to changes based on new information. For example, a company’s forecasts may need updating based on new data. Real-time updates provide changing insights into the company, allowing the owner to use the information to influence their bottom line.
FP&A provides several benefits for a business. Initially, it lets the owner or executive see where the company is headed if everything stays the same. Forecasting at this level is relatively straightforward, but the reports must still account for changes in trends and the economy.
Another benefit of FP&A is that it helps business owners determine new goals and know what it will take to reach them. Through predictive analysis, they can learn what changes must be made in the company’s revenue to expand the business operations. For instance, if the owner wants to add a new location, they’ll need to know how much of an increase in income they will require to purchase the property.
FP&A also tracks how well the company is doing concerning its goals. The analyst can prepare a variance report showing where the company has gone off-track. Then, the executive can take corrective action to reach their goals or adapt them toward a new focus.
Another benefit of FP&A is providing the “why” to what happened. Through descriptive analysis, the business owner understands why they weren’t on budget last month or last year. They can see where things didn’t work out as expected and how to avoid that situation in the future. For example, the owner may notice that spending was higher in one area than what the budget allowed. Perhaps accounts receivable were outstanding longer than expected, which led to poor cash flow.
Through predictive analysis, executives can also better prepare for changes. Therefore, if business owners find that revenue decreases every summer, they can adjust their spending in the spring, giving them more cash to get through the slow season until business picks up in the fall.
Companies need to develop a solid financial planning strategy to succeed, and AccountingDepartment.com can help. It’s time to leverage financial information with FP&A services from AccountingDepartment.com to elevate your business and achieve your goals. Contact us today to learn more.