What is FP&A and how can it accelerate your business?

Many businesses are still in recovery mode, dealing with the aftermath of unprecedented circumstances brought on by the pandemic. As they learn to adapt to the new landscape, the role of FP&A has taken center stage in hopes of addressing the challenges the last two years have highlighted the importance of. According to Gartner Research, 70% of new FP&A projects are set to become extended planning and analysis (xP&A) projects by 2024, emphasizing digital transformation and cross functional planning and analysis for more efficient processes. 

Financial Planning and Analysis is a crucial function in any business, and is essential when crafting your company strategy to achieve success. While it wasn’t always seen as such, FP&A has become increasingly more important as the technology and data it generates continue to guide financial decisions for growth. In fact, a recent 2021 IMA survey found that the largest increase in emphasis for finance-related areas is in risk management, cash forecasting and cash management. Through analysis of what has happened in the past, FP&A informs what can be done in the future, allowing leadership to make educated and calculated decisions. After years of uncertainty through a pandemic, as well as an increase of technology and data at our disposal, FP&A made companies realize the need for advanced and predictive data analytics. 

We spoke to Possible Finance's FP&A Manager, Nicole Sullivan to get a deeper understanding of the evolution of FP&A over the last few years, and the opportunities and challenges FP&A professionals might face along the way. Nicole is a finance leader who is passionate about optimizing operations to maximize impact within mission-driven organizations. She's held various strategic finance roles throughout her career from GE to the non-proft sector.

What is FP&A?

Nicole: FP&A stands for Financial Planning and Analysis. While accounting is historical in nature and records what has happened with a business’s finances in the past, FP&A is the forward-looking branch of finance. It includes activities such as planning and budgeting, forecasting and modeling, and analyzing past and projected financial performance in order to inform management’s decision-making that will determine the future of the business.

Who is involved in FP&A? 

Nicole: There are committed FP&A teams and professionals, but everyone contributes to a value-add FP&A function! And everyone benefits from it as well. Numbers lose their meaning without context, and it is cross-functional collaboration that brings context to an FP&A team. Of course, close collaboration with the accounting function is essential to make sure past financial performance is understood correctly and future financial forecasts are in alignment, so we are not comparing apples to oranges in our analysis.

Other functions are also involved to give context to the numbers. FP&A is all about telling the story behind the numbers and visualizing the numbers to best demonstrate what’s going on with the business. Collaborating closely with each function allows FP&A to tell an accurate and nuanced story that delivers both the numbers and the context of those numbers to the audience, be it management, the board of directors, or investors.

Why is FP&A so important for businesses?

Nicole: It's so important because it allows for strategic management of the business. FP&A provides the information for high-quality decision making by using data visualization to portray deep insights in a clear way. It lays out the expected financial impact and results of various decisions, allowing management to choose the best path forward depending on the goals of the business. This can mean different things depending on the company’s goals but increased growth, profit, and cashflow are all potential outcomes of an effective FP&A process.

How has FP&A evolved in recent years? 

Nicole: The evolution of data — where companies today have mass amounts of data to analyze — has driven the shift in FP&A. This data allows for the type of business insights that weren’t available a decade ago. Additionally, advancement in business intelligence and data analytics tools has allowed FP&A professions to spend less time on reporting and more time on analysis. The time previously spent on gathering and scrubbing data to generate accurate reporting can now be spent on strategic analysis aimed at delivering insights to management. In recent years, COVID has accelerated this shift as it made scenario planning imperative. The uncertainty created led to multiple possible realities that all had to be forecasted and planned for, some of which involved drastic shifts in how companies would need to operate to respond to changing buying patterns and supply chain crises.  

What are key metrics that mid-market/enterprise FP&A teams rely on?

Nicole: The key metrics an FP&A team focuses on are dependent on the company’s vision and strategy. Growth oriented companies focus on revenue metrics, such as Annual Recurring Revenue (ARR) and Revenue Growth. Companies focused on operational excellence target Gross Margin as a key metric while relatively mature companies focus on Net Profit. Companies in industries focused on innovation may focus on Free Cash Flow to understand how much cash they have available to invest into Research & Development. 

For SAAS (Software as a service) startups like Vic.ai, growth metrics are key because they predict the future earning potential of the business. These include revenue metrics such as Annual Recurring Revenue (ARR), Committed (or Contracted) Annual Recurring Revenue, and Annual Contract Value (ACV) of sales bookings. They also include Marketing metrics such as Customer Lifetime Value (CLV) and Customer Acquisition Cost (CAC).

How can companies better utilize FP&A experts, if they are struggling to do so or haven’t already?

Nicole: By aligning them closely with management goals and objectives so that they can be the right-hand professionals to business leaders and prepare the relevant reporting and analysis needed for management to make sound strategic decisions. Beyond utilizing corporate FP&A teams to advise the c-suite executive leadership, companies can embed FP&A experts into all functions, allowing them to serve as business partners to the field and work as a trusted advisor to verticals like operations, sales and marketing, and supply chain. As discussed above, the role of FP&A is evolving, and that evolution includes FP&A taking ownership of operational metrics (along with financial metrics), as well as strategy, and essentially the roadmap for the company. The recent developments of data availability and business intelligence tools has impacted all functions, allowing insights to be derived from function specific data, such as retention metrics for HR and pipeline growth for sales. FP&A experts can work as internal service providers, delivering data-driven insights to all departments using the same skills of reporting, analysis, and data visualization used in financial analysis.

FP&A Challenges

Why is clean data so important for FP&A teams?

Nicole: High-quality data is essential because it is the data that tells the story of the business. FP&A experts massage and arrange this data in the most compelling way to clearly communicate the main message, but it is the data itself that determines the basis of this message. Therefore “garbage in, garbage out” is a common saying among FP&A professionals, meaning that if the data used for an analysis is inaccurate, incomplete, or inconsistent, the results of that analysis are not going to be dependable. This leads to poor decision making and poor company performance as a result.

What are some strategies that have solved this?

Nicole: Data management is a field in itself, with growing significance in recent years with the onset of big data. There are various software and database tools that can help a team manage the quality of its data. From the perspective of an FP&A professional with less control over the organization’s overall data management strategy, I have found that making sure I have a clear understanding of any raw data I am using is essential to high quality analysis. This includes understanding how the data gets inputted or created in the source system and how it was filtered or summarized to produce whatever export I am using. I accomplish this by working with the owner of the data to understand the nuances of the dataset, any scrubbing that needs to be done before beginning analysis, and any context that needs to be kept in mind when deriving insights from that data.

If you are not directly handling data, how do you get context from managers, leaders, & the CEO to connect the dots between all of the data points?

Nicole: You use whatever means necessary! Collaborating closely across functions and departments is key for information sharing and nuanced understanding of the data. Asking questions whenever possible and investigating into what data and information I do have access to help me to connect the dots. Working with both the functional owners of the data as well as the technical owners of the software or database where the data is held are both key to understanding nuances within data.

Why is clear communication so important for FP&A?

Nicole: Clear communication is essential for FP&A because it allows for the meaning behind the numbers to be clearly understood. This in turn allows for clear insights to be generated and communicated to leadership or the outside audience. It is important for these insights to be clear because that is part of the value-add of the function. The goal is for FP&A to cut through the noise of everything going on in a business and deliver intelligible analysis that points to action. FP&A teams excel when they do not require business leaders to spend time parsing out the meaning of an analysis.

More personally, clear communication from leadership or whoever is requesting analysis is important to me in my role because it allows me to ensure I am focusing the analysis so that it is relevant and valuable to the decision maker or audience.

STAY AHEAD WITH AI TECHNOLOGY

As we learned from Nicole, staying ahead of the curve through predictive analytics is key in management decision making. New technologies such as Vic.ai Intelligence provide clients with process mining capabilities, featuring KPI, business insights and prescriptive analytics. Optimizing your AP processing through AI technology can drastically improve your workflow. 

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