Let’s take a look at the basics of financial planning and analysis and why it is critical founders understand its principles and its uses.
We’ll start with a definition and move on to look at some guiding principles behind the best FP&A.
What is financial planning and analysis?
Financial planning and analysis (FP&A) is how you determine whether your company will be able to afford to achieve its vision, goals and objectives.
So, it’s pretty fundamental stuff.
Whereas accounting is very much a backward-looking exercise – telling you what has happened – FP&A is all about the road ahead and ensuring that there are no obstacles lying in your way.
For startups this road forward is 100% critical in terms of actually raising the finances for growth. This is why there are startups with zero revenue but sky-high valuations. These valuations are based on projected future earnings.
Who handles my FP&A?
In new ventures, the FP&A function is often handled by the founders with outsourced support pulled in as and when needed. assistance.
As a company expands responsibility for FP&A will usually settle with an inhouse or outsourced CFO. At some stage investment will be made in a dedicated team to handle FP&A.
Increasing financial complexity, headcount, revenue sources and outside funding channels necessitates more and more specialist financial infrastructure. With venture funding realised, 30+ employees and revenues of above £5 million, you would expect to see a FP&A department taking shape.
What does a FP&A manager do?
Typically, the CFO manages financial accounting and the FP&A manager handles management accounting.
The FP&A manager is essentially in charge of the processes that support business health and ensure financial survival. Their work will include:
- Short-term cash flow analysis and forecasts
- Internal control analysis
- Creating and interpreting financial models and simulations
- Anticipating cash flow scenarios and financial projections
- Implementing monthly, quarterly and annual growth strategies
Finance as storytelling
FP&A is all about telling stories through numbers. Forecasts and modelling are used to provide insights into the future by connecting data dots to unlock value.
Lying behind this narrative impulse is anticipation. FP&A ensures answers are ready that link planning to strategic business decisions.
But the bottom line is that FP&A managers determine how much money your business needs, when it needs it and how long these funds will last.
Financial planning
Accountants record the historical results of your business. FP&A professionals analyse this to explain performance. Then they forecast future results based on this understanding.
This planning involves predicting how the bottom line will change over time and contributing to solutions that can close any financing gap. It indicates the potential of your business and suggests a timetable for financial viability.
In doing so this planning should answer:
- What are your gross and operating margins?
- What is your profit potential?
- How durable is your stream of profits?
- What are the variables that determine pricing and profits?
- What are your fixed, variable and semi-variable costs?
- What assets does/will the business use?
- How many months will it be before you break even?
- How many months will it be before you reach positive cash flow?
- When will you run out of cash?
- What significant changes in cash flow may occur as you grow?
What are the best FP&A principles?
Business opportunity always drives business strategy and it is this that drives financial requirements and the financial strategy.
Creativity plays a very important role in financial planning: you must look creatively at alternative sources of finance.
FP&A is continuous cycle: it only stops when the company ceases trading.
The financing strategy is determined by the available alternatives, so raise money when you do not need it.
Cash flow is critical: the overall health of a startup is determined by cash flow. Poor cash management is one of the most frequent causes of company trouble.
Brain power need not be on your books: reach out to mentors, advisors and coaches to gain a powerful treasure trove of FP&A insight.
OPR is FP&As friend: other people’s resources (OPR) reduce the cost of ownership greatly. Such bootstrapping allows you to rely on the minimum possible to bring cash into the business.
The bottom line – FP&A is critical to your business
If you don’t understand FP&A, invest in someone who does.
FP&A will help you to achieve competitive advantage by increasing efficiencies in operations and use of capital. And this can lead to higher startup valuations and more access to talent.
Good forecasting means better strategies for a brighter future.
