Financial Planning And Analysis Fp A Definition Purpose Importance

What is Financial Planning and Analysis (FP&A)?

Explanation

Financial Planning and Analysis form an integral part of any organization that can help make futuristic decisions for the company based on the analysis of the data.BudgetingBudgetingBudgeting is a method used by businesses to make precise projections of revenues and expenditure for a future specific period of time while taking into account various internal and external factors prevailing at that time.read more, Forecasting, Analysis, and Planning are the primary functions of the FP&A, which draws a fair picture for senior management like the CFOCFOThe full form of CFO is Chief Financial Executive, and he or she is a top level executive of the firm who is responsible for the firm’s overall finance functions and has the authority to make financial decisions for the organization. read more or CEOCEOChief Executive Officer is the full form of CEO. He is the most senior member of a corporate organization, an executive who oversees the whole administration and operations of the company and reports directly to the board of directors and chairman, with the sole purpose of generating wealth for the company’s stakeholders and shareholders. read more to make any major corporate decision.Cash flow management and FP&A prove to be pillars for the company’s growth, which eventually will generate profits year on year.Data used to analyze here can be either Quantitative or Qualitative, based on which the analysis can be carried forward to evaluate the company’s progress towards the set goals and objectives.It considers business and economic scenarios and historical trends to anticipate future potential obstacles and, simultaneously, forecast the company’s financial results.

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Purposes

This can be used to analyze financial data to forecast the economic trend and implement the company’s financial policy.Since this is done through the financial data, it depicts the financial numbers for the company by analyzing financial statements like cash flowCash FlowCash Flow is the amount of cash or cash equivalent generated & consumed by a Company over a given period. It proves to be a prerequisite for analyzing the business’s strength, profitability, & scope for betterment. read more, balance sheetBalance SheetA balance sheet is one of the financial statements of a company that presents the shareholders’ equity, liabilities, and assets of the company at a specific point in time. It is based on the accounting equation that states that the sum of the total liabilities and the owner’s capital equals the total assets of the company.read more, and income statementIncome StatementThe income statement is one of the company’s financial reports that summarizes all of the company’s revenues and expenses over time in order to determine the company’s profit or loss and measure its business activity over time based on user requirements.read more.There are several purposes for doing financial analysisFinancial AnalysisFinancial analysis is an analysis of finance-related projects/activities, company’s financial statements (balance sheet, income statement, and notes to accounts) or financial ratios to evaluate the company’s results, performance, and trends, which is useful for making significant decisions such as investment, project planning and financing activities.read more for any company, like in corporate finance for analyzing the NPV or IRR of any project or in an investment analysisAn Investment AnalysisInvestment analysis is the method adopted by analysts to evaluate the investment opportunities, profitability, and associated risks in their portfolios. In addition, it helps them to determine whether the investment is worth it or not.read more setting where the numbers can be used to analyze the investment.The most general way to analyze the data is to do the ratio analysisRatio AnalysisRatio analysis is the quantitative interpretation of the company’s financial performance. It provides valuable information about the organization’s profitability, solvency, operational efficiency and liquidity positions as represented by the financial statements.read more and compare the same with industry standards or evaluate the historical records.A periodic analysis of the financial data will help the entity to maintain the data and analyze the trends to make any managerial decisions for future advancements.

Importance of FP&A

The financial analysis sets a good base for any company to succeed by setting the financial and business plan; adequate planning leads to a better understanding of how the business is performing than the projections.In case of financing requirements where the company needs to borrow funds for future advancements, FP&A will try to present a separate finance section in front of the board in a very brief manner. Also, the lender would want to see the numbers before lending out money.Accounting and FP&A are two different methods to analyze financial statementsFinancial StatementsFinancial statements are written reports prepared by a company’s management to present the company’s financial affairs over a given period (quarter, six monthly or yearly). These statements, which include the Balance Sheet, Income Statement, Cash Flows, and Shareholders Equity Statement, must be prepared in accordance with prescribed and standardized accounting standards to ensure uniformity in reporting at all levels.read more; in the place where accounting ends, FP&A takes over. In short, accounting focuses on historical numbers, and FP&A focuses on forecasts and future numbers.FP&A strategy links the long-term plans with annual reporting and capital budgetingCapital BudgetingCapital budgeting is the planning process for the long-term investment that determines whether the projects are fruitful for the business and will provide the required returns in the future years or not. It is essential because capital expenditure requires a considerable amount of funds.read more; with further analysis, it also helps develop financial models and assists in the annual target setting process.Consistency and stability are very important in any business. A reliable FP&A process will help get this stability and, at the same time, include reliable information for the management to make sound decisions.Most organizations have a dedicated team for FP&A, which continuously tries to improvise and maintain the numbers in the pursuit of many strategic objectives, and finance teams are becoming stronger and stronger by generating effective analysis to create more economic benefits for the organization.

Financial Analysis and Planning vs. Business Analysis and Planning

Some factors differentiate these two ideologies; let us discuss them further in our article:

In this, finance-related arrangements are centered around planning and determining inside a financial year, concentrating on meeting the quarterly or YoY target. Other functional teams intend to reduce expenses instead of foreseeing up-and-coming business issues. The analysis is centered around recorded revealing and standard reports joined with worthless models. Reports and data are regularly obsolete and not adjusted to key business drivers. The business analysis approach includes exercises from capacities critical to pushing the business ahead – for example, marketing, sales, and operational management – all lined up with the organization’s key vision. As opposed to focusing on only budgetary or financial valuation, the organization coordinates key useful regions that straightforwardly impact business results.While evaluating the financial numbers, reflect the financial picture of any company. However, some executives feel that the reality of new and changing business trends is not included in these numbers. This puts out a whole picture for making any management decision for the company. It is based on available data, and Business analysis helps the management know the vibe in the market about any particular business.Some corporates are also of the opinion to change the FP&A to Business planning and analysis due to the wide horizon it covers for analysis; numbers from Financial analysis might help any company make a decision. Still, it might be from a short-term perspective, while business analysis will create a more realistic report based on the ongoing trends in the economy.

Conclusion

FP&A forms an integral part of any firm’s operations; this kind of analysis and forecasting helps the business know the historical trends and anticipate the upcoming trends. This is a pure number-driven process where business analysis also provides some qualitative output for the management; depending on the need and requirement, the company can decide which analysis needs to be considered.

What is Financial Planning and Analysis (FP&A)?#

Explanation#

Purposes#

Importance of FP&A#

Financial Analysis and Planning vs. Business Analysis and Planning#

Conclusion#

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