What is FP&A?
The 4 core responsibilities of FP&A teams
Working in FP&A is exciting, full of surprises, fast-paced, slow and methodical, tedious, tiring, or deeply intellectually stimulating - often all in one day. FP&A stands for Financial Planning and Analysis. In a nutshell, our goal is to provide visibility on business performance to senior leadership, support our business partners in the decision-making process with financial analysis, and manage related budgets and forecasts. On a slightly more granular level, FP&A’s role can be divided into 4 core responsibilities:
Planning & Forecasting
Business Partnering & Financial Analysis
Month End Close & Reporting
Process Optimization
Note that some companies may assign slightly different roles to FP&A. Specifically, responsibilities can differ regarding how much accounting or business partnering responsibilities the FP&A team has. However, based on my experience working at public and private companies across multiple industries, these four core responsibilities apply to the majority of FP&A teams.
1. Planning & Forecasting
What is Annual and Strategic Planning?
The FP&A team is in charge of facilitating the Strategic and Annual Planning process. The Annual Plan lays out what the company wants to achieve in the next year, in terms of growth, financial performance, as well as other business metrics. Strategic planning is about setting the mid- and long-term vision of the company and determining how achieving the premise of the vision is expected to translate to business performance.
The 9 goals of Annual Planning
A thorough planning process aims to achieve several goals:
Inspire the team to work towards a shared vision via clearly defined rallying cries
Define the metrics that matter
Articulate the assumptions underlying the key drivers responsible for the success of the business
Ensure alignment across different functions and teams
Set quantified expectations, define priorities, and crucially, what’s not a priority
Create detailed action plans to deliver against the goals
Discuss contingency plans to allow for rapid decision making once issues present themselves
Detect flaws in strategy and execution before they cause issues
Create tracking capabilities that allow rapid learning in-year
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What I love about Planning is I get to see what each team I’m partnering with is up to and how they plan to turn strategies that may seem vague at first into concrete ways to drive the business forward. When partnering with the Marketing team, for instance, I get to see the details about planned TV advertising campaigns and learn why the asset was designed in the way it was. It fascinates me how knowing what marketers are trying to achieve with each frame made me see ads in a completely different way.
Why planning is not a waste of time
A thoroughly run annual planning process can take up a significant amount of a company’s resources and also heavily involves the leaders of every team and function. Given the multitude of other priorities employees have to accomplish, some wonder if planning is even worth it. Specifically, people may call out two downsides of spending quality time on planning:
1) the number you arrive at for the next year may prove completely unrealistic a few months later in a fast-changing environment.
2) Proposed plans and targets are often changed at the last minute by senior executives with seemingly little regard to the hours and weeks that the team has put into creating them in the first place.
What objections like these miss is that the value in annual and strategic planning does not lie in the final result itself. Yes, we should aim to have an idea of where we end up at the end of each quarter, especially if we are a public company that owes Wall Street forward-looking guidance. But the real value in planning lies not in the numbers it produces but in the process itself. By discussing the assumptions of the plan, we discover the critical dependencies, must-have milestones, and underlying risks and opportunities. In the following year, the team has to weather the storm of sudden changes in the forces impacting the business, like changes in competitive behavior, regulatory landscape, or customer demand. During these crises, leaders may not have the time or state of mind to create optimal responses. What differentiates successful from failing companies is often a detailed plan that provides thought-out, thoroughly reviewed options to respond to these challenges.
How does Strategic Planning differ from Annual Planning?
The strategic planning horizon is typically three to five years, while annual planning focuses mainly on the next year. While a strategic plan should define desired results against all P&L line items, it does not include detailed action plans. The idea is to clarify the company’s vision, mission, and how these translate into strategies and business outcomes. We separate strategic from annual planning because the high amount of details involved in the annual planning process can lead people to lose sight of higher-level goals and create too much concern about potential roadblocks. We can avoid some of our innate biases towards risk aversion and create long-term goals that are engaging and motivating by focusing on the firm’s vision of what success could look like,
The Planning Cycle
Companies that choose to run strategic planning and annual planning processes separately typically refresh the Strategic plan in the second or third quarter. The process involves top-down guidance from the CEO, CFO, and senior department leaders, followed by analysis and scenario planning by department and team leaders. Annual planning kicks off in the third or fourth quarter of the year - the larger the company the earlier the planning process has to start because more stakeholders are involved that require to be consulted and aligned. Smaller companies can run the annual planning process in 4 to 6 weeks from start to finish, while it can take 3-4 months for large companies. At Unilever, a large multinational consumer goods company, for instance, the planning process kicks off in July or August and plans remain unlocked until December.
The most important part of the Planning Cycle
Once the annual planning process is done and the new year starts, the work is not over. On the contrary, the most important part of planning begins, that is tracking and analysis of observed results. The annual plan serves as the measurement stick to compare weekly, monthly and quarterly performance against. This is where it’s critical that the right Key Performance Indicators (KPIs) were selected during the plan creation phase. Comparing how actual performance measures up to Plan is called variance analysis.
Why all Plans are wrong
A common pitfall is to blame inaccurate planning as the cause for in-year variances. It’s important to keep in mind, however, that a plan should generally be considered wrong the moment it is put on paper. That’s because most industries today operate in an environment that is rapidly changing and unpredictable in nature. It does not mean however that those comparisons to plan are meaningless. Immense value comes from determining what caused the variance. Assumptions on individual KPIs or line items could have been inaccurate or certain events may have not been considered at all. Only by drilling down to this detailed level can the teams determine what went wrong, how to mitigate the risk of this issue occurring again, or how to capitalize on resulting opportunities.
Forecasts versus Plans
Results of the variance analysis process are revised forecasts, risks, and opportunity lists and revised action plans and priorities. At this point it is important we differentiate between forecasts and plans. The plan is created once a year and does not change. It serves as the ultimate goal on what we set out to deliver. The forecast however is being updated on a regular basis, typically monthly or weekly. Its purpose is to predict as accurately as possible what the company will deliver by the end of the period, given the most recent news. In short, the Annual Plan is a commitment, while the Forecast is the latest estimate on how we track compared to that commitment.
2. Business Partnering & Financial Analysis
FP&A teams are typically assigned to partner with a specific team or department outside of Finance. For example, one FP&A team may be supporting the Chief Marketing Officer and her team, while another FP&A team works with the HR or IT team. Business partnering in this case refers to ensuring that the leadership of the team we support has the visibility of business performance they need to achieve their goals. For example, a Marketing team needs to understand how much their customer acquisition cost was in the last period, i.e. how much they spent to acquire a new customer on average. By comparing that to a set expectation, we can then determine if we are on track to reach our goal or if more research is required to understand root causes.
Leading Indicators tell the future
Since the business environment is constantly changing in most industries, FP&A needs to regularly evaluate new metrics that could give us even better insights into where the company is headed.
Leading Indicators signal other metrics are likely to change a certain way in the near future. For example, a decline in the number of visitors to the company’s online store may indicate a decline in sales in the next period. The reason leading indicators are so important is that they give us an opportunity to make adjustments to prevent or mitigate negative downstream impacts. In this example, the company may determine that certain ads did not work well enough to drive traffic to the online store, which can be addressed quickly before it results in a drop in sales.
Identify drivers by adding depth to existing KPIs
In addition to identifying new KPIs, FP&A teams are tasked with refining existing metrics to create more visibility on results. Specifically, our goal is to identify underlying drivers for the business results we measure. For example, assume that gross margin actualized 50 basis points lower than Plan in the last month. While that is an accurate representation of the financial result, it does not yet tell us anything about what caused the miss versus expectations. A drop in gross margin could either be caused by an increase in costs relative to revenue or by a decrease in the average price per unit. Let’s assume we determined the culprit was higher than expected costs of goods sold (COGS). While this gets us closer, we still need to drill deeper to understand the true root cause. The analysis is only complete once we can narrow the reason down to specific actions or environmental factors that can be changed in the future or reflected in the forecast if the outcome is not in our control. In our example, we may attribute the increase in COGS to higher shipping costs due to a price increase by a freight carrier. Now that the driver has been determined, FP&A can inform the relevant Logistics team and ask if the issue can be addressed going forward or if the forecast needs to be adjusted to include the increased shipping cost.
Drive major decisions with timely insights
As part of business partnering, FP&A may be asked to run an analysis or create a model to help the team make a business decision. For instance, the company may be considering expanding into a new country, building a new factory, replacing internal systems, or hiring consultants to restructure the organization. This is one of the most exciting responsibilities of FP&A because the outcome of our analysis is often the deciding factor whether to execute against a major investment, whether to revise or even table the idea. That’s because the business team may have a rough idea of how much additional revenue or cost savings the initiative may deliver, but they look to FP&A to put all pieces of the puzzle together and provide an accurate assessment of the expected impact on the top-line as well as bottom-line of the company.
Create accountability and increase ROI
FP&A plays an important role in ensuring the company’s growth is balanced and profitability is a key consideration in decision making. Balanced growth means growing at a rate that does not result in unnecessarily high risk. A company may be growing too fast for instance, if the infrastructure is so stretched that key systems and processes reach their breaking point. This could result in a catastrophic business disruption that may have negative long-term impacts. FP&A is tasked to remind others of the importance of growing profitably because different departments typically have narrow goals that can at times be at odds with profitability. For instance, a sales team may have sales targets that are difficult to reach and they may resort to aggressively increasing rebates to “make their number”. In this case, the sales team would receive their bonus payouts, but the increase in sales may not have resulted in any additional profits for the company due to the increase in rebates and related expenses.
The Influencing Challenge
This responsibility of FP&A can be one of the most challenging but - as I find - also one of the most rewarding parts of the job. It’s challenging because we need to influence business partners without having hierarchical authority. This means we can’t simply tell them what to do. Oftentimes, decision-makers in other functions are several levels more senior than their FP&A business partners. What it comes down to is influencing skills. FP&A leaders need to walk a fine line between holding their business partners accountable to higher-level company objectives while maintaining a good professional relationship. We can’t just say “no” every time our business partners ask for more funding, because the resulting decline in trust will likely result in less information sharing with FP&A. That in turn can create conditions where FP&A is too far removed from the day-to-day decision-making to be able to make informed recommendations in the future. It all comes down to the right balance between challenging our business partners to be mindful of profitability and helping them to achieve their individual goals, even if those may at times be at odds with ours.
3. Month End Close & Reporting
Another part of most FP&A teams’ responsibilities is to ensure monthly expenses and revenues are recorded correctly in the company’s books and variances are understood. This includes explaining differences compared to the Plan, the last forecast, or the same period in the prior year. In this area, we partner closely with other Finance teams, such as Accounting and Accounts Payable or Accounts Receivable. Since FP&A teams are closer to the day-to-day operations than other finance teams, we have a key role to play in the financial controls framework.
Financial controls are everyone’s business
Certain financial controls exist to ensure the company records expenses and makes payments that are adequate in relation to the services or goods they are for. FP&A may help in maintaining these controls for instance by reviewing purchase orders or by reconciling actuals versus forecast with the goal of identifying irregularities that require further research. Potential issues we watch out for are additional zeros entered accidentally when a budget owner creates a purchase order, a sudden increase or decrease in recurring expenses compared to historical trends, or a vendor whose expertise appears not to match the stated expense type. In all of these cases, FP&A would identify the potential issue and then reach out to the relevant budget owner in the team we are partnering with to clarify if a correction needs to be made. In the case that certain issues repeat frequently, the FP&A team may develop training materials for their business partners explaining how to adhere to the financial control in question.
Opportunities, not failures
What excites me about variance reporting is that you never know what you find once you start peeling back layer after layer of potential causes for a difference. Sometimes, it's a trivial error, but more often than not, it's a sign that some aspect of the strategy isn’t working as intended or we were too optimistic or pessimistic with our forecast. I always try to treat these issues as an opportunity to improve results in the future rather than a failure. That also helps with communicating the irregularities to the responsible team and maintaining good relationships with my business partners.
4. Process optimization
A typical month or quarter in the life of an FP&A Analyst has a number of processes and workstreams that repeat. For example, the budget management, forecast update, or month-end close processes typically run every month following the same pattern. While the results and issues we analyze differ widely month to month, the process itself, i.e. how we obtain the numbers or how we run calculations, remains the same. That gives us an opportunity to look at the details of how we do things and see if the process can be improved, shortened, or made more efficient.
Why it’s critical to prioritize process optimization
Process optimization is not nice to have, it’s a necessity in today’s environment. We need to continuously challenge the status quo and think about ways we can make manual workstreams faster, easier, and less error-prone. That’s important because how FP&A adds value is not by spending hours reconciling different systems to each other or assembling Powerpoint decks. We add value by being an advisor to the business and by recommending ways we can grow in a balanced and profitable way.
Eliminate, Simplify, Automate
The way to approach this is to examine the individual steps that make up the process and then look for opportunities to eliminate, simplify and automate. It’s important to stick to this order since no one should spend valuable time automating a process that is unnecessary or overly complex.
I enjoy process automation because you can look at the operation like a giant puzzle. Which pieces can be manipulated in a way that makes the entire machine run more smoothly? What happens if I remove this piece, are there any negative consequences? Will anyone even notice? Let’s experiment and try doing it completely differently for a month - we can always go back to the way it was before if we run into issues. The more we keep iterating and improving our recurring processes the more time we have for deep, creative work that moves the needle.
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