What is financial planning and analysis (FP&A)?

FP&A professionals typically perform various tasks such as collecting and consolidating historical data, forecasting trends and outcomes, preparing budgets and financial statements, monitoring business performance and collaborating with stakeholders on business planning.

In most organizations, FP&A is part of the finance department and reports directly to the chief financial officer (CFO) or the director or VP of financial planning and analysis.

Unlike accounting which focuses on past financial results and regulatory compliance, FP&A has a forward-looking mission. It predicts which actions, investments and strategies will help the business achieve its objectives in the future.

Corporate FP&A is important because it empowers an organization to make informed decisions regarding financial strategies, operational plans, new initiatives, risk management, headcount planning and more. These strategic decisions are essential to an organization’s profitability and financial health.

By using data analysis to forecast trends, identify opportunities and measure key performance indicators (KPIs), FP&A teams help business leaders answer critical questions, such as:

• What is our projected revenue for next quarter?
• What is the profitability of a specific product, service or business unit?
• How would cost reductions affect our profit margin?
• How could automation streamline our operational workflow?
• How would a merger or acquisition affect our bottom line?
• How would a new market competitor impact our market share?

There are 4 basic components or steps to financial planning and analysis:

• Data collection and consolidation
• Planning and forecasting
• Budgeting
• Performance monitoring and reporting

The first step of the FP&A process is collecting, preparing and consolidating data that are used for forecasting and planning.

Operational data, financial data, employee metrics and key performance indicators (KPIs) are extracted from internal systems. For example, FP&A teams might collect sales data from customer relationship management (CRM) software, cash flow data from enterprise resource planning (ERP) systems and payroll data from human resource information systems (HRISs).

FP&A teams also collect data from external sources that provide insight into market and economic conditions. These sources might include market research into customers and competitors, analyst reports from industry experts, government statistics and currency exchange rates.

The information is then prepared for use by verifying its accuracy, removing errors or inconsistencies and standardizing it into a consistent format. The clean data can then be consolidated into a unified dataset for later analysis.

The next step is to use the collected data to create financial forecasts to support strategic planning. These forecasts typically include critical drivers of future business performance, such as projected sales, cash flow, operating expenses, staffing requirements and customer retention.

FP&A analysts often use financial modeling to predict which strategies, actions and investments provide the best business outcomes. For example, scenario planning models can simulate what might happen if a business raises or lowers prices or if market conditions, such as demand or the cost of goods fluctuate.

These insights help inform planning processes, as business leaders decide how they will allocate resources, execute market strategies and set future performance goals.

After forecasts are completed and a strategic plan is in place, FP&A teams begin allocating funds and resources across the organization. This budgeting process includes assigning funds to each business unit or department and determining capital expenditures for assets such as office space and equipment.

FP&A analysts then work with senior management to create a final master budget that documents all spending across the entire organization. The master budget aligns with FP&A’s forecasts and goals for future business performance such as projected revenue, cash flow and profitability.

As changes occur over a fiscal year, the master budget might need to be updated. FP&A teams often use rolling forecasts to stay on top of evolving market and financial conditions. This process enables them to make dynamic and informed updates to the budget throughout the year.

To help an organization achieve its targets and goals, FP&A analysts continually monitor, analyze and create ad hoc reports regarding financial performance. This ongoing performance management process provides insight into what went right or wrong, and what changes might be required.

For example, financial analysts might perform a variance analysis to determine why actual sales revenues fell short of the budgeted target. FP&A then issues a report with data visualizations to help sales managers understand how factors such as low demand or a lack of sales leads contributed to the shortfall. The sales managers can then make strategic changes to address those issues.

Artificial intelligence (AI) and machine learning (ML) technologies can collect, organize and analyze large volumes of data in real time. By increasing the speed and accuracy of these FP&A functions, they help finance teams improve forecasting, planning and decision-making for multiple business units across an organization.

Balance sheets are a critical tool of the FP&A process because they provide a unified view of an organization’s assets, liabilities and equity. FP&A managers use them to isolate potential risks, identify opportunities for improvement and understand the overall financial health of the business.

FP&A teams use cash flow analysis to understand the inflows and outflows of cash across an organization. This information helps them make smarter decisions about future investments, operational expenses, debt management, financial risks and strategies for growth.

FP&A teams often communicate complex financial insights by visualizing data in dashboards, charts and graphs. This approach makes it easier for stakeholders to understand trends and patterns that might affect business performance.

ERP systems are a critical source of financial data from areas such as sales, supply chain, procurement, inventory and payroll. FP&A teams often rely on ERP data to help them create forecasts, plans, budgets and reports.

Financial modeling helps FP&A teams evaluate the “what if” impact of business plans and changing market conditions. It projects the potential financial results for new products or services, cost reductions, investments and other business initiatives.

FP&A software packages perform multiple FP&A functions such as data collection, data analysis, forecasting, planning, budgeting and reporting. Sometimes, businesses create their own FP&A solution by using a combination of separate software tools and internal systems.

Income statements provide valuable information such as revenue, cost of goods sold, gross profit, operating expenses, operating income and net income. FP&A analysts use this data to evaluate profitability, forecast future performance and identify areas for cost reductions or efficiency improvements.

Rolling forecasts are an important tool because they provide updated financial projections regularly, usually monthly or quarterly. This enables FP&A to react quickly to changing market conditions and take advantage of emerging business trends.

Scenario modeling enables FP&A analysts to simulate different combinations of business actions and market conditions to forecast financial outcomes. This capability helps them improve decision-making, evaluate business strategies and prepare for changes to the business landscape.

According to the FP&A Trends Survey, more than half of FP&A teams use spreadsheets such as Microsoft Excel as their primary financial planning tool.¹ Spreadsheets help analysts organize and analyze data, build models, create visualizations, generate forecasts and conduct financial reporting.

FP&A teams use variance analysis when actual financial results differ from the projected or budgeted numbers. Variance analysis helps them discover potential causes of and appropriate responses to surpluses or shortfalls in areas such as revenue, expenses and customer loyalty.

Currently, only 6% of FP&A teams use artificial intelligence and machine learning.¹ However, analysts predict these technologies will play a significant role in the future of financial planning and analysis.

AL and ML automate and improve the accuracy of a range of FP&A functions such as data collection and preparation, data analysis, modeling, forecasting and planning. These capabilities give finance leaders more time to focus on strategies and tactics.

The number of FP&A roles and the need for candidates with financial management certifications are expected to rise in the coming years. FP&A analysts will increasingly function as business partners to multiple departments across an organization.

In the future, FP&A analysts are also expected to become more involved with environmental, social and governance (ESG) initiatives. FP&A teams provide insights into the financial impacts of sustainability initiatives and the environmental impacts of business operations.