Financial Analysis and Planning: Your Complete Overview

Data Analysis

Regardless of the size of your business, you’re probably aware of the role of an accounting team and their responsibilities. However, your organisation can go a step further to benefit from financial analysis and planning. A financial planner and analyst (FP&A) uses data to forecast and predict the future of a business. In this sense, they can help to maximise revenue, reduce risk and increase efficiency. 

What is Financial Analysis? 

The financial analysis differs from standard accounting in a significant way that it focuses on planning. Financial analysis leverages data to forecast and project future earnings. Whereas accountants and bookkeepers are legally bound to produce standard financial documentation such as income statements and balance sheets for both internal and external speculation, FP&A professionals are focused on creating reports for domestic usage. 

The information procured by an FP&A professional is management focused and geared towards what has yet to happen. 

As such, an FP&A analyst has the following duties:

  • Analyse and deduce if a company’s current assets and investments are being used most beneficially 
  • Gauge the organisation’s overall health 
  • Determine which products and services are contributing the most profit
  • Examine the departments’ cost efficiencies 
  • Map growth plans and project financial forecasts 3-5 years out 
  • Prepare internal reports for management and executives to use for decision-making 
  • Identify profit margins 

FP&A Activities

To accomplish the duties mentioned above, financial planning and analysis professionals are in charge of: 

  • Budgeting: Budgets are outlines to list expectations for what a company hopes to achieve in a given period. They generally include revenue and expense estimates, expected cash flow, and expected debt reduction. Once the period occurs, budgets are compared to actuals to assess variances. Most commonly, budgets are prepared for the fiscal year, but some businesses choose to make quarterly and monthly budgets. 
  • Forecasting: By examining historical data, a forecast estimates future financial outcomes. Forecasts provide managerial teams with information on how to make better decisions to achieve desired results. Financial projections help to determine how to allocate budgets in future periods. They can be both short and long-term, and they serve to help make immediate decisions. 
  • Rolling Forecasts: Rolling forecasts are set for periods, say 12-months, and continue to reassess as time moves forward. This means that current data is taken into account to update the forecast regularly. A rolling forecast tries to address the shortcomings of static estimates to take into account what’s happening to make decisions as close as possible to real-time. 
  • Reporting: To turn an FP&A’s budgets and forecasts into usable information, they must manage to communicate to higher-ups and decision-makers within the organisation. As such, they are responsible for preparing reports like short term cash flow analysis, operation review reports, forecasts, budgets, and the like. Accurate reporting is at the heart of ethical decision-making, so this reporting step will rely heavily on clean data and proper methodology. 
  • Analysis: Once budgeting has prepared and the actuals have occurred, FP&A analysts must perfect analysis to determine variances. This helps to inform how accurate or divergent planning is from reality. Then, they can use this data to adjust models and assumptions to improve for the future. 

Types of Financial Analysis 

There are different types of financial analysis, which include:

  • Actual vs. Budget: This is done by reporting the variance between actuals and budgets. More often than not, this is completed with high frequency, generally monthly. 
  • Ad Hoc Reactive Analysis: Business environments are highly dynamic and ever-changing. As such, an FP&A analyst may be called upon to perform ad hoc reports and analysis in response to macroeconomic or microeconomic shifts. 
  • Strategic Analysis: When a business is considering a merger or acquisition or a new product launch, they want to mitigate risk as much as possible. To do so, financial analysis is performed. 
  • Proactive Analysis: Staying ahead of the curve can provide a business with its competitive edge. As such, FP&A professionals are encouraged to be active in their duties to discover problems, find solutions and optimise business decisions. 

Challenges of Financial Analysis 

The importance of financial analysis cannot go unnoticed. However, the procedures rely heavily on data. This can easily create problems. For example: 

  • Data collection: To start analysis, you need to collect data. Data collection can be a challenge in itself because of customer input errors or the lack of incentive to provide data in the first place. If data is being sources or purchased, it can be timely and inaccurate. 
  • Errors in reporting: There are errors in reporting that can occur based on inaccurate data. This can result in poor decision-making. 
  • Separated data: Many organisations don’t have a single receptacle and storage method for big data. As such, some lives inside software systems and other data is on an employee’s computer, trapped in a spreadsheet. As such, missing or invalid data can exist because of this separation. Additionally, those who need access to data may not have it. 
  • Outdated information: Data needs to be regularly updated and cleaned. If data is obsolete, then it doesn’t serve a purpose for present and future reporting and analysis. 
  • Lack of resources: Since financial analysis and planning relies on hard skills and professionals who are trained, the funds could be a challenge. Not only do you want to work with experts, but you’ll also soon see the need for a trustworthy technology solution in automation software. 

Often, FP&A analysts may waste time trying to chase data and spreadsheets from people within the business. This eats away at the time they could be spending to review reports and perform analysis. 

Skills in FP&A

Financial planning and analysis professionals need a broad set of hard and soft skills. From communication to mathematical understanding, they serve as links between data and decision-makers. As such, they should possess the following qualifications:

  • Project management: They have to be able to be proactive in creating procedures, executing what has to be done and do so promptly. 
  • Decision-making: One of the essential skills of an FP&A professional is the ability to make decisions. Businesses face an array of financial options, and management will rely on an FP&A analyst to help decide the best route forward to help achieve business goals. 
  • Reading and analysing: Along with understanding a company’s financial statements (income statements, balance sheets, etc.), FP&A professionals also sees the larger picture by assessing cash flow, liabilities, assets and more. 
  • Financial Modelling: A corporate model is used to create long-term forecasts and also produce presentation decks for investors, creditors, internal stakeholders and ad hoc analysis. As such, FP&A professionals must be well versed in financial modelling procedures. 

How Automation can Optimise Analysis and Planning 

The good news is that FP&A doesn’t have to be performed without the use of technology. It shouldn’t be. While spreadsheets are immensely useful tools, they lack the robust capabilities of software solutions. Automation software and platforms can not only ensure the safety and accuracy of data, but they also help to make FP&A processes faster and more accessible. With consolidated data sets and visualisations for reports and real-time dashboards, Automation helps an FP&A team be more agile and powerful. 

As a leader of an organisation, the importance of internal and external communication of financial analytics is paramount. However, the biggest challenge of many CFOs and finance teams are this is significantly restricted by time constraints. With a data automation tool, your financial analytics can be easily created, and kept up to date automatically with live data and shared with all teams. With all data secured safely in the cloud, audit trails fully integrated, and automating many manual data tasks, finance can focus on analytics, have fewer errors, and significantly reduce compliance risk in the process. Ultimately the seamless sharing of information proves invaluable for your finance teams workflow and peace of mind. 

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