Financial planning and analysis (FP&A) is the bridge connecting the strategic direction of the business with available financial resources. The beauty of this model is the ability to provide continuous analysis and monitor the performance against set parameters without any manual updates, as in the case of budgeting.
In the financial planning process companies need to develop a financial forecast with accuracy, relevancy, and timeliness to ensure achievement of the strategic objectives and lower the risk of failure. However, at scale-ups and growing companies, building the FP&A process can sometimes be directionless and unorganized.
To help you out, here are six key principles to guide you in developing and managing an effective financial planning process.
1 - Connect your strategy to financial planning
The purpose of FP&A is to lead a business to more informed decisions and optimized performance. Hence why, before trying to transform FP&A, it's important to have a clearly defined business strategy and then align the FP&A strategy with it.
It's also vital to define the goals of FP&A as clearly as possible in order to help the team have a clear path and motivate them.
2 - Analyze strategy in terms of actionable plans
There is a need to promote a culture of using financial metrics at all levels of the organization. It's difficult to track and measure the performance of the operations without seeing it on the financial dashboard.
Setting periodic targets and measuring success against targets' achievement can help connect the actionable plans with the financial resources.
3 - Establish short and long term business drivers
Once actions plans are linked with financial resources, the focus should be placed on the drivers that exhaust resources or increase the cost for the company's operations. But, there must be a direct correlation between the driver and the financial impact on the logical ground.
The right level of details, speed, flexibility, and mathematical complexity should lead to a system of drivers that ensure financial forecast accuracy.
4 - Develop what-if scenarios with the help of technology
Technological advancement enables finance teams to understand the extent of the outcome when changing inputs on the system. It also helps business managers decide taking into account the outcome in the best and worst situation.
It helps broaden the decision maker's thinking spectrum while assessing risk and relative rewards.
5 - Mitigate uncertainty from the process
By reducing the uncertainty from the process of forecasting, businesses can turn the possible to probable. And what it takes to make financial outcomes probable is extensive testing through what-if analysis.
It helps to understand with what frequency certain key factors that impact the business should be reviewed to bring an element of certainty within the forecasting process.
6 - Develop forecasting and keep it rolling
We live in a dynamic world where everything is changing continuously. We experience changes in the external environment, changes in the trade tariff, the cost of commodity, the rate of taxation, the inflation rate, etc.
So, why not keep space for potential changes in the developed forecast. The rolling forecast is a great tool because it helps to overcome some of the weaknesses of the traditional budget.
Specifically, the rolling forecast involves an adjustment of forecasts and resource allocation every month or quarter based on what’s actually happening in the company. It provides managers with a timely vision into the following period whenever they need it. However, keep in mind that this forecast flexibility requires extensive integration and automation to respond to external market factors quickly.
How can Abacum help?
By implementing these key practices to your FP&A, you will clearly see an improvement not only in your results, but also in the team's response to sudden changes. However, keep in mind that this forecast flexibility requires extensive integration and automation to respond to external market factors quickly.
Through our automation features, you can eliminate manual tasks such as pulling data from your ERP, BI and CRM systems and having to manually transform data into sensible numbers. The platform is also collaborative meaning you don't need to switch over to email or Slack to have a conversation with budget owners.
Great financial planning doesn't need to be solely a "mature" company benefit. Get started early and efficiently with Abacum.