What is FP&A?

The FP&A process is a continuous cycle of data collection and analysis. As businesses grow and expand into new markets, and in times of market volatility and rapid change, the process becomes more complex. More data needs to be collected and more analysis needs to be done – which is why many large and midsize companies have formed dedicated FP&A branches within their finance departments. But despite increasing complexity, at its core the FP&A process includes the same four basic steps:

1. Data collection, consolidation, and verification
   The first step in the FP&A process involves collecting financial and operational data from ERP systems, data warehouses, and other business solutions. In addition, data from outside the enterprise – such as broader demographic, economic, and market data – may also be collected.
   
   Once all the necessary data is collected, it needs to be consolidated, standardized, and verified. Accurate plans, forecasts, budgets, and analysis all depend on the quality and completeness of the data they use – so this step is absolutely essential. It’s also very time-consuming, so businesses are now turning to AI-powered solutions that can automate many of these tasks.
2. Planning and forecasting
   In this step, FP&A analysts use the prepared data to create financial forecasts that predict how the business will perform in the future and if it is headed in the right direction. Financial forecasts include sales forecasts, cash flow projections, and more. Financial forecast models are also used to test out different scenarios, simulate the impact of different variables, and determine the best course of action to drive the right outcomes.
   
   The most commonly used financial planning methods include:
   
   Predictive planning: With predictive planning, FP&A professionals create a model on large data sets of past performance. Then this time-series forecasting model is used to predict future performance. Predictive analytics supercharges planning tools, especially when it’s integrated in a single solution and augmented with AI and machine learning.
   
   Driver-based planning: In driver-based planning, analysts identify a company’s key business drivers (aka the things that are most important to its success) – and then create a series of plans that mathematically show how the business drivers would be affected by different variables.
   
   Multi-scenario planning: Scenario planning and analysis is the planning method used increasingly by businesses today. In multi-scenario planning, analysts make assumptions about what might happen in the future. They anticipate consequences and then create a plan for responding to each plausible scenario.
   
   These models and financial forecasts are used to create the financial and operational plans needed to achieve the business’ overarching strategic goals. Developed by senior management with input from FP&A, the strategic plan includes high-level targets like revenue and net income over the short- and long-term.
   
   Collaboration across departments is critical for all types of planning. It ensures plans take all data, variables, and expertise into account – and it helps increase both accuracy and engagement. Collaboration brings more validity to plans – and helps build consensus around them. This is also where xP&A comes in, linking and synchronizing plans across departments so the business can eliminate silos and move as one well-oiled machine.
3. Budgeting
   In the budgeting step, FP&A professionals estimate the expenses needed to execute the corporate plan based on the revenue from the strategic plan. They then allocate an expense budget to each business unit or function – as well as the revenue and cash flow they are expected to generate. Corporate collaborates with every department and then rolls up the agreed upon budgets into one master budget.
   
   The corporate budget is usually created annually, and updates are made quarterly as financial conditions change. However, to better cope with volatile market conditions, many businesses have now adopted continuous budgeting cycles that are frequently updated with rolling forecasts and projections. Some organizations have also adopted zero-based budgeting, which avoids bloat and overspending by continually evaluating which expenses are necessary and which are not.
4. Performance monitoring and analytics
   To advise the business and provide decision support, FP&A teams analyze financial data and monitor performance – including sales, expenses, profit, working capital, cash flow, and other KPIs – on an ongoing basis. They answer ad hoc queries and translate numbers into a narrative – or data story – to help decision-makers understand a situation and take considered action.

FP&A analysts also generate regular reports and data visualizations, and conduct activities like profitability analysis – which includes future profit projections and can answer questions like “Which products and services will be most profitable next year and now?” or “Should we outsource production or keep it in-house?”.