What is FP&A?

FP&A stands for financial planning and analysis, but what does that mean? And why do we do these things? Let’s break it down and discuss.

Financial planning, or budgeting, is really the act of setting goals for your business and the analysis side is measuring your performance to these goals. Few people even go on a picnic without some sort of plan, yet I have come across many small businesses that don’t have a formalized planning process or annual goals or targets. For now, we will not indulge the obvious question here, but rather discuss why this is important.

To accomplish a goal, you need to first set the goal, determine if it is realistic, and then make a plan to achieve the goal. To increase revenue or increase sales, it is often essential to spend money to make money. If you set a goal to increase your revenue to $15M next year, you may need a new sales person, increased marketing spend, etc. The first step is to ensure you understand all the variables of your business to make these decisions correctly. Do I need 1 new sales person, or 2? How much do I need to spend on marketing? Do I need to hire an additional marketing person. Do I have the right marketing strategy?

Financial planning and analysis is done to better understand your business, your strengths, weaknesses, what’s working, what need improvement. What is your margin, is that good or bad? Could it be better, how could it be better? What your company started out as may be completely different than what it is today. And if your company is not different, it is very likely that the industry is different, the competitors are different, or you just haven’t noticed the changes.

Once you have the plan, the analysis side of the equation is what ensures you hit your target. Your marketing plan may not have been perfect, but through analysis, you adjust your marketing plan to ensure you hit your target for the year. You may need to spend $1.2M instead of $1.1M to hit your target of $15M in revenue, but you can make up for the increase in spend through these newly discovered efficiencies in production. If you are not analyzing your performance on a consistent basis, understanding where you are doing well, where you need improvement, you will never achieve your goal. A lot can change over the course of the year, and you need to make sure you are adjusting and adapting to these changes, or are in front of these changes, if you want to accomplish your goals.

More importantly, are the elements that are out of your control. What if the market is crashing, how do we preserve capital, where do we cut costs, how do we control our bottom line. This is what makes the monthly analysis essential. If the environment changes, and you need to adjust your annual target to $14M, do you still need to hire a second sales person? What should you now spend on marketing? How do you take advantage of a hot market, and how do ensure you survive a downturn?

If your competitor is well prepared and has a solid plan, reacts, and adjusts their business properly, you may loss ground at best, if you even make it until the end of the year. The team with the better plan, who is better prepared is the team that wins. No matter what analogy you use, the bottom line is the winner is the one with the better plan.