What is Financial Planning and Analysis? (FP&A)
Overview
Financial Planning and Analysis, abbreviated as FP&A, is a team under the corporate finance umbrella of a company that is involved with tracking performance measures, forecasting, and analyzing potential opportunities for the firm to improve its operations and financial management.
Essentially, the FP&A team seeks to answer the following questions:
- What does our performance mean? Are we doing well or not and in what aspects?
- How do we expect to perform in the future
- What are our biggest growth opportunities and where are our biggest risks of failure?
What do you need to know for FP&A?
| # | Area |
|---|---|
| 1 | Accounting |
| 2 | Financial Analysis |
| 3 | Statistics and Inference |
| 4 | A Willingness to be Wrong |
| 5 | Strategy and Creativity |
Accounting
FP&A analysts need to understand how to measure performance before the more complex parts of the
role can even be considered. Accordingly, the first requirement is a strong understanding of accounting rules.
There are numerous performance measures that are typically used rather than the standard financial statement
line items, but a comfortability with accounting standards is required in order to speak the same language
as the accounting team from whom much of the source information comes.
Financial Analysis
Core principles of the relationship between risk and reward as well as an intuitive understanding of capital
budgeting and the required rate of return on projects are needed in order to bring meaning to the numbers.
In addition, a critical ability is that of building reasonable assumptions in order to forecast.
Statistics and Inference
Advanced analysts use statistical principles in order to use more data to build more defensible numbers as well as bring in scenario analysis to create models that show how sensitive forecasts are to various underlying assumptions
A Willingness to be Wrong
Perhaps unexpectedly, the best FP&A analysts have a mentality that appreciates and accepts being wrong in their analysis.
The largest value that FP&A can bring to an organization is to bring clarity to the areas of the business that are the most
uncertain. These areas often have no predictable correct answer because they are complex and are dependent on events that
have not even occurred yet, but are highly influential. An aversion to error prevents one from tackling these issues to begin
with or to provide estimations with the best available information for fear of being called out when their estimations inevitably
do not perfectly match up with what actually occurs.
Thus FP&A analysts require a sense of maturity to accept that incorrect forecasts do not necessarily reflect poorly on their abilities.
In addition, they also need a true understanding of the value they are providing. While they cannot eliminate all uncertainty, the
estimates they provide help proactive action to be taken, which is often much more effective than waiting until after the fact and reacting
to the situation at hand.
Strategy and Creativity
Inherently, the goal of FP&A is not just for financial management, but a source of operational improvement and recommendations for the best areas for investment. FP&A analysts must both uniquely understand the business and industry and provide unique insights that are not just quantitative in terms of "how much" but also "how" and "why".
I hope this was helpful as an introduction to Financial Planning and Analysis. For further information, please view this short Youtube video.