The basic elements of FP&A are forecasting, budgeting, reporting and analysis. But it could also include other areas such as resource allocation, IT support, Operations support and HR support. Each of the individual elements is a subject in itself. However, let’s attempt to understand the core elements in brief with day-to-day examples.

Forecasting

All of us have some amount of savings and we want to invest it somewhere.  Forecasting can be defined as the periodic prediction of future trends considering the current internal and external factors. Usually, this is done by analyzing and extrapolating the past results and applying known anomalies to past trends.

Budgeting

We all budget our expenses. At the beginning of every month, we draw up our expense statements and determine the amount we can afford to spend what we’d like to save.  Budgeting involves drawing out a detailed financial plan and establishing a goal for the future period. It usually details the various financial elements and its drivers considering the capabilities of the business. This activity is done before the beginning of the year and is drawn out by month.

Reporting

At periodic intervals, we all get appraisals at our workplace or we get to attend the PTA meetings at our child’s school. What we get to hear is a summary of past performances and our standing with respect to expectations.  Reporting can be defined as providing of information at periodic intervals to various stakeholders that enables them to take important decisions. Stakeholders include management, business partners, investors, creditors and debtors. Information could be related to past performance, future plan, strategy, objective and market standing among others.

Analysis

When we overspend, we try to see where we are over-spending, what expenses can be controlled, and how we strayed from what we initially planned.  Financial analysis can be defined as assessment of the financial aspects of an organization including deployment of funds, profitability, investor protection, business viability and market standing. It usually involves the understanding of ratios, comparisons with Budgets and Forecasts and detailed study of the financial statements. This activity not only helps understand the problems and provide decision support, but also visualizes opportunities and ensures better performance.

FP&A in Corporate World

In a corporate scenario, FP&A function usually comes under the direct purview of the Chief Financial Officer or the Director – Finance. The activity involves liaison with various departments, understanding their functions, their impact on the Business and providing support to take important business decisions.

FP&A caters to various departments like the Finance, Operations, HR, Corporate, Procurement, Quality, Sales and Marketing etc. In short, FP&A function is that thread of every organization that beads various departments together and ensures achievement of their common goal. In addition to providing timely reports and analysis, FP&A also provides support for redesigning the systems used for accounting, reporting etc.

Why FP&A?

• Envisioning the short-term and long-term objectives
• Driving performance
• Meeting and overachieving Internal and external expectations
• Timely identification and correction of financial or operational concerns
• Understanding the reasons for variances to expectations
• Strategic analysis
• Identifying opportunities and providing decision support to capitalize them

FP&A is a very dynamic and interesting function of finance. It requires the analyst to be deeply involved with the business and to understand not only the numbers, but also the science of running the business. It is therefore, very important for analysts to understand the business before jumping into the numbers in order to keep the essence of “A” in FP&A alive.