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rubber ducks lined up

FP&A 101

By: Bill Webster, bill@getsuitless.com, Blogger at Suitless Inc

Get Your Financial Ducks in a Row

“We have plenty of money – go for it!” said no business owner to her employees ever.

Intuitively, entrepreneurs live 4 quarters ahead of their teams. That means, they’re commonly looking at where they need their sales to be in a year. They’re looking at what features their products should have, in order to gain a competitive edge on other market players. They’re looking where to save and where to apply their money to get the most out of it.

It’s also common for entrepreneurs to feel some stress when looking at their current cash position and make plans to fulfill their vision. A business owner asks herself questions like: Are we putting our excess cash to best use in investments? What should be our risk tolerance? What is our current ROI? How can we improve this? Which product is giving us the better margins and why?

Usually a business owner will, when affordable, hire an FP&A analyst to assist her in making the best decisions and getting her money ducks lined up.

The Acronym FP&A

FP&A stands for “Financial Planning and Analysis.” It sounds fancy, but it has been around for quite a while. There was a rapid expansion of financial knowledge in the 19th century with the financial successes and woes of the Industrial Revolution. Early financial analysts compared current assets and liabilities. They developed financial ratios to begin “scoring” a company’s health and performance.

Nowadays, FP&A teams play a crucial role in companies by performing budgeting, forecasting, and analysis that support business decisions. In a way, it’s like having a tune-up on your car. It gives a business a good charge and firm acceleration. Businesses can survive without it, but usually don’t thrive without it.  

So, you might be thinking: do I need to hire someone besides my accountant to do this? Not necessarily.

Accounting

An FP&A analyst needs a good understanding of the company’s bookkeeping, journal entries and general ledger. Unlike accountants who are in charge of record keeping, an FP&A analyst is charged with examining, analyzing, and evaluating the company’s financial activities. This means helping the business owner map out the company’s financial future, i.e. making sure they have runway. Accounting will work hand in hand with the FP&A analyst. And you can outsource the work to someone who can assist, instead of hiring a full-time employee or paying your accountant’s rates for the task.

Operations

FP&A analysts are good problem solvers. They are able to decipher the various puzzle pieces that constitute a company’s finances. They envision putting the pieces together to formulate a variety of possible growth scenarios.

The analyst will need a solid knowledge of the company’s financial statements: balance sheet, cash flow statement, and profit & loss statement. Seeing this quantitative data and comparing it to some qualitative knowledge of the business’s operations and products, the analyst should be able to put together recommendations for a business owner rather quickly. These reports will become more and more accurate, the more data the analyst can review. So giving them access and insights to some of the operational data of the company helps improve their service to you.

FP&A Process

A good analyst not only understands the meaning and implications of each individual financial statement. He also sees the larger picture of how a company’s total financial position is reflected by the combination of assets, liabilities, cash flow, and income.

When it comes to process, a good FP&A analyst will need accounting and operational data, along with a good understanding of the business owner’s vision. With these things, the analyst can prepare recommendations as frequently as you need them.

There’s no set standard for how and when to prepare reports. It depends on the business owner’s needs and interest. Typically, a monthly report and a quarterly trend report are helpful to a business owner. The quarterly trend is useful because sometimes you’ll have a good month, sometimes a bad month. Just relying on the monthly data won’t let you see the bigger picture.

Good FP&A Advice

Very few, if any, companies can be consistently profitable and grow without careful financial planning and cash flow management. The job of managing a corporation’s cash flow typically falls to its business owner (and CFO, if you can afford one). The FP&A analyst makes sure all the data is presented and solid recommendations are fielded.

In the end, a company’s FP&A analyst is expected to provide a business owner with analysis and advice regarding how to most effectively utilize the company’s financial resources to increase profitability and grow the company at an optimal rate, while avoiding putting the company at serious financial risk.

Suitless offers FP&A services, especially regarding company runway recommendations and increasing margins on products and services. We also provide insight for your decision-making about investment opportunities and risk tolerance. Call us or email us to find out more about this service included in our standard monthly flat fee.

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