Understanding the mechanics of financial planning process

Financial Planning and Analysis (“FP&A”) is an essential component of the finance team’s responsibilities.  It creates ongoing collaboration between the finance team and the wider business, whilst supporting management and the Board with decision-making.

Financial planning is not just about crunching numbers but rather understanding the needs and goals of a business. Knowing what you want to achieve financially helps you plan ahead to make sure you reach your objectives.

During this video, experienced CFO and CEO Stuart Trood summarizes the importance of financial planning and analysis to a business:

FP&A is important for many reasons, including:

• Providing interaction between the finance function and the wider business – it is often the first place that most people across the business come into contact with the finance team.
• Supporting the decision-making for the business by providing vital information to the board and management team.
• Determining how best to allocate capital across the organization.
• Analyzing the business cash flows.
• Helping to maximize return on investment and assets.
• Informing what the business should do next.
• Identifying the main cash cows and underperforming products or divisions.
• Providing the Board with more detail of what is working well and what needs changing.

In summary, it assists with the outcome-based decisions that the board and wider business need to make. It informs the external marketplace how you are doing, such as the shareholders and other stakeholders.

Approach

The financial planning process starts with setting clear, attainable goals. These should be measurable and time-bound to determine success or failure. You also need to analyze your current financial position and research any external factors that might have an impact on your plan. This could include markets, legal or tax implications, or other financial matters.

Once you’ve identified what needs to be done, it’s time to create a budget and track progress against it. This process should be ongoing so you can adjust and refine your plan on an ongoing basis.

It is essential to obtain each department’s buy-in to the budgeting process. This helps ensure that each team is contributing to the overall financial objectives, and that everyone understands their role in reaching them. You can achieve this by getting people involved in creating the budgets, setting up regular financial check-ins, and providing team members with the data they need to make informed decisions.

Here are five steps for successful financial planning:

1. Set realistic goals: Decide what you want to achieve and create a timeline for when you’d like to reach them.
2. Analyze your current financial position: Understand where you stand financially today in order to plan for the future.
3. Research external factors that could influence your plan: Look at market forces, legal and tax implications, and other financial matters.
4. Create a budget: Track spending against this budget to ensure you are on track with your plans.
5. Obtain buy-in: Get all stakeholders involved in the process so everyone is working towards the same goals.

It’s also important to review your financial plan regularly, taking into account changes in the market, economic trends, and any other variables that could impact your business. This helps you stay ahead of the game by anticipating problems before they occur and letting you have time to make adjustments if needed.

Don’t forget to review your financial plan at least every three months. This will ensure that it remains relevant in line with any changes to your business or external circumstances. You should also regularly benchmark progress against the original objectives to make sure you are reaching your goals.

By understanding the financial planning process and taking steps to create and maintain a realistic budget, you can ensure your business is financially stable and set up for long-term success. With the right guidance and preparation, you will be able to meet your goals in an efficient manner and make better use of available resources. This will help increase profitability, reduce risk and pave the way for future growth.