What is Financial Planning and Analysis?

The Financial Planning and Analysis play a pivotal role in any business strategic decisions for future investment. The tasks of FP&A are to conduct budget and cash flow forecast that supports business decisions of the operational managers, and Chief financial controller to ascertain profitability.

The Corporate financial planning utilises both real-time quantitative and qualitative analysis of all business operations to evaluate the company's profitability performance. The FP&A consider economic and business trends, review past company performance, and attempt to anticipate obstacles and potential issues from forecasting business results.

The FP&A analyses real-time financial data, include but not limited to income, expenses, taxes, capital purchase, and investments. The financial planner is charged with examining, analyzing, and evaluating the entirety of a corporation’s operational activities, and ascertain the business profitability in the future.

The financial analyst attempt to diagnose the business financial health by examining current KPIs. Basically FP&A endeavour to dissect and understand the business financial transactions and forecasting future profitability. The FP&A involving scenario planning and budgeting & cashflow forecasting, integrated financial planning, project management and performance reporting, financial analysis and modelling. The FP&A collect, and analyse the business real-time financial data and then create reports for CFO or business operational manager. The What-if-scenario analysis will help operational manager and Chief Financial Controller understand the timing difference in business revenue, expenses, cost drivers, working capital, cashflow in order for them to make decisions for project management, investment decision, business expansion, business disposal or divesting and forecasting future profitability.

Roles of FP&A Managers:

The role of FP&A manager involving analysing real-time financial data to create a What-if-scenario analysis of the business operational in the medium to long terms. The business historical performance, real-time financial data and KPIs are used for budgeting and cashflow forecasting, then compare the benchmark of the industry and competitors. The business performance in the future is prone to external threats such as the global market's current economic and business trends, government regulations and taxes. The business expansions could also be hindered if there is insufficient working capital, capital funding, lack of financial planning, budgeting and cashflow analysis of the business.

Profit and Loss:

The FP&A team and manager is responsible preparing budgeting & Cashflow forecasting analysis with variances commentaries, Profit and Loss, Balance sheet, and Cashflow statements, for different departments or business units.

Budgeting & Cashflow forecasting:

Budgeting & Cashflow forecasting is one of the primary responsibilities of the FP&A. It includes financial planning and analysis of the company's future financial performance by preparing 3 years financial business models and compare to the industry benchmark and its competitors, in light of the current economic climate that impacts revenue and profit.

Project Management

Financial analysts research, real-time data collection, and data analysis, advise a business management on the most financially efficient means of growing the company’s business and profits. The financial planner prepare a reports for three or five-year financial projections, to ascertain if the project investment is financially viable and profitable. The financial planner involves:

• Examining key financial metrics such as profit margins, sales volume, and inventory turnover
• What-if-scenario analysis of revenue, expense, cashflow, investment and profit.
• Operating a business in a cost-efficient manner by boosting sales and business process improvement
• Reducing variable, fixed and overhead costs through a total revamping of a company’s business process

A sensitivity analysis:

In a financial modelling context, a sensitivity analysis refers to the process of making small changes of one key input in a financial model and ascertain how sensitive the model would affect the overall future profitability or cashflow.

What-if-Scenarios analysis

The what-if-scenario analysis involve listing a whole series of inputs and changing the value of each input for each scenario. For example, a worst-case scenario could include sales decreasing, and/or increased payroll expense. What-if analysis refers to answering the question “what-if sales decrease?” or “what-if payroll expense increase?” which can be answered by running scenarios and sensitivities. This can also be achieved by using Pareto Principles scenarios by changing the inputs either manually or using data tables.

Scenarios and sensitivity analysis are a great way to insulate your financial modelling from unknown risk by examines and evaluating all the possible outcomes of the business performance under different key driver’s scenario. For example, if sales increase, then revenue increases, so profitability increases, so cash flow increases, so borrowing decreases, so interest payable decreases and so on. The scenarios analysis can assist with decision making.  They provide dynamic results from different key drivers scenario so that the decision makers can see the expected impact of each course of action. How close to reality these scenarios really depend on the accuracy of the assumptions implicit in the financial modelling.

The assumptions should be changed in each scenario are the main cost or revenue drivers that have the least certainty for which fluctuations would materially impact the business.

There are many ways to create scenarios and run sensitivity analysis:

• Manual Scenario selection of Switches or Drop-downs is the most commonly used method.  If the model assumptions are accurate and all the inputs will automatically calculate the outputs, then the results of the model will provide a real-time forecasting.
• Data Tables are incredibly powerful and best for running sensitivity analysis when you have a single output and one or two inputs.
• Monte Carlo (Stochastic Simulations) which tests thousands of tiny variations in scenarios.
• Pareto principle identify the 20% of drivers that explain 80% of the business results.

The traditional budgeting & cashflow forecasting can no longer be predicted based on only historical data as a result of the dynamic modern business environment, external and internal changes. A lot of changes are needed to provide more insightful planning and forecasting of a business future financial performance. Scenario Planning is one approach that allows us to make decisions quickly based on real-time data.

Management Reporting:

The FP&A prepare real-time reports for the operational manager or Chief Financial Officer. These on-demand reports provide a more comprehensive view of a business department or a particular KPI. The FP&A are responsible for the reporting and its recommendations.

Our accountants will provide the following financial planning and analysis of your business:

• Evaluating the company’s current assets and investments performance. Provide alternate use of working capital for investment to maximise growth and profitability.
• Examines the company’s overall financial health, primarily by using key financial ratios such as the profit margin ratio, asset to liability ratio, debt to equity ratio, current ratio, quick ratio, and interest coverage ratio
• Ascertain products that generate the largest portion of its net profit or sales volumes
• Identifying costs driver for each products and examine which product have the highest profit margin or the lowest
• Examining and evaluating the cost-efficiency and profitability of each business units.
• Working with individual departments or business units to prepare budgets and consolidate them into one overall corporate budget
• Preparing internal reports for operational manager or CFO to supports their decision making
• Creating, updating, and maintaining financial models and detailed forecasts of the company’s future operations
• Comparing historical results against budgets, forecasts and actual, and performing variance analysis to explain differences in performance and make process improvements
• Planning opportunities for the company to expand or grow. Providing support growth plans, including capital expenditures and return on investments or using the DCF method. Preparing financial modelling for three-year financial forecasts.

The financial analysis is expected to provide operational manager or CFO with analysis and advice regarding how to most effectively utilize the company’s working capital or resource allocation to increase profitability and expand the company at an optimal rate, while avoiding putting the company at serious financial risk.