The core business of any FP&A team is to analyze both qualitative and quantitative aspects of a company’s operations to come up with plans for the future. Usually, the team uses the company’s past performance, as indicated in financial statements, to highlight mistakes and successes. It also uses this data as a compass to determine the way forward.
Apart from analysis, a good FP&A team should be able to accurately communicate its conclusions and recommendations to the company’s executives. Each department should be informed of their performance and which areas they need to improve. To do this, FP&A and executive finance teams should use financial data to create four areas of crucial reporting:
1 – Department Budget vs. Actual Reports (BvA)
Each department has its own budget which is aligned with the company’s budget. Department heads need to have a clear view of their actual spending versus the budget. It is also essential for the FP&A team to have a comparative report on the same.
BvA reports are created by the team in collaboration with department heads. They create an opportunity for department heads to explain any variance in expected expenditure, and take steps to mediate it. The report can then be submitted to top executives to keep them up to date on business performance.
By collaborating with individual department heads, the FP&A team can record commentary that explains variance in the expenditure versus the actual budget. The analysis provides fresh insights and can influence the executives’ understanding of departmental performance.
2 – Cash Flow Analysis & Forecasting Reports
Before financial statements are prepared, there is a need to monitor short term cashflow. By collecting and analyzing the cash receipt and payment data, FP&A teams forecast future liquidity. They create reports that predict the final performance of a department and should be able to issue weekly updates on the same.
Forecasting reports help to identify and mitigate cash flow issues at the early stages. They are also presented to executives with recommendations on what can be done to improve the company’s cash position. Waiting for financial statements at the end of the fiscal year, without any review beforehand might have disastrous consequences for any organization.
3 – Executive Summary Reports & Dashboards Based on the Core Financial Statements
A company has three financial statements at the end of each fiscal year; the balance sheet, income statement, and statement of cash flows. The FP&A team needs to review and understand the content of these statements because:
- the reports give an understanding of past performance
- they provide crucial information for financial modeling
- the information they contain is essential for financial forecasting
- the data they hold is necessary for creating a Long-range Business Plan (LRBP)
- they enable validation of recommended financial models
Although it is not the FP&A team’s responsibility to produce and maintain these financial statements, they must have a clear understanding of the components and their implications. This requires the basic understanding and application of accounting principles. To some extent, it will require linear collaboration with the accounting department.
The FPA&A team should create an executive-level report or dashboard for efficient consumption by company leadership. This report or dashboard will benefit C-level executives who often base their decisions on the contents of the statements. The report will also inform recommendations on opportunities that will improve the company’s performance.
4 – Operation Review Reports
Apart from the analysis, the team has the responsibility of planning. They should get insights from financial statements and use them to advise the company’s leadership on efficient ways to improve performance.
This may also include financial modeling, which creates various scenarios to make educated decisions on matters such as product placement, increasing the size of the staff, or mergers and acquisitions. Before presenting a financial model to the executives, the team manager must make sure that all variables have been taken into account.
A review of operations is important to inform these decisions. FP&A teams should survey operations and forecast outcomes. This will help managers to test specific scenarios and make a decision as to what they can change in the company’s operations. They will also be able to track the progress and compare it to predicted outcomes.
The role of an FP&A team cannot be understated
When furnished with data from the accounting team, FP&A is tasked with the responsibility of makings sense of the data. A review of past performance, prediction of future outcomes, and recommendations on the company’s path into the future is expected from the team. Therefore, accurate reporting is a necessity.
BvA reports, Cashflow and Forecasting reports, Analysis of Financial Statements and Operational Reports are standard reporting practices that every FP&A team must have. Experienced FP&A professionals will simplify their reporting and give a company’s executive a clear view of the business performance. These reports will also influence business decisions made to improve the management of resources and impact performance in a positive way.