People think Financial Planning and Analysis (FP&A)is only about numbers; if someone thinks to be successful in FP&A, they must have a lot of advanced Excel skills, financial modeling skills, and know accounting standards. While these technical skills are important, they are not all that is required to be successful in FP&A. In fact, understanding the business is just as important as understanding the numbers. Without having a good understanding of the business, FP&A will never provide value no matter how accurate the analysis is.

FP&A is in the middle of all decision-making. FP&A provides planning, forecasting, budgeting, performance analysis, and strategic decision-making support to FP&A Leadership. All the insights generated through FP&A analysis will impact operations, marketing, sales, human resources, supply chain, and long-term strategy. Because of this, FP&A professionals need to look beyond the spreadsheets and create an in-depth understanding of how the business is run.

In this blog post we'll take a look at how an understanding of the business increases the quality of FP&A financial insights, and how FP&A will produce less accurate financial insight when they do not understand the business. We'll also look at how FP&A can develop business acumen and explain why organizations continue to seek Finance professionals who are able to provide business partner support rather than just be good at crunching numbers.

Understanding FP&A Beyond Numbers

FP&A takes data from various sources and provides business insight from that data. The data alone is meaningless. Data is simply numbers that are derived from actual business transactions and activities. For example, business activities are comprised of the following types of transactions: product purchases by customers; lead generation from marketing campaigns; goods manufactured by factories; service delivery by employees; and the application of strategic decisions made by management. If FP&A does not understand these transactions/activities, financial analysis cannot be performed.

FP&A may see a decline in revenue, which could indicate serious problems for the company, but without an understanding of what caused the decline (such as seasonality, market conditions, changes to pricing, customer churn, and/or operational issues) FP&A would not have the necessary information to investigate further or take steps to prevent the same type of problem in the future. Business understanding allows FP&A to gain the knowledge needed to interpret the numbers accurately and provide business insight instead of just reporting what the numbers are saying.

Creating a better business understanding enables FP&A professionals to correlate both financial performance and operational performance. It allows them to move beyond just talking about what happened and to answer the questions of why did it happen and what should occur as a result of it happening. This change from data reporting to data insight generation is what makes FP&A a strategic function within the organization.

FP&A as a Strategic Business Partner

Typically, companies have begun to understand that FP&A (Financial Planning & Analysis) does not just work to produce budgets and variance reports. Companies now want FP&A to be a business partner to the business and as a result, FP&A works closely with the different functional areas to understand what their goals are and what challenges they face, while helping them to leverage financial insight when making decisions.

In order for FP&A to be a true business partner, it needs to understand the way in which each function contributes to the overall performance of the organisation. Sales teams concentrate on volume, pricing, and customer relationship management. Marketing teams concentrate on brand development, lead generation, and customer acquisition. Operations teams concentrate on efficiencies, capacity, and quality. Human Resources concentrate on talent and productivity as well as culture. FP&A needs to have an understanding of these perspectives to provide the most relevant and practical financial guidance to their respective functions.

When FP&A has a deep understanding of the business and the different functional areas within the business, its conversations with its stakeholders will be significantly more productive. Rather than asking why the numbers look like they do in isolation, FP&A will be able to discuss trade-offs, risks, and opportunities with the stakeholders. This builds a foundation of trust between FP&A and its stakeholders, and allows FP&A to be positioned as an area that creates value for the organisation rather than being perceived as a functional area that is only focused on controls.

Linking Financial Performance to Business Drivers

Identifying and understanding Business Drivers is one of the key roles of Financial Planning & Analysis (FP&A). Business Drivers are the factors that determine Financial Results. Examples of Revenue Drivers are Customer Growth, Pricing Strategy, Product Mix, and Market Expansion; cost drivers can include Production Efficiency, Supplier Pricing, Labor Costs, and Technological Development. Understanding the business very well, helps the FP&A group to be able to identify the right drivers and model them accurately. Without this understanding, the models created may turn out to be too simplistic or unrealistic. For example, creating a revenue growth forecast without knowing the Sales Cycle, Customer Behavior, and Competitive Dynamics would lead to a distorted revenue forecast. With a good understanding of what the Business Drivers are, FP&A can create Driver-based Models that will match Reality. Organizations will be able to use these Driver-based Models to run What-if scenarios, analyze Risk, and assess the Financial Impact of Strategic Decisions. This is especially important in an environment of uncertainty, where the ability to be flexible and look ahead is essential.

Budgeting and Forecasting Require Business Insight

Budgeting and Forecasting Are Important Functions of Financial Planning and Analysis (FP&A). However, they Should not Be Viewed Only as Mechanical Tasks. Proper Budgeting and Forecasting Require a Thorough Understanding of the Business's Business Plan, as Well as Operational Constraints and Market Conditions

When an FP&A Department understands its Business, Its Budgets Will Be Realistic and Aligned With Business Strategy, and Forecasts Will Represent Actual Performance Trends Rather than Arbitrarily Established Targets. An FP&A Department will Challenge Assumptions in a Supportive Manner to Ensure that Business Plans and Financial Projections Are Both Challenging but Achievable.

When a Budget is Developed Without an Understanding of Business, it Often Becomes a Top-Down Process That Does Not Reflect the Environment in Which the Business Operates, Resulting in Frequent Changes to the Budget, Performance Missed by Various Stakeholders and General Frustration. Business-Supportive Finances FP&A Will Create Budgets That Can Be Utilized as Realistic Road Maps rather than Rigid Financial Documents.

Supporting Decision-Making at the Leadership Level

Financial Planning and Analysis (FP&A) is an important support function for senior leaders in their decision-making process regarding key business activities; however, FP&A provides both financial and non-financial analysis support for these decisions.

FP&A's ability to understand the business environment allows it to present FP&A's financial forecast in a manner consistent with the business's needs. Rather than presenting FP&A in an automated manner via a series of complex spreadsheets, FP&A can articulate the financial impact of various alternatives using insights supported by both qualitative and quantitative evidence. By enhancing the quality of their decisions, FP&A can also expedite the decision-making process.

For instance, when assessing an opportunity to launch a new product, FP&A must consider the customer needs, market competition, the company’s ability to manufacture and sell the product, and marketing. Financial forecasts developed without this context can mislead senior leaders regarding their potential return on investment. Business knowledge provides FP&A with the necessary context to ensure that financial models accurately reflect strategic realities.

Improving Cross-Functional Collaboration

The FP&A department collaborates extensively with other departments, and an essential aspect of effective collaboration is for FP&A to fully understand all the other departments’ goals, constraints, and terminology. When FP&A has a solid understanding of the business, the communication process becomes more streamlined and effective.

FP&A uses this knowledge of the business to anticipate the concerns of their stakeholders and tailor their analyses accordingly. Additionally, understanding the business enables FP&A to determine where the business can derive the greatest value from financial insights. This level of collaboration and knowledge creates strong relationships and improves the alignment of the organization.

Without a solid understanding of the business, FP&A risks being alienated from the rest of the organization. FP&A will produce reports that are accurate but ultimately irrelevant to stakeholders. Stakeholders will view FP&A as being out of touch with the day-to-day operations of the business. This disconnect will weaken the influence and effectiveness of the FP&A function over time.

Enhancing Scenario Planning and Risk Management

Today, companies face an ever-changing environment due to high levels of uncertainty stemming from market volatility, regulatory changes, technological disruption, and geopolitical risk on company profit margins. With the use of FP&A, companies can develop effective strategies to prepare and be proactive in dealing with this uncertainty through both scenario planning and risk assessment.

Scenario Planning is not just about using computation to determine what may happen based on existing data. Scenario Planning must also consider how numerous factors will affect one another and the impact of all those factors will have on a business.

Having an overarching understanding of your business provides FP&A with the foundation for creating realistic scenario opportunities and evaluating their impact if they become reality. Based upon that understanding, FP&A can assist to provide management with contingency plans and guidance on risk management; without that background knowledge an organization’s ability to effectively execute its scenario planning is limited because it will be purely theoretical in nature and less practical.

Driving Value Creation, Not Just Cost Control

The majority of what we have done in traditional finance functions focuses solely on controlling costs; this includes all controllable items, such as salaries, operating expenses, and direct-to-client sales. While controlling costs is critical to any organization, there is much more that the Finance Department's role is intended to accomplish. Strategic FP&A provides additional value to the organization by identifying opportunities for revenue generation and cost savings through business investment and growth.

Understanding the business drives the success of FP&A; this will enable the organization to properly assess growth opportunities, which align with the company's strengths as well as the company's market opportunity. Business understanding will also allow for an assessment of trade-offs between increasing short-term profitability and long-term business capitalization.

When FP&A understands business operations and market conditions, it will provide the necessary support for innovation rather than stymie it. Through financial insight, revenue-generating and cost-saving opportunities are actualized.

Avoiding Common FP&A Pitfalls

The lack of understanding of the business can lead to a number of common failures in Financial Planning and Analysis (FP&A) that will hinder the ability to conduct effective financial analysis, while eroding the level of confidence of stakeholders.

a)     Common failures include:

b)    Over-dependence on past data without understanding the underlying trends;

c)     Unrealistic assumptions included in financial model;

d)    Ineffective communication of financial insight to non-financial stakeholders;

e)     Opposition from operation teams because of a perceived lack of relevance to them.

Most of these failures result from the gap that exists between finance and operations. Improving an FP&A team's understanding of the business will help to avoid these failures and produce meaningful financial insight.

Developing Business Understanding in FP&A Professionals

To develop an understanding of a business it requires an intentional process of continuous education & development; it does not happen spontaneously or without effort. FP&A (Financial Planning & Analysis) professionals need to continually seek knowledge about the business beyond just reading through the company’s financial records.

Continuous learning occurs through relationships with Stakeholders, participation in Business Reviews; understanding customer experiences; keeping abreast of Industry Trends and other functions and projects.

In addition, Organizations can foster that business acumen development by encouraging FP&A cross-functional rotations, giving FP&A the opportunity to participate in Strategic Conversations, creating an environment where FP&A & other Functional Areas are willing to work together.

This process will eventually create well-rounded FP&A professionals who have the knowledge, credibility and confidence needed to influence business decisions.

Conclusion: FP&A Is About Understanding the Business First

FP&A is much more than simply being a finance function; it is also a business function viewed through the lens of finance. To have an effective FP&A team, they must have an understanding of the business. When FP&A professionals lack this understanding, the financial analyses they conduct are not only incomplete but also fail to reflect real-world conditions.

When FP&A professionals are knowledgeable about the business, they can properly interpret numbers, identify whose actions are responsible for specific results (key drivers), assist in making strategic choices about future actions, and work collaboratively with others inside the organisation. FP&A becomes a valued partner to the business, rather than just a source of information.

Today’s businesses operate within a fast-changing environment. To be successful, organisations need FP&A professionals who possess knowledge and expertise regarding the operation of the organisation (how value is created) as well as how financial decisions affect long-term success. It is important to know the numbers, but even more important is to know the business behind the numbers.

In summary, Finance & Accounting (FP&A) requires finance professionals to understand the business because finance cannot be viewed separately from the business. Finance is there to support the business, help make decisions, and help drive ongoing success.