Businesses following FP&A best practices have a leg up on the competition who aren’t. Financial Planning and Analysis (FP&A) involves scrutinizing financial data and creating a roadmap to achieve financial goals during uncertain economic times.
But FP&A best practices involve more than just preparing financial statements and reporting on fiscal success. FP&A Professionals analyze financial data to identify risks and opportunities, create action plans, and build the company’s path forward.
Only some startups have a dedicated FP&A function. This article explores the importance of FP&A skills, what to measure, and how to implement FP&A best practices for your startup.
There are many ways to handle FP&A in your business. Because it can form the cornerstone of any startup’s financial management, it’s worth understanding what the best are doing. Below are several best practices that can serve as a roadmap for managing your business’s finances while making informed decisions that lead you toward your strategic goals.
A solid financial model and forecast involves realistic budgets and forecasts built on accurate current and past financial data. Your economic basis should let you identify trends and patterns that help shape future projections.
Hence, solid FP&A should analyze accurate and quality financial information, including financial statements, cash flow reports, and other relevant financial data. These tools give a comprehensive overview of the startup’s financial health.
After gathering all relevant information, professionals can make reliable forecasts that balance expenses and revenue while considering market conditions, trends, and opportunities.
A budget informs your startup’s overall strategy. It should align with long-term goals and create a path for achieving these objectives. Each expense or revenue projection should serve a purpose.
A reasonable budget also considers upcoming trends. The team gathers data about each department to understand what drives revenues and how to allocate investments. After defining your budget, the team sets and updates key performance metrics to track your progress.
Of course, financial analysis is much more than a one-time event – it’s an ongoing process that calls for regular budget monitoring and variance analysis.
Regular reviews and budget assessments allow you to adjust the course as required and ensure progress toward your financial objectives.
Effective FP&A involves tracking and analyzing KPIs. Common KPIs include profit margins, revenue, return on investment, and other indicators.
Selecting financial metrics that fit your business gives valuable insights into your financial performance.
For example, revenue growth provides insight into the startup’s sales performance. At the same time, other metrics, such as profit margins, offer insights into the startup’s profitability. Return on investment (ROI) and return on capital employed (ROCE) metrics can measure the startup’s profitability against its relative cost.
Analyzing these KPIs goes a long way toward informed decisions based on data-driven insights. Moreover, the metrics evaluate the effectiveness of financial operations and strategies.
Scenario analysis is a tool that businesses use to evaluate the impact of different scenarios and mitigate risks. For example, you can identify potential risks within the business environment and formulate a response strategy to combat any arising challenges. Or, you can model how you would cope with a massive increase in sales.
These various scenarios can help in identifying risks and coping with contingencies to mitigate them.
The money moving into and out of your company is called cash flow. Managing it well requires solid planning and forecasting.
Cash flow management involves predicting future estimated cash flows based on sales, investments, and other business situations. In other words, it helps assess whether you expect a surplus or shortfall in cash.
Limited cash flow control can paint you into a corner and force difficult decisions to cover bills, thus leading to financial difficulties.
Effective cash management is a good predictor of financial health.
There are a lot of FP&A tools on the market that can seamlessly merge with your accounting stack. The important thing is to pick one that fits your business model and your industry.
A fitting FP&A technology helps businesses reduce unnecessary effort. It brings efficiency so you can make informed decisions regarding investments, hiring, capital expenditures, and overall strategy.
FP&A best practices help startups understand and employ critical concepts in a robust financial framework supporting their strategic objectives. But getting there on your own can be a challenge.
Fortunately, advice from seasoned FP&A professionals can get you off on the right foot. FP&A is a strategic tool for making informed decisions while managing resources to drive growth and profitability. At Founder’s, we understand the complexities of startup financial planning and analysis. Our team of experts can help you implement the best practices while navigating a complex financial landscape.
Contact us today at Founder’s to get started!