How business owners use FP&A to make better financial decisions?
Most business owners know their numbers, but not what those numbers mean for their next move. They ask questions about what happened in the past and forget to use that information to plan for the future. My payroll expenses are up 20%, but my revenue only grew 5%, so what now? FP&A aims to answer the “so what now” part of the question.
What is FP&A?
Financial Planning and Analysis turns raw numbers into decision making insights. It analyzed the changes that happened month over month, year over year, and same month last year but also gathered insights into why those numbers are different and what happened. Once we gain those insights, we are able to better navigate what we want to do next. For example, in April last year we did double the revenue than April this year. We know we launched a special marketing campaign in March that drove results (we know because we tracked those numbers), but we failed to do a similar campaign in March this year. With that information, we now know that we need to focus on developing a similar campaign in May that should help yield similar or better results in June. FP&A helped uncover the reason those results happened and how to best replicate them as we plan forward. This is the power of FP&A in your business.
How to use FP&A in your business?
Most business owners track lots of data but never do anything with it. They see it as a checklist task, I review my data and they move on to the next thing. Data can be powerful if we track it for a specific purpose. We are trying to improve utilization % by 5%. First we benchmark the current state, then we implement some changes like discuss process improvements with the team, focus on improving follow up, etc. Then, we check 30-days later to see if the metric improved or got worst. The chances are that you improved your outcome in the right direction. This moves you from reacting to what already happened and puts you in control of what you want the result to be. This proactive planning plus visibility, helps business improve and navigate challenges before it is too late.
How to make better decisions using FP&A?
One of the ways we use FP&A is by implementing scenario planning. Before we make business decisions, we outline the pros and cons of a financial outcome. What needs to be true for this to go well? What are the risks? How can we prevent them? What data do we need to make sure we are on track? You do all this scenario analysis and planning before making the decision to gain insight into what the financial gain or loss might be of a given business decision. This prevents us from going the wrong way financially and highlights if a decision can help improve our financial situation.
We use scenario planning for hiring decisions, pricing decisions, working capital needs, understand which lines of product or services are actually profitable, etc.
New to FP&A? Reach out for a free consultation on how we can help you put it to work in your business.