Tips For A More Effective FP&A Process
Every business needs a solid detailed financial framework to help them plan, build and grow. It is foundational to business success - especially for small and mid-sized firms who are often resource constrained . From understanding business building blocks, to developing targets to tracking and reporting on performance, a planning and reporting process should be a virtuous circle. Some tips to keep it on track.
Be realistic and scenario plan– many budgets and business plans come undone (usually early in the process) as a result of faulty assumptions. While it would be nice to think you will have steady revenue every month, or your total expenses will always grow minimally or there will never be a need for administrative fees etc., building in unrealistic assumptions into a financial plan can put undue stress on a business. Constructing models with high-mid-low scenarios is an effective tool to evaluate possible upside or downside surprises into your thinking and save you much angst down the road
Build plans you can effectively report against – building an incredibly detailed, multi-layer budget when you only only have a rudimentary reporting tool can be a waste of resources as you may not be able to track all that detail effectively. Conversely, building only a very high level summary budget (which is not great in itself) when you have the ability to report in granular detail can be a missed opportunity to gain insight. The appropriate level of detail will vary from company to company and will change over time as a business grows and matures. The overall key for is to strike a balance in your budgeting and reporting that allows you to manage and analyze your business effectively as possible with the tools you have
Revisit and update– avoid the set it and forget it approach. A financial plan is developed at a point in time. As you move forward new information and circumstances will come into play that may alter your thinking and financial outlook. Updating assumptions and re-forecasting as needed is a critical piece of business management. Success is as much about looking forward and adapting as it is comparing to a set of original assumptions.
Develop a reporting cadence – it is striking how many small business that rarely generate consistent financial reports. Not only in terms of timing but also in terms of content. I will often hear “we don’t need them”, “we have a handle on the business” or “we can do one next quarter etc.”. Any and all of these are poor reasoning. Not generating (whether from staff or an outside resource) at least basic monthly reporting of the income statement. balance sheet and cash flow is an unforced error and can lead to significant issues. Getting into into a rhythm is critical to managing performance efficiently. A key component is developing a financial calendar which lays out what information is due when, and which financial reports are to be generated and presented on what date. This both level sets expectations while installing the financial discipline that will serve a company well as it grows.
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