Financial Planning and Analysis in Corporate Finance

Most companies strive to achieve business growth and increase profits. It can be challenging, however, to determine which decisions will lead to the best financial outcomes. For instance, senior executives may wonder if it would be worth it to purchase new equipment that may improve operations or expand into a new market. This uncertainty about the company's major business decisions can lead to conflict among decision-makers and poor strategic planning.

Financial planning and analysis (FP&A) addresses these challenges by providing a systemic, data-driven approach to risk assessment and decision-making. It’s a process designed to help companies use their capital and resources as effectively as possible.

Read on to explore key elements of financial planning and analysis.

According to the Association for Financial Professionals (AFP), the goal of financial planning and analysis is to “optimize the use of capital and resources by supporting business decisions.”¹ The process aims to create a strategic plan “that coordinates the company, can be measured, and can be checked.”¹ Forecasting and budgeting are key parts of this endeavor.

The National Center for Education Sciences defines financial forecasting as, "the practice of projecting the quantitative impact of trends and changes in the operating environment on future operations. It is an integral part of all ongoing planning efforts."² Financial professionals use forecasting to predict future trends in the business’s operations and overall market. These predictions help analysts decide how to allocate resources when creating budgets, which are also known as financial plans.²

Also called investment appraisal, capital budgeting is the process used to determine which long-term investments are worth pursuing. Companies use this method to calculate the potential risks and benefits of developing new products, building new facilities, and making other significant capital expenditures.³

The AFP notes that, “FP&A drives strategic business decisions across [an] organization through integrated planning and forecasting, performance management and financial analysis.”¹ This approach offers insights into resource allocation and investments, and allows companies to align their financial and operational goals with their missions.

In financial modeling, mathematical formulas and predictive analytics can help forecast a company’s future performance. Analysts can create multiple financial models to predict the outcomes of different decisions and scenarios.⁴

As described by the AFP, the models most commonly used in FP&A include:⁴

• Three-Statement Financials, which yield an expected income statement, a balance sheet, and a cash flow statement (sometimes called a pro forma), and is used to see a company's holistic impact or expectation
• Discounted Cash Flow (DCF): a valuation analysis model that estimates the current value of future expected cash flows of an investment, decision, operation or asset
• Consolidation, which combines the financial statements of multiple business units into one single entity: the finance teams in disparate parts of a company will develop their unit models and submit them to the corporate FP&A team for consolidation
• Budget: an aspirational performance plan which is often used for setting corporate and divisional targets and spending allocations as a means toward meeting overall goals and objectives
• Forecasting, which is the best, realistic estimate of expected performance based on historical data, the current situation and expected actions
• Sum of the Parts (SOTP), which allows the model-builder to determine what the company’s individual business units would be worth if they were purchased by another entity

Real life is often unpredictable, so a company’s financial performance doesn’t always align with financial forecasts. Analysts use variance analysis to calculate the difference between projected and actual performance numbers. This method enables businesses to identify deviations and investigate their root causes.⁵

Companies use long-term financial planning to make projections and decisions over a multi-year period. This process involves predicting expenses, revenues, trends, risks, and other factors affecting a business’s financial health. Long-term financial planning lets senior management anticipate future obstacles and create a roadmap for growth.⁶

Sales forecasting uses current and historical financial and operational data to analyze sales patterns and predict future trends. This forecast considers many factors, including previous revenue, market dynamics, and the economy. Analysts use sales forecasting to identify growth opportunities and set goals for moving a company forward.⁷

Key performance indicators (KPIs) are tangible measurements that allow business leaders to monitor their progress toward financial objectives. Finance professionals track many KPIs, such as:⁸

• Average conversion time
• Number of new leads per month
• Customer retention rates
• Website traffic
• Social media engagement

KPIs should relate directly to a company's goals. For instance, if a business unit wants to increase sales, it may track advertising and customer retention data.

Corporate financial analysts use two calculations to evaluate the value of investments over time: net present value (NPV) and internal rates of return (IRR). NPV estimates the value of all future cash inflows and outlays over an investment’s lifetime discounted to the present. IRR calculates the compound annual return the company will earn over the asset's lifetime.⁹

Companies face many risks to overall financial health, such as economic downturns and legal problems. Analysis professionals can use risk assessment to identify financial risks and develop mitigation strategies. Risk assessment involves several key components:¹⁰

• Identifying potential threats to the business’s financial health
• Quantifying the likelihood that risks will occur and their impact
• Evaluating and prioritizing risks
• Making strategic decisions to manage risks

Financial analysts frequently use digital tools to streamline and improve the accuracy of FP&A. Professionals can use artificial intelligence (AI) and machine learning (ML) to perform advanced analytics and automate routine tasks, such as creating forecasting models. Data visualization software and interactive dashboards also allow analysts to explore and represent data in visual formats.¹¹

Finance professionals must often explain business performance, economic trends, complex financial concepts, and insights to business leaders and stakeholders. For this reason, analysts need outstanding communication skills. In addition, these techniques help them tell compelling stories with data:¹²

• Use simple, jargon-free language
• Anticipate stakeholder concerns and address them preemptively in reports and presentations
• Use data visualization tools to show company performance in recognizable graphic forms—tables, pie charts, bar graphs, heat maps, and so on
• Keep the presentation focused on key metrics instead of trying to cover all data gathered on the entire organization

Financial analysis supports many aspects of corporate strategy. Business leaders can use the insights gleaned from this process to make informed decisions about:¹³

• Mergers and acquisitions
• Investments
• New products
• Risk management

Financial planning and analysis can help businesses comply with federal and state regulations. Analysts often prepare financial statements and other reports for regulatory bodies. For example, the United States Securities and Exchange Commission (SEC) requires businesses to file quarterly and annual reports about their financial activities.¹⁴

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