[Approximate Reading Time : 4 mins]
Many companies all over the world are navigating challenging territory, with the COVID-19 pandemic disrupting their raison d’être or, to a lesser extent, the degree of consumption of their services and products. Uncertainty bedeviled businesses in 2020; with the second and third waves of the pandemic flowing and ebbing in various parts of the world, uncertainty is the new certainty.
Given this prevailing reality, how will companies ensure certainty in business to stay afloat, sustain themselves, and thrive?
Financial Planning & Analysis (FP&A) is the answer.
Let us examine the whys and hows of this critical business function.
The role of the FP&A department is to provide accurate, timely advice to the organization’s leaders with budgeting, analysis, forecasting, financial planning, and cash flow management to ensure a company’s growth and profitability. The critical components are as follows:
- Examining the return of interest (ROI) on the company’s current investments, evaluating the best use of the working capital, and considering other options to use cash flow.
- Assessing key financial ratios, including current ratio, debt to equity ratio, and interest coverage ratio, to evaluate financial health.
- Identifying which product yields the largest net profit and which product has the highest profit margin.
- Reviewing the cost-efficiency of each department vis-à-vis the cost of running the department.
- Collaborating with different departments on their budgets and integrating them into one budget.
- Collating reports for the leadership to enable and support decision-making.
- Designing and updating financial models and forecasting future operations.
- Performing a comparative analysis of the results against budgets, forecasts, and variance analysis and suggesting improvements.
- Identifying opportunities for growth and expansion, including planning, capital expenditure, and investments, and generating five-year financial forecasts.
Role of Technology in FP&A
Companies are increasingly gravitating toward the cutting-edge technologies of artificial intelligence (AI) and machine learning (ML) to acquire a dynamic, real-time picture of data, including rolling forecasts. Fast and agile business intelligence (BI) software that allow for quick analytics on hypothetical what-if scenarios, driver-based forecasting, and self-service reporting capabilities enable the business to sustain itself and thrive better. AI and ML algorithms fine-tune prediction models toward better precision. These technologies help the company do the following:
- Get accurate data fast, to make informed strategy decisions and for future planning.
- Align financial data and strategy with company goals and make agile shifts, as and when required, to match the numbers with the goals.
- Use automated forecasting models for speedy data processing for strategy and communication.
- Empower the financial function to engage with other teams, with the benefit of analysis of business drivers and economic realities.
How does the FP&A technology ensure business certainty?
Uncertainty is the new certainty. Creating what-if scenarios to support financial planning using the capabilities of technology and business realities at play enables envisaging a plethora of certainties and accounting for such situations. Using technology to guide the company to what might happen and realigning business planning to ensure minimum negative impact on financials lends certainty, in times of uncertainty—thus, enhancing business expertise. Leveraging the best technology in FP&A allows companies to thrive in times of transformation, as they are more agile and better prepared to tackle challenges with a greater certainty of outcomes.