The Fundamentals of Financial Planning and Analysis for Startups
As a startup, you may not be ready to dive headfirst into an enterprise management software solution right out the gate. While this may be a wise approach in the early phases of your journey, it does not mean that you can disregard financial planning and analysis (FP&A) entirely.
In fact, FP&A is perhaps one of the most important business activities that a startup can undertake, simply because it can help steer strategic decisions and future operational efforts. Strong FP&A capabilities make it easier for your CFO and finance team to turn around required reports quickly and efficiently, which empowers them to perform ad-hoc feasibility assessments as new strategic opportunities arise, thereby keeping your startup agile.
Furthermore, with a rapidly changing workplace, a continuing global pandemic and economic uncertaintycausing major disruptions, now is as good a time as any to ensure that your company’s future financial health is secure.
What is financial planning and analysis?
FP&A is a collection of planning, forecasting, budgeting, and analytical processes that support a company’s important business decisions and overall financial health. With the data and insights derived from your FP&A solution, you will be able to more accurately determine whether or not your firm will be able to afford to accomplish its goals and objectives, both in the long and short term.
As a result, key decision-makers will be armed with the information they need to formulate higher-value strategies, which should increase the likelihood of success and economic prosperity.
One way to look at FP&A is the precise opposite of traditional accounting. Whereas accounting looks at historical data and gives you insights into your overall revenue and expenses over a specified period of time, FP&A is more concerned with how your future financial position should influence today’s decisions.
Of course, this is especially crucial for startups, since cash is typically scarce, and business executives must seek to make the most of the little resources they have at their disposal. Furthermore, because most startups lack access to historical financial data that can be analyzed, FP&A becomes even more critical, particularly when it comes to valuations and predicting future earnings and scalability.
Who is responsible for FP&A?
In most startups, the responsibility for FP&A typically falls on the shoulders of the founders, since it is unlikely that there is a large enough team to warrant a separate division in this early stage. However, as the company grows and begins to scale its operations, the responsibility for FP&A is usually passed on to a CFO (chief financial officer), whether that role be in-house or outsourced.
While FP&A can remain the CFO’s duty, there will come a time when growing financial complexity, increasing personnel, new revenue sources, and outside funding channels necessitate more specialized financial infrastructure. Of course, all of this is highly situational, and each startup will have its own threshold for when it may deem it necessary to establish a specialist FP&A department.
Nevertheless, when the time does come, it is recommended that you equip your workforce with an FP&A solution so that your startup can easily gather, report, and analyze financial data as it scales.
Financial planning combined with financial storytelling
One of the main advantages of FP&A software is its ability to tell stories through numbers. For most of us, making sense of complex equations and financial calculations isn’t exactly the easiest task in the world. Fortunately, FP&A software can simplify large sets of data and display them visually.
Breaking down financial data through forecasting and modeling helps create a narrative behind your finances, which can help paint a clearer picture when planning strategic business decisions.
The benefits of FP&A software for startups
Now that you have a clear understanding of what FP&A is, let’s look at some of the primary advantages that your startup will gain from utilizing FP&A tools.
- Automation – FP&A automates the majority of the complex manual computations that founders and CFOs generally must perform when forecasting and constructing financial models. Not only does this automation free up significant amounts of time that can be devoted to other duties, but it also eliminates the possibility of human error.
- Business-wide insights – FP&A software frequently contributes to increased insights that would have been overlooked in the absence of a data-driven, automated approach. Your operational and financial data can be used in tandem to generate precise and comprehensive business-wide insights through every facet of your operations, including sales, customer relationship building, and marketing.
- Increased collaboration – FP&A technology helps firms break down the data silo culture that exists across many organizations. This is because FP&A software views budgeting, forecasting, and reporting as a cooperative effort that comes together to integrate insights from across the company. This is something that could prove extremely beneficial to a startup.
- Future proofing – FP&A software enables you to develop strategies that help future-proof your startup by allowing it to continue operating (as normally as possible) regardless of the conditions. Your tools can assist your company’s decision-makers to implement the most beneficial, cost-effective, functional, and long-term solutions. Some programs even allow you to create a rolling forecast that enables constantly updated planning.
FP&A is non-negotiable
With the aforementioned capabilities and benefits in mind, it’s easy to see why many people regard FP&A capabilities as a must-have for startups. Aside from providing an element of financial stability, FP&A will support you in gaining a competitive advantage by boosting efficiencies in operations and capital utilization.
In turn, this can lead to higher startup valuations and improved access to talent, both of which can be critical to your firm as it scales and looks to expand its operations.
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