If you are a small business owner, the workings of large companies can often seem abstract and irrelevant. Big corporations have enormous resources and large staffs to dedicate to everything from research and development to marketing and sales. Small business owners, by contrast, are accustomed to shouldering multiple responsibilities and stretching budgets to the limit.
But in certain cases, the functioning of big companies offer valuable lessons small companies could do well to emulate. For example, many large companies dedicate people from across their organizations to the task of financial planning and analysis, or FP&A.
At its most basic level, FP&A is a company health checkup and wellness plan. FP&A involves gathering and analyzing data about a company’s current performance – for instance, what products are selling best and are growing in demand – as well as its most encouraging prospects. FP&A is the process used to develop budgets, sales forecasts, and to assess company profitability. FP&A is also an essential tool to guide a company’s most important strategic decisions, including the need to release new products and services, cut costs, or target a new geographic market.[1]
FP&A Can Be a Strategic Advantage for Small Businesses
At first blush, FP&A may seem like an indulgence of time and resources that small business owners can’t afford. Owners already more than fill their days with the tasks that go into keeping their customers and employees happy. Can FP&A deliver enough value to make it worth the time?
The short answer is yes. Indeed, FP&A provides information that small business owners can use to deploy limited resources, identify areas of inefficiency, and pursue new opportunities to become more successful and financially sustainable. In fact, FP&A done well can drive outcomes that meaningfully improve the current performance and future growth of any small business, including[2]:
Additional funding and investment
Small businesses don’t lack transformative ideas, products, and services. What they do often lack is the money to develop and commercialize great ideas and bring them to market. Outside investors can provide the capital small businesses need to grow and become more profitable. But outside investors need to be confident that they are investing in a strong and efficient company that can earn a return on their investment. FP&A provides the information that investors will want to review as part of their normal due diligence.[3]
More efficient resource allocation
Small business owners live by the mantra of doing more with less. Often, however, decisions about where cuts and investments are needed are made based on hunches and limited information. FP&A changes that. In fact, the budgeting process that goes into FP&A leverages historical data and forecasting of upcoming expenses that small business owners can use to make the most productive use of their limited resources.
Establishing business goals
Even the most harried and overstretched business owner knows the importance of setting tangible and time-based business goals. It’s hard to know how to dedicate employee and financial resources if you aren’t clear on what you’re trying to achieve. The full financial picture of expenses, sales, and profits that comes from FP&A helps entrepreneurs and small business owners set realistic goals around revenues, market expansion, and profits.
Optimized budgeting and cash flow management
Ask small business owners what they think and stress about the most and the answer is likely to be cash flow. Ensuring that enough money is coming in to continuously meet payroll and expenses while still making critical investments in a company’s growth is a constant source of angst. While FP&A on its own won’t solve cash flow worries, the process that goes into it will give small business owners the information they need to pinpoint when they can expect cash flow gaps. This provides time to find the most advantageous solutions to fill them, rather than scrambling to fill the gaps with expensive capital.
Mitigate risks
Running a small business means living with lots of uncertainty about market conditions, changing consumer demands, and the overall state of the economy. FP&A can help surface those uncertainties and allow businesses to develop contingency plans and strategies to reduce or respond to risks.
The Three Basic Steps of FP&A
The advantages FP&A can deliver to a small business are many. But how do you do it? There are three essential steps[4]:
- Collect and validate data Complete and accurate information is the foundation of FP&A. Unfortunately, most companies can’t just press a button and view their sales forecasts, cash flow and income projections, and other business-critical information in one place. Big companies involve teams from across the organization to collect the information that goes into FP&A. Small companies can have an advantage because the data may be more readily accessible – if they maintain good records and use systems that allow data to be extracted easily. Gathering and checking the accuracy of company-wide data is the first step in FP&A.
- Financial forecasting and budgeting Translating data into actions and decisions is step two in FP&A. Budgets allocate resources over set periods of time – usually one year – but should be made with the understanding that conditions change. Which is why budgeting and forecasting of expenses and sales should incorporate best-and worst-case scenarios and have flexibility to adapt.
- Variance analysis and revisions The final step of FP&A is like balancing an equation in math class, albeit with budgets and forecasts. Variance analysis is just another way of saying pinpointing data discrepancies. For example, your budgeted expenses may be greater than your sales forecasts, which will mean you need to find ways to close that gap.
The Future of FP&A
FP&A is ultimately an exercise in collecting and analyzing data. Which is why it’s no great surprise that FP&A is likely to be transformed by artificial intelligence (AI) and machine learning (ML) – both of which excel at ingesting huge amounts of information and quickly spotting trends and producing insights. This is a particularly promising FP&A development for small business owners who don’t have the time and staff to exhaustively pore over data.
Another technology advancement that can make FP&A more efficient for small business owners is cloud computing, which makes it easy to share gather and analyze data across an organization. Easily accessible information also helps small businesses perform ongoing, real-time FP&A because data is always instantly available. Access to real-time information lets businesses react more nimbly to emerging risks and opportunities.[5]
Small business owners should think of FP&A as an opportunity to take stock of how their company is performing and what actions can bolster its prospects. To get started, consider how data is collected and shared in your company. Do you rely on Excel sheets and paper? Or do you utilize a cloud-based ERP? FP&A will be more efficient and quicker to begin if you have a cloud-based ERP.
But the reality is that the insights and understanding that flow out of FP&A make the process worthwhile regardless of how you record and share information. You just have to commit to the process and get started.
