As a startup, you may not be ready to implement an Enterprise Performance Management (EPM) solution to use in financial planning and analysis (FP&A). But tweaking your plans, budgets, and forecasts to accurately and strategically plan your finances, is crucial in dynamic business environments.
About 73% of finance practitioners simply use Excel for most of their work, despite the availability of FP&A software. Findings from the gtnews FP&A Technology Survey, sponsored by Wdesk, find that even large established companies with more resources don’t regularly use sophisticated tools. This is mostly due to a lack of IT support.
So why should you care about FP&A? One of the main benefits is to determine the likely future outcomes of decisions made in the present. Since these are based on past performance and current actions, these can give an accurate picture of future consequences.
Sophisticated FP&A tools aside, CFOs will be your partners in gathering the right data to do bottom line FP&A. Recording every present and historical number, will enable them and/or your CFO to analyze the results. After this is done, future results will be forecasted using the information learned during the analysis.
Using this process, FP&A’s benefits will bring a startup to a whole new level of excellence. Evaluating both the positive and negative impact of decisions is essential in the success of a startup and can determine many planning components looking onto the future. FP&A also allows management to see opportunities which were otherwise missed. This is because FP&A goes far beyond spreadsheets and allows for a much more faceted look at where adjustments can be made. This includes opportunities such as reallocating resources, and operational changes. A typical FP&A covers the following areas:
- Budgets: Setting a proper budget and tracking cash flow is key to identifying and mitigating any liquidity issues that may appear on the horizon.
- Profit and Loss Analysis: ROI (return on investment) is forecasted with a close analysis of the gross and operating profit margins
- Solvency Analysis: This analysis evaluates current assets and liabilities
- Return on Capital Employed: ROCE = Earnings Before Interest and Tax (EBIT) / Capital Employed. ROCE measures a company's profitability and the efficiency with which its capital is employed
- Shareholders’ Return on Investment: The internal rate of return of all cash flows to an investor during the holding period of an investment.
Financial Planning and Analysis can seem like daunting and complex tasks for startups to undertake. After all, not too many entrepreneurs start businesses because of their passion for spreadsheets and financial analysis. If you aren’t experiencing these benefits, talk to Escalon about our virtual FP&A services, a low stress, affordable answer for your startup.