Financial Planning and Analysis (FP&A) for Small Businesses

We know that 82% of businesses fail due to poor financial management. Small business owners need a process to analyze financial statements, and many factors must be considered. Understanding your business’s financial reporting and analysis procedure is critical for making the right decisions.

Financial Analysis and Planning (FP&A) helps startups and growing businesses navigate their uncertain journey. With accurate accounting and reporting, the finance team can uncover data-driven insights to help management make swift changes or tweaks. Your company’s financial position and net income demonstrate your actual results.

For example, regularly conducting budget variance analysis to actual figures can help reallocate budgets mid-cycle. Decision-making on particular line items such as revenue, short-term liabilities, and debt cost are actions most companies do not make throughout the cycle.

Maximizing cash flow is critical to balance sheet growth and operational performance. Your business will never unleash its growth potential without the proper financial management tools and resources.

How To Improve The Financial Reporting Processes

To improve your financial reporting process, you must understand your current situation and the steps you take to get there. The historical performance will drive your projections, and internal analysis will drive your reporting.

As a firm, your financial reporting helps allocate resources such as cash, future revenue, and costs to the appropriate profit center. Your company looks to financial analysis for financial information around liabilities, profitability, and intrinsic value.

You can do this by:

• • Understanding the current state of your reporting system. Evaluate the strengths and weaknesses of the current system before making changes.

• • Look at every aspect, from how data is collected to how information is presented in reports or presentations; don’t forget about things like time spent on manual processes, such as data entry or formatting documents.

• • Improving the efficiency and effectiveness of each step along this chain by using technology where appropriate (and not just because it’s cool). Knowing which tools will make your job easier means being able to choose wisely when purchasing new software – don’t just buy whatever comes up first in an online search engine result.

• • If possible, seek advice from experts who’ve already been through similar processes themselves – they’ll be able to tell whether certain features are worth paying extra money for because they’re helpful rather than just being marketed as such (which happens too often).

• • Research to see what competitors are doing. Also, locating industry standards can help you understand what is normal. Financial reporting with generally accepted accounting principles is standardized with online accounting software.

What is the Most Important Factor in Financial Statement Analysis?

The most important factor in financial statement analysis is understanding the business. If you are unfamiliar with the industry and its operations, you will have difficulty analyzing any company’s financial statements.

Before making any conclusions about its health or success, you must also understand what each number on the income statement means. Accordingly, understanding industry benchmarks and current market performance will help you assess current health relative to your firm.

Understanding accounting principles is another critical skill for analyzing financial statements. Accounting standards vary from country to country and even within regions of one country; therefore, it helps if you know which accounting standards apply at your firm’s location to better evaluate its numbers against those standards (and vice versa).

What are Financial Analysis Techniques?

Financial ratios can be used to gauge the effectiveness of a company’s management and to compare it with other businesses in its industry. The most common types of financial ratios include liquidity, market value, activity, profitability, and efficiency ratios. FP&A helps you identify and track your business’s key drivers and provide insight into how well those drivers perform.

• • Liquidity Ratio: demonstrates your ability to pay off financial obligations with current assets easily converted to cash.

• • Market Value Ratio: used with publicly-traded company stock to assess current share price

• • Activity (Efficiency) Ratio: measures how efficiently assets are converted into cash

• • Profitability Ratio: demonstrates how much profit is generated compared to expenses, equity, or assets

Financial reports contain financial data and analysis demonstrating your company’s liquidity, financial health, and future performance projections. Without consistently evaluating your financial statements, your company’s performance can diminish, hurting your financial position.

How Can Financial Statement Analysis be Improved?

There are two main techniques for financial analysis: top-down and bottom-up. The top-down approach looks at the broader macroeconomic environment. At the same time, the bottom-down approach looks at various components of company-specific factors like the balance sheet, profit and loss, and supply and demand.

Your company’s ability to conduct accurate financial reviews and evaluate key performance indicators will improve your analysis to drive future growth. The cash flow statement will guide management’s discussion around net income, cash flow, and allocation of free cash flow.

The balance sheet analysis will examine your company’s assets, financial position, ability to reduce debt, and increase assets. Without a strong balance sheet, your company will have limited investment opportunities.

Understand Your Financial Reporting and Analysis Process

The first step in improving your financial reporting and analysis process is understanding how it works. You need to know where your business excels, where it could use improvement, and what you need to do better.

• • Understand the current financial reporting and analysis process.

• • This includes knowing what data is collected, how it’s measured, who collects the data, and when they collect it (e.g., monthly or quarterly)

• • How long after collecting before this information gets into your hands as a manager or owner of the company (and whether that’s too long) if any gaps between collection points could reduce the accuracy/quality of results if not filled in by hand later on downstream.

A key element of financial reporting is analyzing historical data. Did we generate more revenue this quarter than last year? Other key factors in financial data are vertical and horizontal analysis.

The horizontal analysis examines financial results over multiple periods or multiple operating business units. The vertical analysis examines only one period and compares line items such as net sales, accounts receivable, cash flows, and current liabilities.

Improve Your Reporting System

The first step to improving your reporting system is to assess the current one. Your company’s financial reports either hit the mark or fall short. Several factors can be considered when evaluating your reporting system:

• • Efficiency: How easy is it for employees to use? Are there any processes in place that are time-consuming or inefficient? Can these be simplified or automated? Administrative costs increase when your systems create more manual work for the financial analyst.

• • User-friendliness: Is it easy for non-technical users (like managers) to understand what’s going on with their data and make decisions based on it? If not, how can we make things clearer without sacrificing accuracy or security?

• • Reliability: How often does something break down, who fixes the problem when it does, and how long does this take–and then how long do they take before they get back up?

The Financial Accounting Standards Board (FASB) works to establish GAAP within the United States. Your financial statements, including income and cash flow statements, must comply with such standards. Public companies have advanced technologies that keep up with constant changes. Your company’s financial position can improve by ensuring your reporting system meets modern standards.

Get Advice From Experts

If you are not an expert in financial matters, it’s essential to consult with someone who is. Many professionals can help you get the most out of your data and analysis.

• • Work with a Fractional CFO. A financial executive can help combine the strengths of your CPA firm and provide a financial analysis. If your business is ready to scale, work with a CFO. This will save you time and money.

• • Consult a financial advisor. A certified financial planner (CFP) is trained in all aspects of personal finance, including investment planning, retirement planning, and tax management. They may also have experience working with small businesses or nonprofits on their accounting needs.

• • Consult a financial analyst/manager/expert/consultant. These professionals often specialize in specific industries, such as healthcare or manufacturing so they know exactly what information needs to be reported for those industries’ unique regulatory requirements and reporting formats such as international financial reporting standards (e.g., IFRS vs GAAP).

More to read here: Top Financial Mistakes Small Business Make

What to do next?

If your small business needs help with financial planning, our team is ready to provide a free consultation. Do not wait any longer to keep reacting as problems arise in your business. Develop the infrastructure to manage your financials in real time with a fractional CFO.

Contact Westport Business Management today for your free consultation.