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FP&A

The FP&A training material outlines the financial planning and analysis process, emphasizing the evaluation of economic conditions and the financial health of a company through liquidity, leverage, and profitability. It differentiates between budgeting and forecasting, detailing various budgeting techniques such as incremental, activity-based, value propositioning, and zero-based budgeting, as well as forecasting methods like moving averages and regression analysis. The document serves as a guide for financial analysts in monitoring financial models, analyzing trends, and making informed decisions for capital budgeting and operational planning.

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0 views3 pages

FP&A

The FP&A training material outlines the financial planning and analysis process, emphasizing the evaluation of economic conditions and the financial health of a company through liquidity, leverage, and profitability. It differentiates between budgeting and forecasting, detailing various budgeting techniques such as incremental, activity-based, value propositioning, and zero-based budgeting, as well as forecasting methods like moving averages and regression analysis. The document serves as a guide for financial analysts in monitoring financial models, analyzing trends, and making informed decisions for capital budgeting and operational planning.

Uploaded by

Singh
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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FP&A Training Material

FP&A Process

 Study current economic state of market, industry, company.


 Evaluate profitability, Viability, stability of the organization.
 Present results as easy to understand process.
 Helps in making decision i.e., Investments, Purchase or sale of shares and stock. Starting new
projects, sales mix.

Elements of financial health of a company

 Liquidity- Ability to meet the obligations.


 Leverage- Investment strategy with borrowed money
 Profitability- profit or loss position with profitability ratios

Responsibility of Financial Analyst

 Monitor or create Financial Model


 Identify and analyze trend related various document and recommend action.
 Helps to make decision for Capital Budgeting, expense and revenue Planning
 Forecast P/L and Cash and compare with actuals & analyze the variance

Budget

 A plan for what Business wants to achieve


 Detailed representation of the future results i.e. Financial position, P/L & Cash Flow that
management wants Business to achieve during a certain period of time.
 It is created for the whole year but can be updated on certain period i.e. after H1 close.

Forecast

 Forecast is an estimate of what will be achieved.


 Forecast is limited to revenue and expenditure
 Usually there is no forecast for financial position but it’s created for Cash flows.
 Forecast may be used for short term operational planning

Budget vs Forecast

 Budget is a plan where business wants to go, forecast is indication where Business is going.
 Forecast is more useful which gives snapshot of actual circumstances where as Budget is
fixed for the entire year based on historical data.
 Forecast can be used to take immediate action while budget information is used for the long
run.

Budgeting Techniques

 Incremental budgeting
 Activity based budgeting
 Value propositioning Budget
 Zero based Budget

Incremental Budgeting: Incremental budgeting takes last year’s number. Then add or subtracts a
certain percentage based on historical data which then gives current year’s budget.
Pros- It is appropriate when primary cost driver does not change year to year.

Cons- It neglects the effects of high inflation for certain costs so it does not give correct a picture.

Activity Based budgeting: This is top-down budgeting approach.

In this process we consider the amount of inputs required to support output set by the company.

Need to determine the activities that needs to be undertaken to meet the sales target and then find
out the cost of carrying out those activities.

Value Propositioning Budgeting Three questions are focussed in this budget:

1. Why is this amount included in the budget?


2. Does the item create value for its customers, staff & stakeholders?
3. Does the value of the item outweigh it’s cost?

Zero Based Budget Most used method.

Stress with assumptions that all department budgets are zero and must be rebuilt from the scratch.

Managers should be able to justify every single expense.

It’s tight and aiming to avoid any overall expenditure that are not totally essential.

Forecasting

Forecasting is a technique that uses recent historical data as input to make informed estimates.

These estimates determine the direction of future trends.

Business uses forecast to determine how to allocate their budget and plan for anticipated expenses
for upcoming period.

Forecasting Techniques:

 Straight Line method


 Moving Average
 Simple line regression
 Multiple line regression

Simple Line method: It’s a simplest and easy to follow forecasting methods.

Financial analyst uses historical data and trends to predict future revenue growth.

First, we have to determine the sales growth rate that will be used to calculate future revenues.

For previous year, the growth rate was 4.0% based on historical performance. Assuming the growth
will remain constant in to the future, we will use the same rate for our all forecast.

To get current year forecast future revenue, take the previous years figures and multiply it by growth
rate. Previous Number * (1+D5)

Moving Average

This method is used to create short term forecast.


Moving Averages that looks underlying pattern of a set of data to establish an estimate of future
values. The most common types are the 3 month and 5 month moving averages. Called rolling
forecasts too.

The 3-month moving average is calculated by taking the average of past 2 months revenues.

The 5-month moving average is calculated by taking the average of last four months revenues.

Simple Linear Regression

Regression analysis is a widely used tool for analyzing the relationship between variables for
prediction purposes.

It will be done in excel either via formula or via chart. To create chart, gather the historical data
create chart and use forecast function in excel.

Another method is to use the equation of the regression line.

Multiple Linear Regression

A company uses multiple linear regression to forecast revenues when two or more independent
variables are required for a projection.

We must run a regression on those independent variables (i.e. promotion cost, advertising cost,
revenue to identify the relationships between these variables)

Go to Data tab-> Data analysis-> Regression

There will be a summary that will have coefficient and using that coefficient from the table, we can
forecast the revenue with the given promotion cost and advertising cost.

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