The role of FP&A and how it is evolving with AI

The role of FP&A and how it is evolving with AI

Guest Post: By Dhosjan Greenaway-Dalini

The goal of Financial Planning & Analysis (FP&A) is to align business operations with the financial goals and overall strategy of the company.  Its role in strategic planning is critical for all businesses.

What is FP&A?

FP&A tackles two critical questions that all business leaders and finance teams should ask.
1 - What are the factors that affect the company's chance of survival and growth?
2 - What levers do I have to influence them?

Traditional tools and methods frequently suffer from inefficiencies and inaccuracies, leading to significant gaps in forecasting, cost analysis, cash flow management, budgeting, and scenario analysis. The potential transformative impact of AI on FP&A, makes it a critical tool for robust decision-making.

In smaller companies, everyone in finance and accounting touches FP&A. Founders in early-stage companies cover this role themselves.  However, in larger organisations, you may have an FP&A Manager reporting to a VP of Finance or CFO.  FP&A specialists are often referred to as finance business partners. FP&A acts as a bridge between the finance department and other business functions, ensuring that financial data and insights are effectively used to inform strategic business decisions.

A core component of FP&A in any business is the financial model, which serves as a roadmap for decision-making and financial planning.  It incorporates analysis, planning, forecasting and reporting. Simply put, the financial model outlines a business strategy in monetary terms.

Historically, FP&A and financial modelling has involved labouring away with spreadsheets and struggling to understand cost and revenue figures within traditional accounting software systems.  Teams have routinely spent countless hours worrying about the implications of thousands of transactions and their impact on business survival and growth.  Many of these tools are not designed to handle the complexity and volume of data that modern businesses generate and are required to analyse.  This limits the ability of FP&A professionals to explore different scenarios, understand the drivers of costs and revenues, and provide meaningful insights for strategic decision-making. Instead of spending their time on value-added analysis and insights, time is lost on manual data manipulation, error-checking, and report generation. AI provides founders and finance professionals with insights to navigate business challenges, understand factors impacting survival and growth and leveraging strategies to influence them.

The evolution of FP&A with AI

So how can AI improve FP&A activities? Let’s assess this through the lens of a selection of key activities within FP&A, also noting the goal of these activities.

Revenue Streams
Goal: To map out all potential sources of income for the business.

AI opportunity: With an ability to quickly analyse market trends and large data sets of historical information (including customer segmentation data and customer sales activity), businesses are better able to understand their customer profile, unit economics and profitability. We now have the capacity to quickly identify subtle patterns and correlations that are hard to detect with the human eye.  Additionally, real-time analysis of revenue streams allows FP&A professionals to easily adjust forecasts and strategies based on current customer activity and market conditions. This agility is key in volatile markets and industries.

Cost Analysis
Goal: To explain the fixed and variable costs that impact revenue and operations.

AI opportunity: AI can be used to automate the process of categorising and tracking expenses. By interpreting invoices, receipts, and other financial documents, there is an automatic reduction in manual entry errors and frees up time for founders and finance teams to focus on value-added activities. Additionally, as in the revenue stream example, AI models can more accurately predict future costs based on historical spending trends and evolving market conditions. This allows companies to anticipate cost increases or identify potential savings, factoring in potential spikes or declines in revenue. As such, proactive cost management is empowered with tactics including renegotiating supplier contracts or evaluating your operational and production processes.

Cash Flow Management
Goal: To show a realistic projection of a business’ cash balance over an extended period of time, ensuring there are sufficient funds to cover the outflows required to conduct business activities.

AI Opportunity: Through real-time monitoring and analysis of cash flow data, AI proactively and quickly identifies trends and anomalies.  Businesses will instantly be able to see how their operational decisions affect their cash flow.   This allows companies to mitigate risks before they impact financial stability.   Additionally, recommendations on the best timing for accounts receivable and payable, as well as on managing inventory levels effectively, will optimise working capital. This ensures that cash is available when needed and is used efficiently.

Budgeting Process
Goal: To set realistic financial plans that reflect both the business's goals and its current financial state.

AI Opportunity: Through accelerated data collection and integration, AI can consolidate and analyse data from diverse internal and external sources, reducing manual entry and the potential for errors.  The assimilation of historical data and predictive analytics enables better forecasting of future financial activity. This facilitates the prediction of revenues, expenses, and other financial metrics with greater precision, enabling more effective budget planning.  Another time saver is the ability to quickly surface real-time analytics regarding clients and projects that are most profitable, allowing for better allocation of limited resources.  As such, budgeting decisions are based on comprehensive and up-to-date information.

Scenario Analysis
Goal: To assess multiple financial scenarios based on different variables, to understand the potential impact on the business. These variables range from internal business changes to macroeconomic conditions.

AI Opportunity: AI-powered tools can quickly generate and analyse multiple financial scenarios based on various internal and external factors.  Rapid testing of different assumptions and seeing the potential impacts on the budget, enables a much faster method of ‘What If Analysis’, crucial when assessing the impact of changes in business outcomes.  For example, it allows you to instantly answer questions like “If marketing costs increase by 20%, what is the impact on revenue, cost, profitability and cash flow?” Additionally, it helps you to define the best case, worst case and likely scenarios, as well as empowering leaders to plan for market volatility.  Businesses can readily evaluate potential risks and outcomes more efficiently, leading to better-informed strategic decisions.

In summary…

Whoever owns the function of FP&A in a business has the role of a storyteller - using financial data to tell the story of where a business has been and where it’s going.  As a business partner, they are accountable for providing stakeholders with reports and insights that give a realistic and contextual view of the current state of business operations, as well as a forecast of the likely future, factoring in marketing conditions and potential risks. Through enhanced accuracy in revenue forecasting, streamlined cost analysis, and more effective scenario analysis, AI empowers FP&A professionals with a pivotal tool for strategic decision-making. CloudFO (the AI Finance Colleague), is delivering on the AI opportunities outlined above.  The platform acts as a member of the FP&A team, improving efficiency to deliver the FP&A remit, and enabling an improved business partnering experience for the organisation at large.  CloudFO seamlessly connects to bank accounts, Stripe, Shopify, Xero, and other data sources.  Your AI colleague proactively surfaces actionable insights and trends, enabling businesses to make informed decisions and drive growth.