10 Steps for Successful Financial Planning and Analysis

Don’t get us wrong. We’re not talking about people doing a bad job or anything like that. What we mean is expectations and internal and external factors that businesses face on a day-to-day basis have changed. And while historically financial planning and analysis has been kept separate from operational planning, this can’t be the case anymore if organizations want to be successful.

There’s more data than ever before that teams now have to sift through. There’s more scrutiny from partners, suppliers and customers about financial integrity. And there’s a necessity for better decision-making that can’t be done using data in isolation. So, with that in mind, we’ve put together 10 steps for better financial planning and analysis.

Account reconciliation is a fundamental part of financial planning and analysis. It involves comparing two sets of records to make sure figures match (i.e. internal financial records against monthly bank statements).

Here are several reasons why account reconciliation is so important:

• Errors like double-charged vendor invoices and false transactions can be caught. Either these mistakes can be fixed or a deeper investigation of fraud can be undertaken.

• Record discrepancies run the risk of not meeting regulatory compliance. If this isn’t addressed, financial health and brand reputation will suffer.

• Matching records allow you to make informed decisions about financial planning, budgeting and working capital. 

For the most accurate financial planning and analysis, you’ll want to take a detailed look at the processes of every kind of account. Are there any delays in processing? What kind of methods are being used? Have figures historically failed to match up more than once?

Here are some examples of account reconciliations that you should prioritize:

• Bank reconciliation: This is verifying the bank balance in your account ledger by comparing it with the statement of account issued by your bank. Each transaction in the bank statement should be compared with internal records. In doing so, you might find some errors with credit received and penalties not being recorded in the account ledger.

• Customer reconciliation: The business compares the outstanding customer balance to accounts receivable in its ledger. This is usually done at the end of the month before submitting monthly financial statements. If any errors are found, they should be corrected beforehand.

• Vendor reconciliation: This is reconciling accounts payable for a vendor with a statement provided by the vendor. The process works by receiving a statement of account from the vendor which records any and all transactions. It’s then compared with the vendor accounts and your account book and any difference is shown on a reconciliation statement. 

• Intercompany reconciliation: This is when a parent company brings together all the general ledgers of its subsidiaries. By doing so, you can detect mismatches in invoicing, loans, deposits and interests, which will help you optimize your working capital, reduce bank transaction fees and minimize financial risks. 

A recent financial planning and analysis trend report showed that financial teams are spending more time on manual activities like data collection and data validation. Also, 26% of respondents admitted they’ve been unable to run data collection scenarios in real-time, damaging the overall agility and effectiveness of their financial planning and analysis strategies. To fix these issues, you’ll want to rely on the three most important pillars of your business: processes, tools and people.

First, you’ll want to deep dive into your financial data processes and ask yourself questions like:

• Where is the friction in the processes that are causing data errors and frustration for staff and customers?
• Are the teams responsible for supplying data to finance aware of what’s going on and what needs to change?
• Are there any specific technical challenges that make it difficult for data integrity?
• What kind of data governance program do we have?

Second, you’ll want to take stock of the tools being used to handle your financial data. Technology that cleans the data (i.e. duplicate information, missing data and inaccurate data) is one part of this. The other part is using technology that integrates multiple data sources together and can work across your entire tech stack. Why? This makes sure everything is consistent across the board so that you’re using the most accurate and reliable data in your financial planning and analysis.

Then you’ll want to build a strong team to manage your financial data. Warning signs that you may need to hire new people include being trapped in a reporting cycle and responding to ad hoc requests for data from sales and marketing and being aware that an increase in data volume will push current systems past their limits. 

Financial reporting can be overwhelming, particularly if you don’t know which reports to focus on. There’s no point in a finance executive handing the CEO a 50-page document if that CEO doesn’t have the context of what they’re looking at.

So, here’s some of the most important financial reports to investigate:

• Income/profit and loss statement: This summarizes all revenue, expenses and profits over a certain period of time. It’s essential for measuring your company’s financial performance.

• Balance sheet: This shows the financial health of a business at a specific time and how likely it is to pay debts and meet obligations. It shows assets, liabilities and equity. 

• Statement of cash flows: This shows the amount of cash coming in and out of the business over a specific period, either monthly or quarterly. It highlights how a business is generating cash, which is key to financial stability.

• AR aging report: This shows how long a company takes to collect payments. It’s usually arranged into different columns such as 0 - 30 days, 61 - 90 days and over 90 days. This report helps to assess the risk of bad debt and which customers are paying on time. Then, you can take appropriate action to lower the risk of debt. 

• Budget vs actual: This report shows actual financial performance against budgeted performance. Any variances can be used for making improvements towards strong financial health. 

Sure, these reports might sound obvious enough. But it never hurts to go over the basics or narrow down exactly the kind of statements that need to be assessed for the best use of time and energy. And the truth is, the future of financial planning and analysis can’t just be about skimming the surface of balance sheets and P&Ls.

As a finance specialist, you must go beyond reports and see the sustainability of a business as the key driver. Yet, a major challenge to be overcome is that there’s barely any standardized method of measuring sustainability at the moment. 

Along with understanding the right kind of financial reports to review, you’ll also want to use the previous year's performance as a benchmark for future planning. And that’s where having an audit committee can come in handy. The audit team are crucial for reviewing and assessing financial statements and digging into the finer details. 

For optimal performance, the audit committee should have a clear assessment policy to adhere to that favors transparency and integrity for all financial reports. To help, let’s explore some questions your audit committee will want to ask when assessing different types of statements.

Balance sheet 

• What were the largest accounts receivables that were written off last year?
• What processes were performed to show that there were no major unrecorded liabilities?
• If third-party pricing services were used, what sort of independent checks were carried out?
• What’s the effective tax rate this year as compared to last year?

Income statement 

• Has the business disclosed policies relating to any different types of revenue transactions?
• Has the gross and net profit percentage changed massively from the previous year?
• Have any unusual or non-recurring items been included in the financial statements this year that weren’t there in the previous period?

Another key step for financial planning and analysis is doing a thorough analysis of cash flow. If you want to achieve the best results from your analysis, it’s about making it as accurate and effective as possible. To do this, you can focus on data-driven forecasting, which is automated and reduces errors. 

To make the most of the data you have available, consider a 13-week cash flow forecasting period. This is because there’s generally enough data for short-term accuracy and long-term visibility for better decision-making. 

Here are some other reasons to run a 13-week forecast:

• As you have enough data to paint an accurate picture for several weeks you can assess liquidity risk. For example, you could plan for a cash shortfall weeks in advance and give finance enough time to budget or secure financing.

• There’s an opportunity for managing cash without affecting long-term planning. In other words, you could plan for debt repayments that wouldn’t impact annual budgeting.

• From an investor’s perspective, 13 weeks is a good bar for measuring financial success and control. You could use it as a benchmark to show the financial health of your business and make it more attractive for investment. 

Once you’ve done a thorough financial report review and cash flow analysis, it’s time to set goals for the next year. Whether it’s to bring in a certain amount of profit or increase sales on specific stock, your goals will be tied to your overall financial planning and analysis strategy across multiple departments.

Think about inventory costs. Think about warehousing costs. Think about the hidden costs of potentially not being as sustainably minded as you could be as a business. Could you offload excess stock to free up your working capital? Could you change your inventory management strategy ahead of a busy holiday season?  

Recently, we’ve seen a couple of great examples of US businesses improving their financial performance based on goal setting and regular financial reviewing. The first is American Eagle Outfitters (AEO). While the company’s total net revenue dropped to $1.24 billion in 2022, AEO set specific goals of improving supply chain and inventory management. This led to profit margins improving in the third quarter of 2023 and a big improvement over the first half of the year too.

The retailer’s financial management strategies seem to be paying off, as Creditsafe data shows it to be at a very low risk of bankruptcy. What’s more, the company has a low DBT score of 5 – meaning it typically pays its invoices five days beyond payment terms.

The second example is Target, which didn’t have the best holiday sales in 2022. But it has since bounced back. According to its Q3 2023 earnings statement, the retailer generated $26.5 billion in revenue, which was up 3.4% from Q3 2022.

Going back to our previous point of setting goals, you’ll also want to create a budget. An important rule of thumb to follow here is to decide on the type of budget model that works best with your goals.

• Cash budget: This model keeps track of incoming and outgoing cash flow, allowing for strategic management. You can identify areas of high expenditure and look at how to maximize your financial resources.

• Static budget: This is an in-depth plan of expected income and expenses over a set period and tracks performance against the plan. You can track your budget in real-time and create reports to be used as benchmarks. The benefit of a static budget model is that you can adjust based on future predictions. 

• Flexible budget: This type adapts to changes in expenses and revenue. In an industry like manufacturing where there are variable costs, this model comes in handy to adapt to market conditions. You’re also able to make informed decisions about resource allocation. 

• Rolling budget:  This model may suit organizations that need to update their financial data regularly (i.e. with seasonal changes). It could suit retail brands that sell different products in the winter and summer so they can make sure profits are stable. 

The risks of poor budgeting include not having an emergency fund to fall back on, falling into debt and not being able to expand. These risks might go without saying. But we’ll say them anyway because we want you to avoid a horror story (which we still see far too often) like the energy conglomerate Enron. It’s a story that’s still talked about today. The company used all kinds of accounting loopholes and shady ‘budgeting’ tactics. But everything caught up in the end and Enron filed for bankruptcy in 2001.

Earlier, I mentioned the importance of hiring the right people to manage financial planning and analysis. That includes financial specialists and staff outside of the department. Because another trend we’ve seen is extended planning and analysis (XP&A), which involves a collaborative approach of strategic planning, business planning and forecasting and operational planning and forecasting. It covers cooperation between multiple teams, streamlining business processes, factoring in new perspectives and offering speed and accuracy with financial data.

Microsoft is a good example of this. Typically, the company starts with a team planning out a single product. Then target metrics are calculated for the product depending on drivers. By taking this approach, Microsoft can predict and understand the revenue that’s expected from customers of the new product. 

So, the takeaway is two-fold. First, investing in new staff means you’ll have people with new ideas coming into the department. With the average age of financial staff in the US being 44, it definitely helps to have new blood moving the business forward. Also, they should be empowered to push digital transformation and explore new technologies.

Second, the CFO should be communicating with investors, the C-suite, directors and other department heads. It’s not enough to just have one or two conversations about financial data and credit scores. It has to be a weekly dialogue where everyone is learning together.

How does the saying go? The only sure thing in life is death and taxes. Well, you can be well-prepared for the latter with the right compliance and practices in place.

• Keep up to date with tax regulations in your state by reading publications, news sites and attending webinars. Join associations that specialize in tax law.

• Understand the ins and outs of specific tax concepts like nexus. This defines the level of connection between a state and a business and whether that business is required to pay sales tax obligations. The 2018 South Dakota vs Wayfair case introduced economic nexus. This means that an organization with a specific level of sales in a state must collect and remit sales tax even if they don’t have a physical presence there. 

• Have a solid process for dealing with tax exemption certificates, which are required for compliance. Don’t just wait until right before a tax audit to think about tax exemption certificates. Plan early. If you don’t have these certificates, you could be hit with liabilities and a hard review of your tax collection processes. So, make sure it’s communicated to all departments how to provide a valid exemption certificate. 

• Conduct regular reconciliations to reduce errors and highlight any red flags in the tax management process. This might involve reconciling tax payments with bank statements or sales data with tax filings. 

Last but certainly not least, technology is what holds a successful financial planning and analysis strategy together and makes sure data flows in the right direction. You’ll want to think about the following types of technology to improve financial performance.

• Credit risk monitoring and intelligence software: Assessing the risk levels, payment patterns, total number and value of past due payments, legal filings, credit scores and credit limits means you get the full picture of your customers’ and suppliers’ you can avoid working with unethical suppliers and late payers who’ll hurt your bottom line. 

• Tax automation software: Increase the efficiency of tax management, stick to compliance rules, avoid costly data errors and integrate with other systems. 

• Accounting software: Using this technology means all accounts can be reconciled, profit and loss are recorded and other key financial success benchmarks are kept in one place.

• Sales and marketing software: Whether it’s a CRM or other customer intelligence platform, this technology is crucial for tracking leads, identifying big-ticket products and driving revenue.