What is the difference between accounting and finance?
Accounting = Reading the news.
Finance = Making the news
And good finance is built on the Financial Planning and Analysis (FP&A) cycle.
FP&A is the set of processes that work together to improve future business financial performance.
The five key processes are:
1. Long Range Strategic Plan
2. Annual Budget
3. Monthly Management Reporting
4. Monthly Performance Reviews
5. Re-forecasts
The most important thing, though, is how the five processes interact with each other.
They need to work like unbroken links in a chain.
The picture (hand-drawn with my kids pens) shows how this works.
Execution > strategy.
But great businesses nail both.
The FP&A cycle is how you make sure one connects to the other.
In the Long Range Strategic Plan you have a high level financial model that sets the goals for the next 3-7 years by year. Think of it like a financialized version of the strategy.
Year 1 of that plan becomes the start point for the Annual Budget. This is a detailed financial plan for one year that shows who needs to do what and when (in the language of $$$).
In the Monthly Management Reporting you review the delivery of that plan. Did you do what you said you would do? If not, why not?
This feeds the Monthly Performance Reviews where you put tension back into the business to drive better performance. It's the feedback loop.
Then Forecast based on what you have learned during the year to understand whether you will get vs budget by the end of the year
Finally, we use the learnings from the last twelve months to update the next Long Range Strategic Plan, and the cycle continues.
You don’t need these steps in place for a startup. But you will as your business grows to the point when you have to distribute decision making. This cycle helps you control how those micro decisions add up to the big financial picture.
Any questions on this?
I’ve got an hour spare now, hit me below
Stock traders often forget that 80% of all stocks move together! If the general market is weak or in a down trend, stop trading. The odds are against you! Patience is a key skill of a trader.
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