AI-powered Bookkeeping and Finance for Startups

AI-powered Bookkeeping and Finance for Startups

Blog Article

Breaking Down the FP&A Function of the CFO Suite

Melody Tong

Customer Success Manager


Jun 19, 2022

Traditionally, the chief financial officer (CFO) is responsible for tracking the company’s past and present financial situation and ensuring on-time and accurate financial reporting. Today, the CFO is expected to inform strategic decisions that drive the success of the company. This function is called financial planning and analysis (FP&A). Depending on the size of the company, the FP&A function can look very different.

  • Large corporation: CFO has a Director of FP&A and a Controller as direct reports, each with a team of analysts. The CFO is focused on company-level strategic planning and building a relationship with investors.

  • Medium size company: CFO has a Controller as a direct report to handle the day-to-day financial operations and reporting. The CFO takes on the responsibility of FP&A.

  • Early-stage startup: Focused on finding product market fit, limited financial information to work with. The CEO outsources accounting to a third-party accounting firm and may conduct simple FP&A.

When enterprise startups reach Series B stage, they achieve a revenue level and customer base that is complex enough to justify hiring a CFO. When hiring your first CFO, it’s important to understand the FP&A function and how it can help your business. The goal of this blog is to explain what is FP&A and why it is important.

What is FP&A?

Financial planning & analysis is a corporation function that uses financial information to make forward-looking recommendations, evolving from a number cruncher to a strategic partner. FP&A should strive to provide data and intelligence to key decision makers so they can make data-driven decisions. Having visibility to the financial health and activities of the company, FP&A can reduce risk exposure and identify growth opportunities.

How does it differ from the Controller?

Let’s briefly breakdown the organization structure: The CFO reports to the CEO. The director of FP&A and Controller both report to the CFO.

  • The CFO is the financial mastermind of the company with oversight of major projects, expansions, reorganizations, fundraising and other strategic initiatives. It’s important for the CFO to have the financial acumen to manage the Controller and FP&A functions.

  • The Controller is responsible for accounting and financial reporting. The Controller is responsible for generating the three main financial statements and ensuring these statements comply with GAAP and other regulatory requirements.

  • FP&A is responsible for strategic planning, decision support, and financial modeling. The FP&A function helps all groups within the company make better decisions by taking historical data, forecasting future performance, and running sensitivity analyses.

Key responsibilities of FP&A

FP&A is the financial liaison of the company, connecting the CEO, CFO, Sales, Engineering, and Operations divisions. With a strong understanding of the company strategy, FP&A can facilitate the exchange of financial information to support all relevant personnel in fulfilling the strategic plan. Let’s get into the details. The key roles and responsibilities of FP&A are four-fold:

  1. Strategic planning

  2. Financial forecasting

  3. Monitoring progress

  4. Project management

Strategic planning: Depending on the nature of your business, you may set a 3-year, 5-year or 10-year strategic plan. This plan conveys the direction of the company and the methodology of how it will deploy resources in order to get there. It starts with setting the vision, followed by determining the strategic initiatives to achieve that vision. We won’t get into detail on how to set up a strategic plan (that would be an essay in and of itself). The main point here is that FP&A should be in the room when senior management lays out the multi-year strategic plan.

Financial forecasting: By running sensitivity analysis, FP&A can build financial models that show a bull case, base case, and bear case. If the returns do not look favorable, FP&A can take this model to the various stakeholders and adjust the business plan. If the cost structure is too high, the business may need to build in greater efficiency or source cheaper raw materials. If the sales projections aren’t robust enough, FP&A can work with sales and marketing to see if they have ideas to increase sales volume. If cash flows are not favorable, FP&A may need to work with purchasing to negotiate better collection terms.

Monitoring progress: While the CFO will always have a pulse on the financial health of the company, FP&A should have a deeper understanding of the root causes of financial stability and distress. In reviewing the financial statements and division updates, FP&A should be the first to raise questions about why certain trends are occurring. Why are cash balances changing more than previous quarters? Why are financial ratios improving or worsening? Simply observing trends is not enough. FP&A must do the analysis to understand why those trends are occurring and how it ties back to the strategic plan.

Project management: This is similar to financial forecasting, except we’re modeling individual projects rather than the entire company. For new projects, FP&A may step in to model out cash flow and returns. As FP&A may not have a deep knowledge of the various groups involved, FP&A will need to work with the department heads to ensure the model includes all the necessary information. Sales and marketing will inform sales, operations and purchasing will quantify cost of goods sold, product and engineering will estimate product development costs, and finally senior management will gauge overhead and other G&A expenses. Once the scenarios are set, FP&A can evaluate the various options by looking at several metrics, including NPV, IRR, and payback period.

How startups should think about hiring a CFO

The office of the CFO has evolved from merely information collecting to financial analyses. The FP&A role requires financial expertise, sound business judgement, and an ability to work across various functions. But the FP&A function cannot exist without the Controller. The first step is getting good financial reporting. The second step is to use those numbers to drive the business forward.

“People used to think the CFO was there to tell you there isn’t enough budget when you needed something or to simply report financial results after the fact. Today’s CFOs must break away from the number-cruncher stereotype and think of themselves as more of a strategic player in the company. CFOs today need to be creative, understand best practices, and know how to create more value for the company. There will always be a need for someone to balance the books, crunch the numbers, and perform critical routine tasks but the CFO role is much more dynamic today.” — Bill Tobia, LLR Partners’ Managing Director of Strategic Finance

At the beginning of this blog, I noted that pre-Series B startups, generally speaking, do not have the business complexities that would justify paying for a CFO. This may not always be the case. To help you make this decision, I advise thinking about the specific financial tasks (ordered from simplest to complex):

  1. Transactions

  2. Book keeping

  3. Financial reporting

  4. Financial planning

  5. Strategic planning

To handle transactions, book keeping, and financial reporting, most startups use a few software tools and an outsourced accounting firm. The popular software tools include for billing and invoicing, and QuickBooks for accounting and reporting. The outsourced accounting firm typically comes with a controller and CFO to do light financial modeling. When the business grows to the point where financial reporting begins to get complex, that’s a good point to start thinking about bringing on a CFO. It’s a good signal that there is enough business activity for a dedicated executive to extract meaningful insights from the financials.

Alex Lee