Management Accounting

The 12 Key Principles of Financial Planning and Analysis

The Institute of Management Accountants offers principles for building an FP&A foundation, establishing accountability, and more.
David McCannJuly 22, 2019

Few processes within a CFO’s purview have as much potential to create or destroy value as financial planning and analysis, stresses a new report from the Institute of Management Accountants (IMA).

Even if a company has the right strategy, if the budget does not reflect those priorities and properly fund tangible initiatives, the strategy will likely not succeed, IMA warns.

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FP&A as often conducted has some basic problems: too much emphasis on forecasting and budgeting within a fiscal year leaves too little time for the planning and analysis needed to help the company develop and execute its strategy, according to the report.

IMA presents what it believes to be the 12 key principles of FP&A, informed by a recent survey of 700 organizations that identified the best-run companies — those that both consistently meet or exceed targets they set for themselves, and consistently meet or exceed their competitors’ results.

Fundamental Principles

Adhering to these first five tenets will provide a firm foundation for FP&A, the institute advises:

P1: Develop a strategic long-range plan and identify specific initiatives and projects/plans to execute it.

The best-run companies have a long-range strategic plan with a differentiation strategy (such as being a cost leader). They also identify specific initiatives to achieve the plan (for example, a continuous improvement initiative). And they translate those initiatives into short-term operational projects.

P2: Identify resources to implement projects/plans and put them in the budget.

Many well-conceived projects that could drive the desired outcomes don’t come to fruition, IMA notes. Well-run companies identify the resources needed to execute the operational elements that will drive results (investment in new technology, for example) and incorporate those resource requirements into the budget.

P3: Understand how operational plans will drive financial results, and monitor the progress of those plans.

Top-performing companies make explicit connections between operational decisions and financial results.

“Typically there is a monthly review process that compares financial performance to planned performance,” IMA writes. “But that process should also include an update on key projects to make sure they’re on schedule. If a project is delayed, find the business explanation for it.”

P4: Quickly identify the business reasons behind plan-to-actual financial variances.

Often seen as something to avoid, exceptions can also help a company understand what’s happening in the business, the report says.

For example, say there was a real plan to grow revenue by 8%, but a key marketing campaign launch date was delayed and a promotional event didn’t draw the anticipated response rate.

“Best-performing companies delve much deeper into those issues,” IMA writes. “What caused the delay in the marketing campaign? If there was an advertising agency issue, maybe the company needs a new one? If the root cause was that the marketing person leading the campaign left the company on short notice, perhaps there is a succession planning issue.”

P5: Make course adjustments when falling behind on financial or operational goals.

“Rather than just adjusting their expectations downward, the best-performing firms are agile. They’re not focused just on financial progress but also on the progress being made on operational goals.” And they are proactive about getting back on track.

Financial forecasting is still a vital function that serves as an early warning system and should provide an unbiased projection, according to the report. “Such analysis requires an understanding of the business and the initiatives that go beyond the understanding of financial models and may require additional training and development for FP&A staff.”

Accountability Principles

As good as any plan is, it takes people to implement it, IMA notes. And people care about reaching targets that they own, especially if there is an economic incentive to do so.

P6: Cascade both financial and nonfinancial operational targets down the company to more specific targets.

High-performing companies integrate financial and operational planning, which includes pushing goals down through the organization. Higher-level goals (growing sales by 1,000 units, say) are broken down into incrementally smaller goals and potentially further broken down to the individual level.

This is “a critical element of building accountability,” the report stresses. “While some companies cascade financial targets, the best-performing [ones] cascade operational targets as well.”

P7: Hold people accountable for financial results.

The best-performing companies clearly identify the people who are responsible for delivering the financial targets in the annual plan or budget, IMA says. They then hold those people accountable for delivering on the targets. And they provide those people with financial incentives tied to achieving the targets.

Good individual performance measures should:

  • Align employees goals with the organization’s key success drivers.
  • Yield relevant information about the actions or decisions of the employee.
  • Be easy to understand, measure, and communicate.
  • Be available on a timely basis.

P8: Hold people accountable for operational results.

This is identical to P7: Identify those responsible for delivering operational targets, hold them accountable for delivering on the targets, and incentivize them financially to do so.

Advanced Principles

These last four principles focus on business drivers and integrating them into FP&A. For companies that have a firm understanding of what drives success in the business, strategy becomes “practical” in the sense that it’s focused on the things that will drive its success.

P9: Identify what drives business success and develop key performance indicators.

Well-run companies codify or formalize what drives success in the business with associated measures so that they become widely shared and understood, the report says.

For example, for most technology companies innovation is considered a driver of success. They may measure that with something like a percentage of sales coming from products introduced in the past two years.

Each industry has unique KPIs that drive success. “KPIs should not be tracked for the purpose of having something to put on a dashboard or scorecard,” IMA advises.

P10: Establish long-term and short-term targets for the KPIs.

With such targets, companies “develop a path between where they are now and where they want to be,” says the report.

P11: Develop initiatives and operational projects to achieve KPI targets.

“This underscores the theme that the likelihood of achieving a goal increases with clear plans, rather than simply wishful thinking,” says IMA.

P12: Monitor results of KPIs and link to financial incentives.

“To avoid gaming the system and motivating managers to optimize their performance at the expense of the organization, incentives should be based on both financial and nonfinancial targets and include both individual and company-wide metrics. Unfortunately, compared to the other principles, relatively fewer organizations tie incentives to achieving goals.”