What is xP&A? Extended Financial Planning & Analysis
Financial planning and analysis (FP&A) is a critical function in any growing organization.
However, because it’s a fairly technical undertaking (among other reasons), there is a tendency for the finance function to become isolated from other departments.
As a result, financial plans are developed for the senior leadership team, with little (or no) consultation with the teams they actually relate to (like sales and marketing).
Extended financial planning and analysis (xP&A) aims to solve this issue, extending the utilization of FP&A to all departments.
This creates a collaborative environment where department leaders have more influence over the plans that finance creates, and finance is able to provide more relevant support to each departments.
In this article, we’ll cover the benefits of xP&A and dive into five real-world examples of extended financial planning and analysis in action.
What Is xP&A?
Extended planning and analysis (sometimes referred to as integrated financial planning) is all about using the FP&A function across the entire organization.
It focuses on breaking down siloes between departments, so that the financial plans that the finance department creates are more realistic, actionable, and relevant to department heads.
To understand the point of xP&A, it’s helpful to get a better idea of the problem that exists in the first place.
In the traditional financial planning and analysis environment, finance leaders create plans for the coming fiscal year or quarter, generally consulting only with their senior leadership team (and perhaps only the CEO, depending on the size and growth stage of the company).
Once a plan is created and signed off, and only then, is it rolled out to the rest of the company. Department leaders (head of operations, VP of sales, etc.) are essentially told: “Here’s what we need to achieve financially. Now go do it.”
This leaves department heads disillusioned with the idea of strategic financial planning, especially because budgets and targets always seem to be more ambitious and unrealistic than the last year.
As a result, finance fails to get buy-in, and department heads struggle to enact the financial plans they’re handed.
xP&A essentially says: “What if we involved department leaders in the planning process?”
Here’s what happens:
What Benefits Does xP&A Offer Finance Leaders?
When finance teams develop an extended approach to financial planning and analysis, they create more buy-in from department leaders, who are now involved right from the beginning.
They’re also able to create more accurate and effective plans, because they’re leveraging the insights of the experts on their team.
Department heads can jump in and say, “That’s not realistic,” and provide evidence as to why. All of this happens during the planning phase, reducing animosity and eliminating the typical, “Well, that’s the plan, make it work.” response.
More than that, xP&A helps reduce the possibility of teams working in siloes, or worst case, against each other.
Because, for instance, sales and marketing plans are developed alongside each other (and with collaboration from department heads), the two are aligned toward a single goal.
xP&A In Practice: 5 Real-World Examples
So, how does this whole thing work?
Let’s explore five real-world examples of extended financial planning and analysis in action.
1. Optimizing The Marketing Budget
xP&A can help finance teams move beyond telling marketing, “Here’s how much you’ve got to spend” and actually use their expertise to develop more effective budgets that are optimized for maximum impact.
Consider this example.
Marketing wants to run a new Facebook ad campaign. They’ve identified that a lot of their new revenue growth comes from social media advertising, and that Facebook is where they’re getting the most mileage for their money.
With an xP&A approach, the finance and marketing teams can collaborate to determine the best way to optimize this spending by combining historical performance with other financial metrics.
For instance, they might account for projected revenue from this campaign (and other channels), and re-allocate that additional revenue back into the ad campaign to maximize performance.
2. Unifying Sales and Marketing
The gap between sales and marketing has been a long-standing challenge for business leaders. They struggle to align the two teams, despite the fact that they are (or at least, should be) working toward the same goal.
xP&A can help achieve this objective.
Say, for example, you have a business goal of doubling revenue from new customers over the next financial year.
To achieve this, marketing needs to attract a bunch of new leads, and sales needs to actively nurture these opportunities. If the two teams aren’t aligned, a problem can emerge.
Marketing might drive the leads before sales is resourced effectively, meaning the sales team can’t properly nurture those relationships.
With a unified approach to financial planning, the finance team can help these two departments understand how their efforts impact each other, and when they need to act on given plans. For instance, they can look at the timelines of marketing spend vs. lead generation, and new job ads for sales reps vs. quota attainment.
Then, they can tell both teams, “If marketing spends $X now, they’ll drive Y number leads. This means sales needs to launch a job ad by X date to hire, onboard, and train in preparation for the new leads.”
3. Preparing Operations For Sales Growth
Growing sales is of little use if your operations team is ill-prepared to deal with huge growth.
xP&A can help operations understand the impact of sales efforts on their own team’s needs, ensuring rapid revenue growth doesn’t mean customers suffer due to delays or implementation issues.
For example, finance can build a model that helps operations understand what their expected delivery volume will look like based on the sales team’s efforts.
That might look something like this: If sales hires three new reps in January, they’ll grow sales by $200k a month by March, meaning operations needs to hire one new team member by March and a second by April.
A model like this is invaluable for companies that sell a physical good, as it allows them to optimize inventory storage costs. Order too early, and you’re paying for storage space unnecessarily and potentially running into cash flow issues. Order too late, and you’re going to have backorders and delays on your hands.
4. Maximizing HR’s Hiring Efficiency
Knowing who to hire is easy. If you need more sales, you hire more salespeople. Need more leads? Hire more marketers.
Knowing when to hire, however, is a whole other ball game, especially for teams that are on the lagging end of growth.
For example, if you’re forecasting significant growth, you’ll probably want to bolster your customer support team to deal with all the new support tickets that will be rolling in.
If you jump the gun and hire too early, however, then all of those extra support reps will be sitting around waiting for the phone to ring.
xP&A can help HR maximize its hiring efficiency by building hiring drivers directly into your financial model.
You might set up a driver, for example, to hire a new customer support rep for every $X in new revenue or X number of new customers.
An extended financial planning and analysis approach can also help human resources teams optimize their spending habits. For example, finance might identify that LinkedIn is a more productive driver of suitable applicants, despite Indeed actually providing more applications.
With this information, HR can dedicate more of their spending toward the more effective channel, achieving a higher return on their ad investment.
5. Building Financial Plans From The Bottom Up
xP&A flows both ways, meaning that finance can help departments like marketing and operations develop effective plans, but also that these teams can provide support to the finance department as they engage in a process of strategic financial planning.
Say, for example, the head of finance is putting together a revenue growth plan for the next financial year.
They have an idea of what will be required to reach those revenue goals, and how this will impact department budgets.
However, rather than simply creating a plan and rolling it out, they ask for advice and feedback from department heads. The VP of Marketing helps them to understand that their revenue driver model from ad spend is unrealistic, as there is a point of diminishing returns that they are already close to approaching.
With this feedback, and some advice on how marketing might better be able to achieve the goals set out for them by diversifying their ad spend regime, finance is able to create a more realistic plan and in doing so, gain buy in from the marketing leader.
Are You Ready to Embrace xP&A?
Extended financial planning and analysis is a powerful approach to strategic finance that is adopted by the majority of high-performing organizations with ambitious growth goals.
Those same organizations know, however, that to get the most out of their xP&A efforts, they need a powerful tool for analyzing company financials and pulling out key insights that drive decision-making.
This content is presented “as is,” and is not intended to provide tax, legal or financial advice. Please consult your advisor with any questions.