What is Financial Reporting?
Financial reporting is the process of documenting and communicating financial and other information with external stakeholders through financial reports. These reports are essential for stakeholders to understand and review the financial status of a company over a period of time. Sometimes, the reports are also generated to satisfy the needs of internal stakeholders whenever necessary.
External stakeholders – Investors, Government, Stock exchanges, Banks, Insurers, etc.
Internal stakeholders – Board of directors, Management, Employees The financial information is recorded in various statements where the form and the structure are regulated by the Government or Accounting standards prescribed by Professional Accounting bodies. The time period can be quarterly, Yearly, or both depending on the requirements
The following are the primary statements that are generated under this process
- Profit & Loss statement
- Balance Sheet
- Cash flow statement
- Notes to Accounts
- Board of directors’ report
- Management Discussion and Analysis report
- Presentation to investors for the Earnings call
- Auditors report (as issued by the Auditors)
What is Financial Planning and Analysis?
FP&A or Financial Planning and Analysis refers to the collective activity of analysis of financial results, budgeting, and forecasting financial performance. The FP&A team collects the information from the reporting team, analyses the trends in results with respect to past periods and budgets/forecasts, gathers meaningful reasons for the variations, and presents them to the management for business decision-making. There are no specific formats or structures prescribed by any regulating body here since the process mainly caters to the needs of the internal stakeholders.
Steps in FP&A
Budgeting – The first activity under this process is to make budgets and forecasts about the financial performance of the company. This is carried out along with people from non-finance functions like Sales, Marketing, Manufacturing, Procurement, Human Resources, Informational Technology, etc. The team obtains inputs from the above functions about the targeted spending needed to meet the organization’s overall goals. These inputs are then converted into financial terms and documented accordingly. The overall budget along with financial targets are then consolidated and formal approval is taken from the management.
Data Collection and Verification Finance
The approved budget becomes the target for the organization and all functions start working towards achieving this goal. In order for the organization to monitor and track its performance, a regular comparison of financial results vs targets is done so that corrective action can be taken, wherever required. Once the reporting team closes the books of accounts, the FP&A team collects actual financial data for that period and starts verifying it for consistency and accuracy. This is a very important step to ensure the data used for further processes is well-verified and business decisions can be taken appropriately.
Variance Analysis in Finance
The data collected is then compared with the budgets and variance analysis is performed. For example, the team will compare the actual sales with budgeted sales to evaluate where the actual sales have exceeded/not exceeded the targets. It could be due to some products doing very well/not doing well against their targets or sales in some geographies exceeding/not exceeding the targets. This slicing and dicing of data is important to understand how and where the variation lies. The FP&A team will then talk to the sales managers to find out the reasons for such variations. This process is repeated for all performance metrics for other functions viz. production numbers, costs, inventory, headcount, etc. A consolidated report is then generated which explains all major variations in actual financial performance vs the budget. The same is discussed with management and corrective business decisions are taken wherever necessary.
Conclusion
Financial reporting and financial planning and analysis are two distinct processes within the overall Finance and accountingfunction. There is a lot of inter-dependence between the two processes yet the career paths are quite different. Financial reporting requires skills like technical accounting, GAAP understanding, and up-to-date information about regulatory aspects. While FP&A needs one to be analytically strong and good with numbers. The interpersonal skills needed for FP&A are quite high as they involve collaborating with various functions other than finance.
Key Differences Between Financial Reporting and Financial Planning & Analysis (FP&A)
| Financial Reporting | Financial Planning & Analysis | |
| Objectives | Generation of financial information like Income statement, Balance sheet, Cash flow statement | Analysis of financial information and evaluating reasons for trends, budgeting, and forecasting |
| Users | External stakeholders like Government, Investors, Lenders, Stock Exchanges | Internal stakeholders like Board of Directors, Management, employees |
| Format | Specific format prescribed by the regulatory agencies to be followed. | No such specific format. Each company follows its own format |
| Skills needed | Technical accounting, GAAP understanding, Regulatory aspects of reporting | Analytical, Working knowledge in tools like MS Excel, PowerPoint, PowerBi etc. |
