Today's fast-paced IPO market requires financial planning and analysis (FP&A) teams to deliver top-notch budgeting, forecasting and analytical expertise within shorter timeframes. While building out the FP&A function has always been key for companies going public, it is even more crucial to develop these capabilities thoroughly and quickly in the current high-stakes market environment, in which missed projections and any semblance of uncertainty are heavily penalized.
The U.S. IPO market is booming, and the latest trends underscore the need to establish a strong FP&A function.
Key considerations and areas of focus
Establishing an effective FP&A function requires specific focus and investment in people, data, technology and processes. As the function matures over time, its ability to accurately forecast the business and develop analytics to provide meaningful insights is dependent on successfully optimizing each of these components.
People — In determining the appropriate operating model for an FP&A function, the delineation between corporate FP&A and divisional finance should be properly understood. Early-stage companies generally combine these areas under one role; however, as the function grows and matures with the business, responsibilities and focus should be more clearly established.
The corporate FP&A function is generally responsible for establishing, overseeing and consolidating enterprise-wide budgeting, forecasting and reporting processes, aligned with company strategies. That function also plays a critical role in the IPO process, particularly in the development of IPO-specific financial models and presentations. Once the company is public, this team typically provides financial analysis supporting externally focused communications and reporting.
The divisional or business-unit FP&A function is generally governed by targets and guidance provided by the corporate FP&A. It collaborates directly with cross-functional business partners to prepare business-unit budgets and forecasts in line with such targets. This function also serves as a finance business partner, providing decision support through data analytics and scenario planning. Strong finance business partners are good communicators who can demonstrate solid business acumen and financial knowledge and are capable of constructively challenging and influencing their business partners.
Data — The availability of clean and reliable data enables the FP&A function to prepare accurate financial projections and support key business decisions. Robust data governance across all levels of the organization is essential to ensure a solid basis for data-driven business decisions.
The data analytics function can help FP&A teams build algorithms and identify patterns in the data to provide advanced analytics or insights about markets, products, competition and economics impacting the business. These insights help bridge the gap between data analytics and financial results.
Technology — In addition to policies, procedures and rules, an effective data governance framework includes adequate technologies to achieve the desired automation objectives.
Generally, early-stage FP&A functions rely on Excel-based financial modeling, reporting and analysis. As the FP&A function matures, implementing a more advanced planning and reporting tool becomes more important. Several factors should be considered when selecting and implementing a planning tool:
The planning tool should be robust enough to handle future business growth and complexities.
It should have the ability to prepare multiple scenarios or what-if analysis to enable decision-making flexibility.
Data hierarchy structures should be clearly defined and aligned to how the business is managed.
The planning tool should be able to integrate with the general ledger and the customer relationship management system to enhance the FP&A team's ability to analyze performance results.
It should support cloud-based applications and/or bolt-on visualization tools to develop robust self-service dashboards.
Process — Budgeting, forecasting and consolidated financial reporting are the basic FP&A processes that should be built out and enhanced as the function matures. The key objectives for these processes include:
Developing overall financial targets based on the company's long-term strategic objectives
Communicating such targets across the organization
Developing a detailed financial plan linking the company's overall strategic planning objectives and financial targets
Providing a mechanism to track and analyze performance relative to plan
Adjusting future financial projections for changes in strategies, tactics or actions taken; external factors; and any other new information impacting business performance.
Financial forecast models generally rely on a combination of historical data, a keen understanding of critical business drivers, and forward-looking assumptions related to such business drivers aligned with strategic objectives. Building robust and accurate financial models is an important component of IPO readiness, as it is necessary for companies to demonstrate their ability to routinely project business performance in a timely and accurate manner.
The momentum around IPOs is expected to continue, and finance leaders should ensure that they have the right level of FP&A expertise to build a sound FP&A function. The FP&A function build-out must begin early and be strategically executed to achieve its IPO objective. A mature FP&A function supported by a skilled team, adequate technologies and data and robust processes will inspire confidence in potential investors and ensure that the organization has the expertise it needs to succeed as a public company.