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Welcome to Corporate Finance Explained, where we break down the essential topics every corporate finance professional needs to know. This series is narrated by AI, created using CFI's expert training materials and designed to help you stay ahead in the world of finance. Enjoy this week's deep dive.

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All right, so today we're going to be diving into FP&A. Financial planning and analysis. Exactly. And so, you know, I think a lot of people listening are probably already familiar with the basics of FP&A, but what we really want to unpack is how FP&A goes beyond, you know, just number crunching and really is a strategic function for companies to plan for the future and make big decisions. Yeah, I think that's a great way to put it. The difference between simply recording what's happened and actually using that to plan for the future. So I guess, you know, accounting is really like looking in the rearview mirror, right? It's all about recording what's already happened. Exactly. And so, you know, I think it's more like using that rearview mirror to figure out how to use your GPS. Right. Or like, you know, using a map to plan out your road trip. Exactly. Yeah. So, you know, thinking about those big strategic decisions that companies make, like if they're going to launch a brand new product or even move into a new market, like that's where FP&A really shines. Yeah, absolutely. I mean, imagine you're a company thinking about launching a new product.

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It's not enough to just have a great idea.

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You really need to know, is this product going to be profitable? Right. And that's where FP&A steps in. They'll analyze the potential profitability of that product. No, they'll build financial models. They'll project how much revenue it could bring in. What are the costs involved? And really try to answer that question. Is this a good financial decision?

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So it's really going beyond just gut feel and intuition, right? Exactly. It's backing it up with data. And, you know, it's not even just about saying yes or no to a product idea. FP&A might reveal that, hey, maybe there's a different way to price this product that would make it much more profitable. Or maybe there's a different market segment that we should target. That makes me think about Amazon's decision to launch AWS, their cloud computing platform. That was a huge move for them. And I bet their FP&A team was deeply involved in that. Oh, absolutely. And back then, cloud computing was still pretty new and unproven. And it would have been easy for Amazon to just say, no, that's too risky. But they had their FP&A teams really analyze, you know, what's the potential market for this? You know, what are the different scenarios that could play out? And I think they were able to show that, you know, even though there's some upfront risk,(...) this could be a really big opportunity for Amazon. And obviously, you know, we see how well that turned out for them. Exactly. So FP&A can really drive innovation by, you know, providing that confidence to invest in new ideas. Yeah. It's not just about saying yes or no to an idea. It's about how can we make this idea even better?

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So we've seen how FP&A can influence, you know, this really big picture decisions. But what about like the day to day work that FP&A teams do? What are some of the tools of the trade? I mean, is it just spreadsheets and calculators? Well, spreadsheets are definitely still a big part of it. Yeah. But there's also a lot of more sophisticated software and tools out there that FP&A teams use. So, you know, one of the big ones is budgeting and forecasting models. Okay. And models are designed to really predict revenue and expenses and ultimately profitability with a lot of accuracy. Yeah. So not quite a crystal ball, but... Not a crystal ball, but definitely more than just a gut feel. So what are some of the other tools that FP&A teams use?

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Well, another big one is variance analysis. Okay. And that's really about comparing what actually happened financially to the forecast.(...) So trying to understand, you know, are we on track? Are we off track? Right. So you do budget for a million dollars in sales, but you only hit 900,000 variance analysis.(...) Helps you understand why you missed that target. Exactly. It helps you figure out, you know, was it because of something we did or was it something outside of our control? Oh, I see. And then another one is scenario analysis. Okay. And this is where you can kind of start to play around with those what if questions. So like what if interest rates rise or what if a new competitor enters the market? Right. Exactly. Okay.

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And then other scenarios could impact the business. That makes me think of during COVID, I read an article about how airlines were using scenario planning to try and figure out, you know, how quickly we'll travel or recover. What are the different scenarios? Yeah, that's a great example. Okay. And then another one that's really important is driver based planning. Okay. And so this is where instead of getting lost in all the details and all the numbers, you really focus on the key factors that drive the business. The drivers. Right.

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So for an e-commerce company, you might say, okay, well, our website traffic is a key driver. Our conversion rate. How many people who visit our website actually buy something that's a key driver? Yeah. Our average order value. How much do people spend when they place an order? Right. So you really focus on those key drivers and try to build your plans around optimizing them. So it's almost like they're reverse engineering success by focusing on the factors that contribute to it the most. Exactly.(...) And with all this high level analysis and all these different scenarios and drivers, they must need some pretty serious tech to be able to do all that. Yeah, absolutely. Yeah. So companies are increasingly using AI powered tools to really crunch these massive data sets that they have. So there are platforms like AnaPlan Adaptive Insights, Tableau. I've heard of those. Yeah. And these tools can really do amazing things. They can crunch numbers in real time. They can generate these interactive dashboards that can help you visualize data. So I guess it's not just about being good at math anymore, right? You need to be kind of tech savvy too. Yeah, exactly. And that's really changing the way that FP&A teams work. That makes me wonder, how is all this tech reshaping the world of FP&A? I think it's transforming the field incredibly fast. I mean, AI is making financial forecasting so much more accurate than it used to be. And not only that, these forecasts can now adapt in real time as conditions change. So it's not like those old school static budgets that were fixed for the entire year, no matter what happened. Right, exactly. Those are kind of a thing of the past now. With AI powered tools, companies are moving more towards these rolling forecasts that are constantly being updated with the latest data. So it allows them to be way more agile. So they can pivot in response to supply chain issues or sudden market shifts or really any curve ball that comes their way. Yeah, exactly. And a great example of this is Tesla. I mean, they're known for being really agile and adaptable. Yeah, they are. And their FP&A team uses real time data to constantly adjust their production plans. Yeah. So they're factoring in everything.

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Supply chain issues, global demand fluctuations, you nave it and they can make these adjustments in real time thanks to those AI driven FP&A tools. So it's almost like they have this financial control center that's constantly monitoring and adapting to the world around them, making sure they're always one step ahead. Exactly. Okay, so I'm convinced FP&A is like super important in today's business world. But what does it take to actually excel in this field? What skills do you need to thrive as an FP&A professional? Having a strong foundation in finance and accounting is obviously important. Right. But it's not enough to just be a number cruncher. You really need to be a strategic thinker. Okay. You need to be able to connect the dots between those numbers and the bigger picture of the business. So it's not just about spitting out data. It's about being able to tell the story behind the numbers. Exactly. And being able to translate those financial insights into recommendations for the leadership team. Right. So they can actually make decisions. Exactly. Okay. So it sounds like FP&A really requires this unique blend,(...) skills, analytical skills, business acumen, even a little bit of storytelling ability. Yeah, you nailed it. And we can't forget about technology too. Yeah, with all the AI and stuff. Exactly. Being comfortable with those tools and knowing how to leverage their power is going to be really important for FP&A professionals going forward. What I find so interesting about this is how collaborative FP&A seems to be. It's not just one person sitting in a room, you know, crunching numbers by themselves. What other skills are important? Yeah, communication and collaboration are huge. I mean, FP&A teams need to work with people from all across the company, you know, sales marketing operations. So you need to be able to, you know, explain complex financial concepts to people who might not have a finance background. Right, exactly. Okay, so strong communication skills, relationship building skills are just as important as those analytical chops. So it seems like the role of FP&A is constantly evolving. You know, it's almost like a living breathing thing. What do you see as some of the big trends that are going to shape the future of FP&A? Well, one thing's for sure.

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AI and automation are going to continue to play a bigger and bigger role. Right. So I think we're going to see FP&A professionals being freed up from a lot of those manual tasks and they'll be able to focus more on higher level strategic analysis. So they can really focus on those more human elements of the job, like strategy and communication. Right. That's interesting. Another trend I'm seeing is the growing importance of data visualization. Okay. So being able to take those complex numbers and present them in a way that's easy to understand and engage, you know, using things like dashboards and charts and graphs. So it's not just about, you know, the data itself. It's about how you present it and tell the story that the data reveals. Okay. So we've covered a lot of ground here, but before we wrap up, I want to ask you, what advice would you give to someone who's interested in pursuing a career in FP&A? Like what steps can they take to set themselves up for success?(...) I would say don't just focus on the technical skills. Which makes sense given everything we've been talking about. Right. I mean, it's important to have that strong understanding of finance and accounting, but it's equally important to develop those softer skills, you know, like communication, collaboration, strategic thinking,(...) that ability to tell a story with data. So it's really about combining, you know, those technical skills with those broader business skills and those interpersonal skills. It's that combination that makes you really stand out in the FP&A world. Exactly. Yeah. It really is fascinating to think about, you know, what goes into all these decisions that shape, you know, the products we use, the services we rely on, really the entire business landscape. It is, I think, you know, a deep dive into the entertainment industry would be really interesting. Maybe a company like Disney. Oh, that's good. They've got, you know, theme parks, movies,(...) streaming services, merchandise, like seeing how their FP&A team navigates all that. It's a lot. Yeah. And makes those really high stakes decisions, I think would be fascinating. Yeah. Just imagine trying to predict the success of like a new Marvel movie or the launch of a new theme park. Or even just their streaming platform, you know, Disney plus trying to forecast the growth of that in such a competitive market. Yeah. It's got to be a huge challenge for their FP&A team.(...) Thinking about all those different factors, you know, content creation, cost subscriber churn rates. Exactly. It's crazy. It's amazing to think that, you know, behind all the magic of Disney, there's this team of FP&A professionals crunching numbers and analyzing trends and really, you know, helping to shape those experiences. Yeah. That's the thing about FP&A is at work behind the scenes in every industry. Right. You know, guiding these decisions that impact our lives in so many ways. Well, I think we've given our listeners a really good overview of what FP&A is all about. Yeah, definitely. It's so much more than just number crunching. It is. You know, it's about strategic thinking. It's about storytelling. It's about using technology to make smart data driven decisions and ultimately to drive business success. I think you summed it up perfectly. So to our listeners out there, the next time you hear about, you know, a company making a big move, think about that FP&A team behind the scenes, analyzing the numbers, you know, projecting the future and helping to chart that course. It's a really dynamic and fascinating field. And we hope you've enjoyed this deep dive into the world of FP&A. Thanks for listening. Thanks for listening to Corporate Finance Explained. If you found this episode valuable, be sure to check out more episodes and explore CFI's highly rated courses at corporatefinancestitute.com. Don't forget to subscribe for more deep dives into essential finance topics. See you next time.