In this two part series, we will take a look at xP&A: what is it and how is it useful.
Finance departments in well-run companies have for years developed best practices around financial planning and analysis (FP&A), which provides useful insights and analytics that help guide a business’s future direction. But even the best FP&A team can sometimes include a potentially fatal flaw: Its focus on financial planning disconnects it from the operational planning of departments and business units throughout the company.
Creating a financial plan in isolation from the strategic decision-making taking place in other corners of the business is no longer enough. Enter extended planning and analysis (xP&A) — the literal extension of FP&A practices and tools beyond finance to the broader organization.
What Is Extended Planning & Analysis (xP&A)?
One of the simplest definitions of xP&A comes from research firm Gartner, which describes it as the extension of FP&A projects beyond the finance department. When an organization adopts xP&A, any function within the business that produces an operational business plan — human resources, sales, marketing, operations, supply chain, IT, research and development — does so using a shared FP&A platform that unifies data models and analytical methodologies.
This approach offers multiple benefits. Traditionally, FP&A processes have provided a structured approach to budgeting, planning, forecasting and reporting so that the finance team can deliver analysis that helps senior executives understand the financial impact of their decisions. However, other functions in the business are making plans and taking actions that can also affect an organization’s financial posture and future direction.
An xP&A approach embeds FP&A best practices and tools throughout the organization to create a more unified picture of the financial impact of departments’ and business units’ operational plans, strategies and activities. It does so through a central platform that supports customized operational planning applications that use the same FP&A platform, architecture and data model, thus improving alignment of planning practices across the enterprise.
xP&A adoption is accelerating in response to the challenges faced by organizations seeking to exploit new digital business models while navigating economic uncertainty.
- Extended planning and analysis (xP&A) extends the use of FP&A principles, tools, data models and processes to non-finance departments throughout an enterprise.
- The adoption of xP&A is rapidly increasing; experts predict it will soon become the dominant approach to FP&A.
- xP&A increases alignment between finance and other departments and business units throughout the organization.
- It also enables finance departments to become more forward-looking, strategic partners to the business.
- Which products/services/product lines generate the largest portion of the company's net profit?
- Which products/services have the highest or lowest profit margin?
- What percentage of the company's financial resources does each department consume?
- What opportunities should the company consider to expand and grow?
Financial planning and analysis (FP&A) encompasses all the financial planning, budgeting, forecasting and reporting processes a business performs in order to arm its executive leadership and board with accurate, data-derived intelligence for decision-making. FP&A teams gather, prepare and analyze financial data to create reports that provide data-driven answers to key business questions, such as:
While FP&A was once a more tactical function providing historical information on financial performance or a snapshot of a business’s current financial state, it is increasingly a more forward-looking, strategic process. Advanced technology and new best practices (including xP&A) are enabling FP&A teams to understand why things have happened and more accurately predict what is likely to occur in the future.
Origins of xP&A
While Gartner coined the xP&A term in 2020, the concept itself is not quite that new. Also referred to as collaborative or connected planning or integrated FP&A, xP&A represents the codification of a variety of multidiscipline, cross-functional approaches to business planning, as opposed to the more typical siloed exercises of the past. This more collaborative approach enables the business to integrate financial planning across functions — from sales and marketing to operations, human resources, supply chain and IT — so that everyone is working from the same financial data and insight when creating business plans and strategies, measuring performance and making changes in direction.
While the lack of alignment between traditional FP&A processes and the rest of the business has long been a challenge, the issue is now paramount. In a changing economic environment, more holistic planning and analytics is critical. At the same time, advances in technology are now making extended planning possible.
Businesses that have embraced xP&A tend to see improvements in financial performance over those with more insular FP&A processes. xP&A creates a foundation for more collaborative and inclusive strategic planning, operational planning and forecasting. As a result, this model is rapidly increasing in popularity. According to Gartner, 70% of all new FP&A projects will be xP&A projects by 2024, extending their scope beyond the finance domain into other areas of enterprise planning and analysis.
FP&A vs. xP&A
The FP&A process offers a structured approach to financial budgeting, planning, forecasting and reporting that has long enabled finance teams to deliver critical analysis that informs decision-making by senior management and boards of directors. The problem with the traditional application of FP&A, however, is that it takes place solely in the finance function — walled off from the rest of the business. It often fails to incorporate the activities and plans of other business functions. Rather, each function does its own planning with little insight into or consideration of their combined effect on the business.
xP&A, on the other hand, takes the structured processes and principles of FP&A and applies them to all functions in the business. When the standard principles of FP&A are adopted within other departments, it paves the way for greater integration, more accurate financial planning and analysis and improved performance. With more traditional FP&A, sales, marketing, manufacturing and other teams have their own campaigns, plans, forecasts and targets — and even HR develops its own plans for staffing and compensation levels. With xP&A, you work toward integrating all these functions. For example, it may become obvious to senior executives how the growth planned by the sales team will require increased manufacturing capacity, which means additional staff and equipment.
With xP&A, planning becomes a more cross-functional process that can evolve continuously, yielding a more integrated — and agile — business.
Happens only in the finance function
Extends to all functions in the business
Includes only data from the central finance function
Integrates data/activities from across the business
Updated monthly and quarterly
Delivers real-time analytics and scenario planning
Creates siloed or disjointed planning and processes
Enables collaborative planning and a single source of data and analysis
Forward-looking, focused on current data
Forward-looking and predictive
Why Is xP&A Important for Businesses?
A standalone FP&A approach is incapable of meeting the varied planning requirements of non-finance departments. In contrast, xP&A can be used to create a process of continuous organizational financial and operational planning. It coordinates data, people, processes and business plans within a single platform, providing a comprehensive view of the business. That integration of financial and operational planning within a single platform is transformational for modern organizations.
Thanks to advances in digital technology, businesses can now take advantage of xP&A tools that accommodate the differing needs of various functions in the business, preserve data accuracy and control and embed automation and intelligence into FP&A tasks. As a result, finance organizations can create a holistic business plan and enable full visibility into organizational performance. Organizations that adopt xP&A often achieve improved business performance and greater agility.
In 2020, many businesses looked to their FP&A teams for ready insights and analysis in navigating extreme disruption and uncertainty. As finance functions anticipate a future of continuing volatility, xP&A offers capabilities that enable broader and more timely insight for corporate decision-making. As noted in FP&A predictions for 2021, agility will be a priority for finance, and strong but flexible financial planning will be vital.
The next part in this series will look a little bit further at how to use xP&A and how it ties into the changing role of the CFO.