FP&A best practices for startups
Published on November 17, 2022
Financial planning and analysis is always an important part of the finance team’s duties, but it becomes even more crucial in a turbulent economic climate. Still, not all companies allocate roles dedicated to FP&A, and even fewer startups do so.
Startups who plan to grow should have dedicated FP&A professionals on their finance teams.
This was the overarching theme of the panel discussion “Predicting the future: FP&A for startups” at the 2022 CFO Connect Summit. Chloé Giraut from Pigment, Rienzo Böhm from Solarisbank, and Paul Mondollot from Aircall shared their FP&A wisdom with community members, guided by moderator Clémentine Svartz from Spendesk.
You can watch the full discussion here:
What is FP&A?
FP&A, or financial planning and analysis, revolves around four pillars of activity:
Management and performance reporting
Forecasting and modeling
The role of FP&A professionals is to analyze the financial data revealed by these pillars. Then, they provide the executive team and board of directors with actionable insights based on their findings. The executive team uses these insights to make important decisions for the organization.
Not every finance team has a dedicated FP&A role. However, as we’ll see, making FP&A a priority in your organization sooner rather than later will pay off.
FP&A best practices from the experts
This conversation explored the clear value of FP&A for startups. Including when to begin.
Invest early in FP&A
It’s key to invest early in FP&A, even as a startup.Paul Mondollot
In concrete terms, Chloé Giraut suggests that your first finance manager be an FP&A professional. Their scope will be very broad and transversal at the beginning, but having a solid FP&A base will serve the company well.
This choice sets you up for success, because early on in your company’s growth, this person will do the following:
Help build your business plan
Monitor performance vs budget
Produce P&L and cash flow statements
If these tasks are not taken care of early on, it’s simply too hard to catch up later. Both Chloé Giraut and Paul Mondollot agree: don’t postpone FP&A to a later stage in the company’s growth.
Precisely because there are so many challenges in the beginning, investing in FP&A will pay off both in the present and in the future.
In the startup space, when resources are tight and you’re trying to keep a lean team, this commitment to FP&A can prove challenging. So when’s the best time to introduce FP&A roles on your team?
When to hire
Paul’s advice is practical: you should definitely hire dedicated FP&A professionals after series A or B fundraising rounds, depending on your size. In his opinion, you need maybe one or two FP&A people very early on, before anyone else on the accounting team.
After these fundraising series, your organization will evolve and grow. FP&A is essential for managing these changes and steering your company safely into the future.
Structure your finance team with FP&A in mind
The structure of the FP&A function, and the overarching finance function, of course depends on the size and complexity of the organization.
Some companies choose to have dedicated FP&A professionals within their finance team. These roles could be:
If there’s not enough budget or need for full-time FP&A professionals, finance leaders may choose to have finance team members do these tasks in conjunction with their current role.
For example, the team may have an FP&A manager, whom the CFO supports part of the time. This would mean that the company has 1.5 employees working in FP&A, or 1.5 FTE.
This is the case at Pigment, where the finance team is made up of three people, 1.5 of whom perform FP&A functions: an FP&A manager and the CFO.
A larger finance team, such as Paul’s at Aircall, might have 20 people in finance, most of whom are in accounting. Of those 20, four are dedicated FP&A to support an organization of 800 employees.
As you can see, this structure is highly individualized. Depending on the startup, FP&A duties can be handled by one person or split between or several employees. Company size, needs, and budget dictates whether or not there are dedicated FP&A roles on the finance team.
Bottom-up vs. top-down budgeting? Do both!
You need to be top-down first, especially when you are in a hyper-scale growth phase, when companies don’t have time to go into granular detail.Chloé Giraut
When it comes to budgeting, the experts agree that you actually need to use a mix of both top-down and bottom-up budgeting models.
Top-down budgeting is when the executive team decides on the budget for the company (hence the “top” in top-down budgeting).
In Chloé’s case, the finance team sits down with the founders or CEO to figure out what their high-level north star is. The idea with the top-down approach is to create a narrative (short term and long term) and write down the equity story, to be shared with the leadership team and then the rest of the company.
Important for product-led companies: sync up with the Product team to make sure you understand what needs to be done from a product roadmap standpoint. If your business plan relies on certain features or products, you need to be sure that these will be delivered.
Finally, engage all the stakeholders early on. Make sure that communication is crystal clear across the company so that everyone is aligned and knows where the company is going.
In bottom-up budgeting, the employees and departments create their own budgets. As a result, the bottom-up approach is much more detailed.
Chloé’s suggestion: work through multiple iterations with the stakeholders involved in the budgeting process, and collect their input. Run scenarios and multiple versions of the business plan, and then stress test these scenarios with the management team.
Rienzo says that it’s a challenge to manage the bottom-up planning measured against top-down expectations from the management. His method is to build driver-based business models reflecting the KPIs for the different teams. His team also looks at personnel costs (headcount) per function and department, and puts together the bottom-up part by aligning with the different department owners.
Then, finance needs to align the bottom-up results with what the management expects, which can be lengthy and challenging at times.
Budget annually, forecast regularly
We do the budget once a year, we don’t change it. But forecasting, which we used to do twice a year, we now do every quarter.Paul Mondollot
As a reminder, budgeting and forecasting are related but not identical. Here is a quick refresher on the differences between the two:
Budgets show the amount your business units intend to spend for a given period.
Forecasting lets a business attempt to predict the amount of revenue the business will achieve over a fixed period. Looking at all foreseeable variables, you try to give a clear prognosis for the company’s profits and losses.
[Here’s a great guide to modern budgeting and reporting]
A full budget-planning session comes but once a year. But some companies use reforecasting to help manage twists and turns, while the budget remains fixed unless there is a major disaster.
In forecasting exercises, you want to include some buffers for the unknown. The buffers can be different sizes. The goal is to have the most conservative approach.
Because the market moves much faster nowadays, forecasting (and reforecasting) can help organizations adapt to fluctuations or sudden crises. Some companies even choose to implement rolling forecasts throughout the entire year.
Collaborate on your budget
Both Paul and Rienzo stress the importance of collaboration when it comes to budgeting.
Typically, the FP&A team is responsible for the entire budgeting and forecasting process. This means that they are responsible for data collection, historical data, top and bottom line modeling, cash burn, and then communicating the targets to everybody.
As the company grows, the FP&A team can start to include other teams in this process. Paul uses the example of the Revops (revenue operations) team. FP&A needs data from the Revops team to be sure that all the revenue functions are correctly modeled.
Matching capacity, headcount, topline by region…these topics get complicated quickly. FP&A can delegate tasks so each team is responsible for their own data. Then, the FP&A team can take this data and build the budget from there.
Choose your tools wisely
We need to be adaptable, flexible, and some of the tools we use can help with that.Clémentine Svartz
Invest in tools that give you visibility across the board. For example, Spendesk provides budget and spend data in real time, meaning that you can make your forecasts with the most accurate and up-to-date information possible.
And one of the most impactful changes you can make when upgrading your FP&A tools is embracing automation. So much of FP&A can be automated, as many FP&A responsibilities revolve around manual data entry.
In fact, one study by YouGov and Spendesk found that “manual reporting” is the task that takes away most from finance teams’ time:
Thanks to the finance automation tools available, this issue no longer needs to slow finance teams down. Look for smart software that automates data entry, stays up to date in real time, and lets you reforecast quickly if necessary.
Final words of wisdom
It’s all about risk management for us today, which was not the goal before. Past assumptions are obsolete.Paul Mondollot
Far from inciting fear, hopefully these words of wisdom inspire you to invest early in solid FP&A. These best practices are meant to help guide your startup to success with a solid FP&A function on your finance team.
To sum it up: invest early, choose tools that provide excellent visibility, automate where you can, and add conservative buffers when forecasting.
A big thank you to Rienzo, Chloé, Paul, and Clémentine for their expert FP&A advice for startups.