Comprehensive Guide to Planning and Analysis for Entrepreneurs

Comprehensive Guide to Planning and Analysis for Entrepreneurs

As an entrepreneur, you’ve likely been engaging in financial planning and analysis (FP&A) informally as your business grows. However, it’s now crucial to formalize this function to enhance your strategic decision-making.

Start by Considering the Macro Environment

Begin by understanding the broader economic and industry trends that affect your business. Building a robust predictive model is the next step. Regularly use and refine this model, embracing any mistakes as opportunities for improvement. These insights can significantly enhance your overall business performance.

The Evolution of FP&A

Traditionally, FP&A was associated with large enterprises, focusing on producing quarterly forecasts to satisfy external investors. However, this perception has shifted dramatically. Today, FP&A is a vital practice for businesses of all sizes. In the wake of the pandemic, FP&A has evolved into a strategic function, essential for navigating rapid changes and uncertainties.

The Strategic Role of FP&A During the Pandemic

During the escalation of the pandemic in March, enterprise FP&A teams were tasked with urgent scenario planning to prepare for various possible outcomes. This strategic focus remains a top priority for CFOs, as highlighted in our recent survey of financial leaders.

Adopting Best Practices for Your Business

As an entrepreneur, you’ve likely engaged in FP&A, even if informally, by running scenarios in your head. By institutionalizing this financial planning process and adopting best practices from larger companies, you can position your business to adapt swiftly to future challenges.


Start with the Macro Perspective

Many companies tend to focus narrowly on their sales prospects and commitments, often overlooking the broader macroeconomic environment and competitive landscape. Typically, finance teams only pay attention to macroeconomic conditions when warning signs emerge—such as the onset of the coronavirus pandemic.

While this approach is understandable, ignoring the broader market conditions is a missed opportunity. The economy and the state of your specific industry significantly influence your company’s future finances, particularly in the COVID-19 era. For instance, modeling potential changes to your EBITDA based on sector rebound scenarios—whether in six, twelve, or twenty-four months—can help you adjust strategies to mitigate losses or capitalize on anticipated gains.

Integrating Macroeconomic Factors into Your Planning

You don’t need to hire a macroeconomist to gain insights into the broader market. Leveraging resources from institutions like the U.S. Department of Commerce can provide valuable information. The key is to incorporate macroeconomic drivers into your financial models. Identify and track the key trends that impact your sector. A weak macroeconomic environment does not affect all businesses equally. For example, during the current pandemic, several sectors have experienced a surge:

  • Residential Real Estate: Interest rates have plummeted, leading to increased activity in certain markets as buyers move away from major cities.
  • Home Improvement: With more people spending time at home, the demand for home improvement products has soared.
  • Work-from-Home Technologies: Platforms like Zoom and DocuSign have become essential tools for remote work.
  • Alcohol Producers: Consumption has risen as more people stay at home.

Anticipating Pandemic-Driven Changes

Consider the potential long-term effects of the pandemic on various sectors:

  • Baby Boom: Prolonged periods of staying home may result in a population increase.
  • Office Real Estate Market: There could be a sustained softening in demand for office space as more companies commit to permanent remote work arrangements.
  • Telemedicine: Virtual healthcare could become a standard part of medical treatment.

By incorporating these broader trends into your financial planning and analysis, you can better navigate uncertainties and position your business for future success.

Identify Variable Inputs

The goal of financial planning isn’t to predict the future with perfect accuracy but to prepare for various likely scenarios and adjust your financial strategies accordingly. Once you have established broad macroeconomic scenarios, you can concentrate on the business elements within your control to respond effectively. A key aspect of this is distinguishing between your variable and fixed costs, with particular focus on the variable side. Variations in demand and new competitors are significant factors that can influence these costs.

Variable inputs are those that can be modified based on the macroeconomic environment, sector-specific trends, and your company’s unique situation.

Analyzing Sector Dynamics

When assessing your sector, consider potential market entrants or shifts in consumer preferences driven by competitors’ new or improved products. Develop models for various outcomes, accounting for changes in market share, pricing strategies, and access to new customer bases.

Understanding Company-Specific Factors

Understanding your customers’ behaviors is crucial. For example, if you are a food commodities distributor, the impact on your business varies significantly based on your customer base. Shipping vegetables to restaurants and hotels poses challenges during a downturn, whereas supplying wheat and barley for beer production may be less affected.

Managing Workforce and Resources

In service-oriented businesses, future headcount additions are often the most significant variable. For product-based businesses, raw materials are usually the critical variable. Classify headcount additions into three categories: essential, steady-state (base case), and bullish scenario. Recognize that some additions are necessary to maintain operations, while others are contingent on sustained growth. Identify any skills gaps that might necessitate reclassifying positions from “nice to have” to “must have.” For instance, a retail business might need expertise in e-commerce more urgently now than in previous years.

Growing businesses typically require additional staff to manage increased sales. However, many projections also include desirable hires to explore new opportunities or support existing teams. Label these hires as contingent on a strong economic backdrop. In uncertain times, consider using contractors to fill gaps until needs become clearer.

Adjusting Variable Inputs Based on Conditions

Identify other variable inputs you can adjust according to current conditions, whether that involves a manufacturing plant or a technology investment. Prioritize these investments so that when macro trends materialize, you can quickly decide which initiatives to proceed with. Conversely, if your sector and revenue prospects improve, you’ll be prepared to allocate resources to high-potential projects promptly. Additionally, work now to understand what documentation and preparations you’ll need to secure funding, such as loans, for expansion initiatives.

By proactively identifying and managing variable inputs, you position your business to respond agilely to changes in the economic landscape, ensuring resilience and strategic advantage in uncertain times.

Data Collection

Accurate data is the backbone of effective financial modeling. Even the most skilled financial modelers struggle without current and reliable data. When gathering inputs, particularly sales projections, it’s crucial for business leaders to recognize and account for inherent biases. Salespeople, by nature, tend to be optimistic, so their projections should be adjusted to reflect realistic growth scenarios.

In my experience as a CFO, the most precise financial models result from continuous and consistent communication with key internal stakeholders. In contrast, meeting with key influencers only once a quarter risks relying on outdated data. As a leader in a growing firm, maintaining regular contact with your team is essential—so keep those lines of communication open.

Broadening Information Sources

When collecting data for financial modeling, cast a wide net. Senior executives often focus on the bigger picture and might be less attuned to the specifics, delegating day-to-day activities to their subordinates. If you find yourself in this position—or if you are that “senior person”—make sure to engage with junior team members who are closely involved in the daily operations and have a sharp understanding of customer and supplier behaviors.

These team members can provide valuable insights into the latest market trends and operational shifts that may not be immediately apparent to senior management. Their firsthand knowledge is indispensable for building a comprehensive and accurate financial model.

By incorporating diverse perspectives and maintaining regular, detailed conversations with your team, you can ensure that your financial models are based on the most accurate and up-to-date information available. This approach not only enhances the reliability of your projections but also strengthens your overall strategic planning.

Establish the Key Business Drivers

To create an effective financial model, it’s crucial to identify the primary business drivers or key performance indicators (KPIs) that influence your top line. Generally, focusing on two to three main drivers provides a balanced approach without overcomplicating the model or creating a false sense of precision.

Top-Line Drivers by Industry

For software-as-a-service (SaaS) and other subscription-based companies, the critical drivers are typically churn rate and its inverse, retention rate, which determine the lifetime value (LTV) of customers. Additionally, gross and net dollar retention rates are essential metrics.

In manufacturing, the primary drivers often include the production rate and the volume of products sold. These metrics help gauge efficiency and market demand.

For distribution companies, key drivers usually involve changes in the product mix and supply chain efficiency. These factors directly impact profitability and customer satisfaction.

In professional services, main drivers tend to be the pricing and mix of services offered, as well as the number of effective salespeople. These elements influence revenue generation and client retention.

Cost-Side Considerations

On the cost side, it’s essential to differentiate between variable and fixed costs. This distinction allows for a more accurate adjustment of variable costs based on your revenue drivers. Group variable costs into general categories such as headcount, marketing, travel and entertainment, and capital expenditures. For product companies, adding the cost of goods sold and distribution expenses to this list is crucial.

By identifying and focusing on these key business drivers, you can create a robust financial model that provides valuable insights and guides strategic decision-making. This approach helps ensure that your business remains agile and responsive to changing market conditions.

Always Be Forecasting

The data collection phase of financial planning is undoubtedly time-consuming, but it’s crucial to dynamically reforecast as assumptions change. Factors like higher churn due to price increases or fewer new customers because of travel reductions necessitate adjustments. Forecasts should never be viewed as static data points; they must evolve as you review and reflect on their accuracy.

Evaluating Forecast Accuracy

Consistently evaluate your forecasts to understand where you were accurate and where your estimates missed the mark. As my grammar school teacher often said, “It’s not about getting it right or wrong, but the logic you used to get to your answer.” You will learn more about your business from the forecasts that were off than from those you got right.

During my tenure as interim CFO of an e-commerce company, we discovered significant discrepancies in our shipping and fulfillment cost projections. We had dramatically underestimated these costs. When encountering such discrepancies, seek insights from various team members with different perspectives. Determine whether it’s a short-term anomaly or an issue requiring deeper investigation.

Identifying and Addressing Discrepancies

In our case, discussions with team members revealed two main issues:

  1. Our fulfillment rates for direct shipments were excessively high and could be negotiated downwards compared to similar companies.
  2. A large customer was overcharging us for shipping.

By identifying these issues, we quickly took corrective action, improving our cost projections and operational efficiency.

The Importance of Iterative Forecasting

Humans are not naturally gifted at making predictions, whether about sports outcomes or economic trends. As the economist Paul Samuelson joked, “Economists have predicted nine of the past five recessions.” However, this doesn’t mean forecasting is futile.

The key is to continuously reflect on what you got right and, more importantly, what you got wrong and why. Predictive models should be iterative, constantly tweaked to more accurately reflect how internal and external factors impact your business. This ongoing process ensures that your forecasts remain relevant and useful, guiding your strategic decisions effectively.


End Game of FP&A for a Growing Business

Once you have constructed a solid predictive model, the primary focus should shift to cash flow management. It is essential to identify monthly cash flow and understand what it implies for your company’s financial runway, considering available cash reserves and debt facilities. If, under certain scenarios, cash flow projections are weaker than desired, scrutinize variable expenditures based on their priority levels.

Setting Strategic Milestones

Establish definitive future points in time—ideally on a monthly basis—as checkpoints for financial performance. Determine the moment at which, if adverse conditions persist, you will defer lower-priority expenditures. Conversely, identify revenue and profitability targets that, if achieved within a specified period, will trigger the implementation of priority decisions.

Making Informed Decisions on Headcount

One of the most significant future decisions involves headcount additions, which are critical for driving next year’s growth. Link these hiring decisions to achieving specific financial milestones. This approach ensures that you are not adding costs to a suboptimally functioning base. By tying hiring and other major expenditures to concrete financial data, you can make informed decisions that support sustainable growth.

Optimizing Cash Flow Management

By continuously monitoring and adjusting your cash flow strategy, you ensure that your business remains agile and responsive to changing conditions. Prioritizing expenditures and aligning them with performance milestones allows for more effective resource allocation and enhances your company’s ability to adapt to unforeseen challenges.

The Bottom Line

Financial Planning and Analysis (FP&A) is crucial for informed decision-making within your company. If you haven’t yet embraced this practice, now is the time to start. Don’t be afraid to make mistakes; they are invaluable learning opportunities. Focus on analyzing the differences between your estimates and actual outcomes, as these discrepancies hold key insights into your business.

As James Joyce famously stated, “Mistakes are the portals of discovery.” By diligently evaluating these divergences, you can uncover vital information that will help you refine your strategies and drive your business towards greater success.

Comprehensive Guide to Planning and Analysis for Entrepreneurs
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Comprehensive Guide to Planning and Analysis for Entrepreneurs
Unlock key insights with our planning and analysis guide. Learn how FP&A can drive better decision-making and sustainable growth for your business.
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ABJ Cloud Solutions
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