It’s shocking to see how similar S&OP and FP&A are. To be more precise, demand planning in S&OP resembles FP&A the most. In fact, the skills required in FP&A matches those in demand planning. In this article, you will learn the following:
- What’s FP&A?
- What are the similarities with demand planning and with S&OP?
- What are the differences with S&OP?
- How can we go from “vs” to “and”?
- What are the differences between IBP and XP&A?
What’s FP&A?
FP&A is a function within Corporate Finance. The FP&A acronym conveys the main activities that the team performs. They are Financial Planning and Analysis.
The focus is on the financial and strategic aspects in an organization. It involves developing a budget, annual operating plan, and the three-statement model forecast—P&L, balance sheet, and cash flow statement.
All these tools are forward-looking, and the goal is to provide sound strategic recommendations to Senior Leadership. The tables below show the definition, scope, period of time and examples of these tools.
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Because of the advances in technology, the cloud, and Covid-19, FP&A has evolved into a top finance function. It has a strong accounting component, but the focus and objectives differ with accounting.
During my time as a full-time accountant before entering the supply chain world, my main activity was building the three financial statements—P&L, balance sheet, and cash flow statement—based on past transactions.
I needed to ensure that the financial statements were compliant. FP&A is more fun because it looks into the future and provides strategic advice, similar to what demand planning and S&OP do.
What are the similarities with demand planning and with S&OP?
The Hackett Group has put together an excellent diagram to show where demand planning, S&OP, and FP&A fits. Demand planning is a step in the S&OP process to balance demand against supply. This is shown at the bottom of the diagram.
Financial planning—FP&A—is the next level, translating the operational plans into financial plans which are linked to the strategic planning, at the top of the diagram.
Demand planning and financial planning share their focus on the future and on providing leadership with actionable insights. Both teams create forecasts and analyze variances in price, volume, and mix. Both teams work with marketing and sales as well.
Demand planning, S&OP, and FP&A face the same challenges too. In an insightful article, Eric Wilson states that the demand planning and FP&A teams feel the same pressures to do more with less and the need to keep pace with the business of tomorrow.
Wilson encourages integration between demand planning and financial planning as the solution for better decision making.
The challenge is that in many organizations, S&OP has evolved separately from the financial planning that FP&A teams perform, as noted in a recent article from FP&A Trends.
When this happens, it is a dead-end street, as S&OP loses strength being perceived as a process within supply chain only.
What are the differences with S&OP?
Although both acronyms—S&OP and FP&A—refer to planning, they are different in the following aspects:
- Scope: S&OP has its origin in supply chain and as its name denotes, it is about operational planning. FP&A, on the other hand, lives in finance and it is about financial planning. Another point related to scope is that S&OP has a strong application in manufacturing companies. FP&A applies to all companies.
- Unit of measure: S&OP manages physical units with different unit of measure. FP&A uses monetary units or value.
- Metrics: Naturally, S&OP uses supply chain metrics related to physical units and time while FP&A uses financial metrics.
- Approach: S&OP uses a bottom-up approach—from the granular level to high level—while FP&A typically applies a top-down approach.
- Planning Horizon: S&OP has a monthly cadence and S&OE, a weekly cadence. FP&A sometimes works with longer planning horizon such as quarters.
How can we go from “vs” to “and”?
“Vs” conveys competition between S&OP and FP&A. It doesn’t have to be that way. Let’s change it for “and”. Integration of both—operational and financial planning—linked to strategy is the answer. Instead of evolving independently, S&OP and FP&A merge in Integrated Business Planning (IBP) or Extended Planning and Analysis (XP&A).
To facilitate integration, there are two critical aspects:
- S&OP and FP&A team members need to sit in each other’s meetings to then decide which meetings to keep. This exploratory phase will contribute to understand and help each other better. There are more similarities than differences!
- All team members need to speak a common language that is the language of the business. This is finance and accounting.
Of course, both teams must be willing to collaborate to build a win-win relationship.
What are the differences between IBP and XP&A?
Both concepts—IBP and XP&A—refer to such a merge between operations and finance aligned with strategy. The difference is the origin: from S&OP to IBP; from FP&A to XP&A. IBP and XP&A represent the most advanced maturity in planning.
Along the same lines, Niels Van Hove explains that “xP&A and IBP have the same objective: tightly integrating strategic, financial, and operational plans with budgets.
They’re planning processes that have evolved from a separate functional origin. Both are eager to integrate further and provide better forward insights to facilitate better business decisions.”
To conclude, there are no fundamental differences between the IBP and XP&A concepts.
