Confession: I Never Actually Worked in FP&A
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I post on LinkedIn all the time about FP&A and building operating models for FP&A teams.
Yet, I've never actually worked in "traditional FP&A."
So, how did this come to be?
I'll explain...
A Non-Traditional Background
I'm definitely not "classically trained" as they say.
I went to a non-target school, never did banking.
Sure, I had a Finance background:
- Accounting Degree
- Consulting
- Corporate Finance/Treasury (sort of "FP&A" but still a new term back then)
But I didn't really learn FP&A until I worked in Private Equity.
(and I had to learn it the hard way)
"You are now the CFO"
I still remember this like it was yesterday, I was as green as they come.
A decent financial modeler, no doubt, but still a far cry from "business thinker," I was tasked with building an "operating model" for one of our portfolio companies.
It went down like this:
"Chris, you are now the CFO of [the company]."
Wait... what?
Just a month ago I was a Senior Analyst in Corp Fin.
I know nothing about being a CFO (and I'm only 28 years old).
It was my first week in Private Equity. I started to freak out...
Reality Check
After the wave of panic subsided, I got to work...
Slowly but surely, I managed to cobble together:
- An overly-complicated Three Statement Model
- With too many tabs
- And tons of messy formulas
(I cringe at my skills back then, but hey that's life).
Like I said earlier, I wasn't really a "business thinker" yet, so I didn't know what I was solving for...
Funny enough, I was more comfortable with highly detailed analysis.
This "big picture stuff" was new to me.
(and wow, I was not as good at three statement modeling as I thought I was)
The "A-ha" Moment
After many meetings, long nights, and iterations I figured something out:
Everyone was focused on four key things:
- Revenue
- Gross Profit
- EBITDA
- Cash
From there, it got easier.
I constantly kept those four things in mind when working on the model.
During meetings I knew the history and forecast for each.
I didn't sweat the small stuff as much.
Suddenly, I was becoming a "big picture person."
I was thinking like a CFO in our meetings because I knew the critical points.
(Sure, my financial model could have been better, but it was getting the job done)
"Let's Run it Back"
The model for the next company wasn't so difficult.
I knew what to solve for.
And now I was helping the actual CFOs at the portfolio companies:
- I built the models
- I ran the monthly updates
- I lead the budgeting process
- I contributed to the strategic planning
- I was the go-to guy for all financial information
Was I a "real CFO"?
Nope. I was still early in my Private Equity career.
But, I knew enough to be a strategic partner to the CFO, and that made all the difference.
That was how I learned the basics of FP&A.
Present Day
Many years later, not much has changed.
I still keep in mind:
- Revenue, Gross Profit, EBITDA, & Cash
- I know the three statements in and out
If you're building a financial model, adjust your mindset in this way:
- Assume the business is yours
- You funded it with your own money
- Any shortfalls come out of your pocket
What would you need to see in the financial model?
- Revenue: What specific products or services are driving growth?
- Gross Profit: How efficient are our cost structures? Are there opportunities to improve margins?
- EBITDA: Does the business have a path to profitability? What are the levers we can pull to enhance valuation?
- Cash: What is our cash burn rate? How much runway do we have before we need additional funding?
Use this information to communicate a "story":
- What happened? (the data)
- Why did it happen? (the context)
- What do we do next? (the plan)
That's core FP&A: making the business operationally and financially efficient so it generates free cash flow and becomes an attractive target in the marketplace (if that's the route you choose to go).
With that foundation, I've found everything else falls into place.
That's it for today. See you next time.
—Chris
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