Private Company FP&A Challenges: Types, How to Prepare

In a perfect world, investors, board members and executives would have full confidence in companies’ financial statements.

However, when a privately-owned company takes an investment from institutional investors, their FP&A and accounting departments typically need to respond to new demands outside of their normal work flow.

5 Common Challenges Financial Planning and Analysis Teams Face

1. Revenue reporting quickly
2. Articulating unit economics
3. Supplying a multi-year forecast
4. Supplying variance explanations efficiently and effectively
5. Version control

1. Revenue reporting quickly

Most private companies that have not received institutional investments may feel that their monthly close cycle finishes within an acceptable amount of time.

However, even during the due-diligence process, investors will likely demand key financial results (such as revenue) much sooner than the monthly close process is equipped to deliver.

For example, investors often want to know how the company is pacing against its last revenue forecast well before the month ends.

2. Articulating unit economics

It is important that your company can articulate what your variable and fixed costs are in a clear fashion.

This may sound like “Business 101”, but sometimes, understanding your unit economics as well as the volume that your current cost structure can support can pose a challenge.

For example, when a SaaS software company is asked, “how much does one new customer cost”, they often find the question difficult to answer because they have not considered what incremental sales, marketing, customer support and/or IT costs are incurred with a new cloud customer, nor how many new customer acquisitions their current infrastructure can support.

3. Supplying a multi-year forecast

Even private companies that regularly forecast their business may not have had to deliver a 5-year forecast that communicates the company’s long-term business plan.

Forecasting beyond the current fiscal year presents new considerations such as:

• Long-term price and cost inflation
• Annual employee attrition rates
• Impacts from potential regulatory changes

4. Supplying variance explanations efficiently and effectively 

After a forecast or budget is delivered, your investors will expect timely and succinct explanations of significant variances.

Often, private companies with less developed FP&A processes lack tested variance templates that can help focus investors on the right areas with the right level of detail.

5. Version control

One associated challenge with reporting your variances is remembering which forecast or budget version was last communicated to each investor group.

Moreover, after external funding is received, the speed and frequency of forecasting increases, adding to the number of versions under management.

Sorting through, finding and verifying these versions can be time consuming, stressful and can often lead to costly reporting errors.

7 Ways to Prepare for Funding Challenges

1. Deploy a ‘flash’ revenue reporting process 
2. Streamline the monthly close process
3. Discuss what your company considers to be variable and fixed costs
4. Adopt a 12-month rolling forecast format
5. Set time aside for an annual, multi-year planning session 
6. Segment variances
7. #cloud-solutionsInvest in cloud solutions

1. Deploy a ‘flash’ revenue reporting process 

Companies that can report their projected revenue for the current month on at least a weekly cadence are in a much better starting position to respond to new investor demands.

Develop at least a semi-automated process that can project total company revenue for the current month on a weekly or daily cadence.

2. Streamline the monthly close process

Ideally, if a company can reduce its monthly close process by one business day, that will pay large dividends down the road in many areas.

Having a shorter monthly close process will allow more time for internal review before having to report key results to your potential new equity partners.

3. Discuss what your company considers to be variable and fixed costs

Work with your operations managers to verify what level of business activity they can support and when additional investment in infrastructure would be needed before embarking on the fundraising process.

4. Adopt a 12-month rolling forecast format

Companies can help prepare themselves to deliver longer-term forecasts by getting themselves in the habit of forecasting at least the next 12-months on a regular cadence.

A rolling forecast that spans the next fiscal year will be better prepared to extend into years 3, 4 and 5 as it would have already crossed the ‘chasm’ of the next year.

5. Set time aside for an annual, multi-year planning session 

At least once per year, set some time aside for your executive team to formulate a multi-year strategic plan.

This planning period, usually in the summer for companies reporting on a calendar year, will help shape both the long-term and the next annual plan.

6. Segment variances

With respect to variance reporting, it is easy to get lost in line-item variances and not provide enough context to your investor audience.

To avoid this, segment your variances by key focus area, key customer account or by variable and fixed costs. 

Understanding what your typical monthly variance percentages have been for the last 3 to 6 months for both revenue and cost can provide added context to your investor audiences.

7. Invest in cloud solutions

Modern, cloud-based financial planning platforms are usually equipped with effective version control functionality, and they are also great at helping you create variances reports quickly.

If your company has an opportunity to invest in a capable cloud-based financial planning software at least 6 to 9 months before the funding raising process begins, you should closely consider this path.

Final Thoughts on Overcoming Funding Challenges

Taking on an external investment can help your company grow and transform.

In order to provide your investors with the additional information they need, your FP&A and accounting processes will likely have to perform at a higher level.