Corporate Finance Explained | FP&A in Action

Welcome to Corporate Finance Explained, where we break down the essential topics every corporate finance professional needs to know. This series is narrated by AI, created using CFI's expert training materials, and designed to help you stay ahead in the world of finance. Enjoy this week's deep dive. Welcome to this deep dive, where we're going to go way beyond, you know, just your typical spreadsheets and budgets. We're going to be exploring how FQ&A really makes a difference out there in the real world. Yeah. We'll be taking a look at companies like Tesla, Netflix, Airlines, Amazon, and Walmart. Some big names, you know, some really fascinating examples. Yeah, for sure. You probably already know some of the basics of FQ&A. Right. But what we're going to do today is uncover how these principles actually translate into those massive investments, you know, the ones worth billions of dollars. Yeah. The decisions behind those blockbuster shows everyone's watching. Yeah. And even how those prices on airline tickets go up and down, you know, like constantly fluctuating. I know, it's like, what is going on with that? Exactly. Let's just jump right in. Imagine you're in the room with Tesla. OK. And they're deciding, hey, should we build another gigafactory? We're talking about a huge, massive undertaking. Huge. And it can't just be about construction costs. Yeah. Right. No, not at all. You're absolutely right. This is where the FQ&A team at Tesla really steps up. They use these like super detailed financial models to justify an investment like that. OK. But it goes beyond just that. It's about making sure it fits into their overall strategy, you know, their strategy in the EV market. So it's not just, hey, can we afford to build this thing? Exactly. It's how will this factory help us kind of stay on top of the whole EV world? Exactly. They're looking at things like how much cash they actually have on hand. You know, is there enough cash flow for another factory? Right. How those, you know, raw material prices, how those are going up and down. How is it going to affect the profit margins? Well, those are all over the place. Exactly. And even, you know, figuring out that point where they start making money, you know, entering a brand new market. What's the breakeven point? Right. Those are the types of things they need answers to before they give the green light to a project, you know, one that's that massive. Right. And it really highlights something I think is really interesting, because a lot of people think FP&A, oh, it's just about being counting. Yeah. Right. But it's not, you know, it's clear here that it's really about like shaping their their position in the market. Yeah. It's really competitive out there for sure. And that industry is changing so fast. Is that something we see across other industries as well? Absolutely. Like, let's take Netflix. Right. They're like well-known for spending like tons of money on content. But every single decision they make has like serious financial analysis behind it. So when they're deciding, hey, should we make this show or not? Yeah. FP&A is actually right there in the mix. Yeah. More than you might think, actually. It's not just, you know, do we like the idea? Is it a good story? It's about whether it makes financial sense. You know, can we actually make money from this? And they use these like really advanced models. They analyze stuff like, you know, how many new subscribers will this bring in? What will it do to keep people subscribed? And then, of course, there's the cost of making it versus how much money they think they'll make. Right. Because some of those shows are just insanely expensive. Right. Like, think about Stranger Things. I heard it cost something like thirty million dollars per episode. Oh, yeah. I can only imagine the kind of forecasting that went into that. It must have been so detailed, you know, just to approve a budget like that. Yeah. I bet they used, you know, historical data, trends, even like some kind of prediction model to see if, you know, with that much investment, would they actually see the subscriber growth they'd need to justify it? Right. And, you know, it's not just about saying yes to new shows. FP&A also gets involved in deciding when to like end a show, even the ones that are super popular. You know, if they're not hitting those financial targets, they're out. Wow. No mercy. OK, let's switch gears a bit to something we all experience as travelers. Have you ever like been looking at airline tickets and you refresh the page and the price jumps up like 50 bucks? What is going on there? That, my friend, is real time FP&A in action. Airlines, you know, the big ones like Delta, American, Southwest, they've got these systems, these really sophisticated systems that are constantly adjusting the prices. OK, so they're not just randomly changing numbers to like mess with us. No, not at all. They're actually looking at a bunch of different things. Like one is just how much demand is there for the flight? Right. So, for example, if a flight, say from New York to London, is like filling up way faster than they thought it would, the system will automatically bump up those fares to, you know, try to make as much money as possible. Then they've also got to consider things like, you know, fuel costs. Right. Those are always going up and down. That can really change how profitable a flight is. And then, of course, they've got to keep an eye on like what are the other airlines charging? Want to stay competitive? It's like this constant balancing act, trying to make as much money as possible while still like getting people to pick those flights. It seems like that real time FP&A approach, I bet that would be really valuable in other industries, too. It is. You know, hotels are doing it. Ridesharing companies even. And, you know, of course, the giants like Amazon. Yeah. They all use these like dynamic pricing models to keep up with the market because it's always changing. Well, speaking of Amazon, let's talk about how they and Walmart, you know, these are two of the biggest players in retail. Yeah. How do they use FP&A to like manage all of their operations? Yeah. It's a lot. It's incredibly complex. Oh, absolutely. When you're talking about retail, forecasting demand and managing inventory, those are the like most important things. And FP&A, I mean, it's crucial for those. Their teams, they analyze mountains of data. They're looking at, you know, seasonal trends, how fast that inventory is turning over, all those costs that are part of the supply chain. They have to make sure that the right products are available, you know, at the right time and at the right price. Yeah. I don't know. It's like trying to make sure everything's in the right place at the right time. This global network of warehouses and stores, it's crazy. What are some of the specific things that they're doing to actually optimize all of that? So, for example, like during the holidays, Amazon, they use like real-time data. So, you know, everyone's shopping, they're buying gifts, they're constantly adjusting what's in the warehouses to make sure they don't, you know, run out of those must-have gifts. They also adjust their advertising budgets, you know, to promote those trending products that everyone wants. And, you know, as we were talking about earlier, they also use those dynamic pricing models to, you know, beat out the competition. Right, right. So it's not just about like predicting what people want. It's about like reacting really quickly when you see those changes in consumer behavior in the market. Exactly. Walmart's another one. They're really pushing the boundaries of what you can do with analytics in FP&A. Really? Yeah. They've like gone all in on machine learning, you know, those algorithms to try to improve how accurate their forecasts are, especially for things like, you know, back-to-school shopping when they know there's going to be this huge surge in demand. And that makes sense. So what kind of results are they seeing from doing all that? Well, just last year, 2023, their FP&A team, they managed to increase their forecasting accuracy by 15 percent, which is pretty amazing when you think about it. That's impressive. What that means is less stuff sitting around unsold, less waste and, you know, at the end of the day, higher profits. Right. Which everybody likes. Yeah, exactly. So we've seen how FP&A is really like shaping the strategies and, you know, the profits of some of the most successful companies out there. But the question on everybody's mind is like, what can we learn from all of this? Yeah. How can we actually apply these insights, you know, to our own work, even if we're not running these massive, you know, multibillion dollar corporations? That's a great question. And it's something we're going to dig into deeper in the next part of our deep dive. Right. We're going to take these examples. We're going to boil them down to like those actionable things you can actually do. OK. In your own FP&A work, regardless of the industry you're in or your role. So stay with us. So we just saw how FP&A is like making big things happen in companies like Tesla, Netflix, those airlines, Amazon and Walmart. And like you were saying, the big question is how do the rest of, you know, the people not running these giant companies. Right. How do we use those same lessons? Yeah, exactly. Those are some pretty impressive examples. But what about the rest of us who are working in smaller companies or maybe even different industries? That's what makes this deep dive so valuable. What we found are three big takeaways that apply across the board. OK. It doesn't matter how big your company is or what industry you're in. All right. I'm all ears. Hit me with those takeaways. I'm ready to like level up my FP&A game. OK. So the first one, and this might be the most important, is that FP&A, it's not just about the numbers. It's really a strategic function. Yeah. We talked about that a bit earlier. It's really easy to get like lost in those spreadsheets and forget about the bigger picture. Oh, yeah, for sure. FP&A isn't just about making reports. It's about providing insights that help shape the direction of the company and making sure that the financial goals, they match up with what the business is trying to achieve overall. So whether it's like a new product launch or a big marketing campaign or even like a major expansion, FP&A should be there right from the start, providing that like financial perspective. Exactly. Think of FP&A as like a partner, you know, at the table, not just someone who comes in after all the decisions have been made to like clean up the numbers. Right, right. OK, so strategic thinking is key. What's next? Data-driven insights. I mean, this is really what drives profitability. OK. And it's something a lot of companies struggle with, even the big ones. Yeah. It's one thing to collect a bunch of data, but it's a whole other thing to actually do something with it. Yeah, exactly. We saw how Netflix uses data to like decide what shows to make and how airlines use real-time data to, you know, adjust those prices when the market is going crazy. Exactly. They're using data to really understand their customers. You know, can we predict how demand is going to shift? And then can we change our strategy based on that? Right. And it doesn't have to be about like big data and complicated algorithms. So even those smaller companies that don't have all those resources, they can still benefit from that data-driven approach. Absolutely. Even if you're just analyzing like basic sales trends, you know, figuring out which products people are buying or, you know, spotting those patterns and how customers behave. I mean, that can give you some really valuable insights that can lead to better decisions and more profits. It's about making sure that the data you're collecting is actually working for you, not just sitting there. All right. So what's the last takeaway? Adaptability. The business world is moving so fast these days that you have to be able to adjust quickly if you want to survive, let alone be successful. Yeah. We saw that with like Amazon, you know, how they manage inventory in real time during the holidays. Right. And how the airlines are always adjusting to those crazy fuel costs. It's all about being, you know, agile and responsive. Exactly. The companies that embrace change, you know, they're willing to question their assumptions and they can pivot quickly. Those are the ones that are going to thrive in the long run. Right. Because if you're stuck with those old plans in a market that's constantly changing, I mean, that's a recipe for disaster. So how do we get better at being adaptable? Is it just about being willing to change course when things aren't working out? It's more about being proactive than reactive. So stay up to date on what's happening in your industry. You know, always be looking for new information and don't be afraid to challenge what you think you know. Okay. And don't be afraid to experiment, try new things, adjust your approach as you go. The companies that can adapt quickly, they're the ones that will end up leading the pack. I love those three takeaways. Strategic thinking, using data to make decisions and being adaptable. Those are super powerful. And what's really cool is that they work no matter what industry you're in or what your role is. Right. But let's get even more practical. Yeah. What are some of the common challenges that people in FP&A actually face? And how can we use these takeaways to overcome them? That's a great question. And that's exactly what we're going to dive into in the final part of our deep dive. So we've talked about how companies like, you know, Tesla, Netflix, Amazon, how they use FP&A to make those big strategic decisions and how those lessons, those insights, they can really apply to any business. Yeah, for sure. We've also talked about those key takeaways, right? Like thinking strategically, making decisions based on data and, you know, being adaptable. Absolutely. But let's get into some of the like the nitty gritty, you know, some of the actual challenges that people in FP&A, they face day to day. Okay. Sounds good. What are some of those and how can we like use what we've learned to overcome them? Well, one of the biggest ones, you know, it's always been a challenge is forecasting accuracy. Right. You know, the world's changing all the time. So trying to predict the future. I mean, it can feel like you're like reading tea leaves or something. Yeah, it can definitely feel overwhelming, especially if you're in an industry where things can change really quick. Absolutely. What can you do? Well, I think the answer lies in what we call dynamic forecasting. Instead of, you know, those rigid annual budgets, you got to think about using rolling forecasts that are, you know, constantly updated based on the latest data, what's happening in the market. So basically ditch that like static crystal ball. Exactly. And be a little bit more agile. Yeah. Be ready for change. Yep. Exactly. What else, what else do people struggle with? Another big one is, you know, trying to find that balance between those short-term financial goals, you know, hitting the numbers this quarter, and then that long-term vision, where do we want to be in five years? Right. It's so easy to get caught up in like the day-to-day stuff and lose sight of like the big picture. Oh yeah. For sure. What's the answer there? Well, that's where scenario planning comes in by like modeling different outcomes. You know, what's the best case? What's the worst case? What's the most likely scenario? Okay. You can actually start making decisions that take both, you know, the immediate needs and the future into account. So don't just focus on like hitting the numbers for this quarter, you know, always got to be thinking about the long game. Absolutely. Okay. So forecasting, balancing those short-term and long-term goals, any other big challenges that we should be thinking about? Well, of course we can't ignore the big one that everyone's talking about, automation. Oh yeah. Right. The robots are coming. Well, maybe not quite like that, but automation is definitely changing the world of FP&A. I mean, it seems like those spreadsheets are like all their way out. Yeah. Well, they're definitely changing. What should people be thinking about when it comes to automation? Well, I think it's about embracing those new tools, you know, things like machine learning, AI. Right. If you can use those to automate the tasks that, you know, take up a lot of your time, the repetitive stuff. Okay. Then you can free yourself up to do more of that, you know, strategic analysis, the decision-making, the things that really add value. So don't be afraid of the robots. As we're wrapping up this deep dive, I want to leave you with one final thought. FP&A, it never stands still. Right. So to really stay ahead of the curve, you got to embrace lifelong learning. So always be curious, always be asking questions, always be looking for new knowledge and skills. Exactly. Read those industry publications, go to conferences, connect with other FP&A professionals and never stop learning. That's great advice. So just to recap those key takeaways one more time. Yeah. FP&A, it's strategic. It's not just operational. You know, think big picture, focus on driving those business decisions. Right. Use data to make decisions. That data is the key to profitability. Be adaptable. The world's changing fast. So you got to be flexible, embrace that change and be ready to adjust how you do things. And never stop learning. Exactly. The world of FP&A is always evolving. So stay curious and keep those skills sharp. I think that's a great place to wrap up. Yeah. We hope this deep dive gave you a fresh perspective on FP&A. I think it did. And maybe even inspired you to, you know, take your skills to that next level. Absolutely. Thanks for joining us. Yeah, thanks for being here. The future of FP&A, it's bright. So embrace those challenges, go after those opportunities and make a real difference in your organization. That's great advice. Until next time. Thanks for listening to Corporate Finance Explained. If you found this episode valuable, be sure to check out more episodes and explore CFI's highly rated courses at CorporateFinanceInstitute.com. Don't forget to subscribe for more deep dives into essential finance topics. See you next time.