Is Accounting Experience Necessary for an FP&A Professional?

15 Reasons to Consider…

Many people see Financial Planning & Analysis roles and Accounting roles as being two disparate career choices. The former focuses on forecasting the business and decision support, while the latter focuses on applying accounting rules to accurately record transactions.

As someone who has spent a great deal of time gathering requirements for both types of searches over the years, while there are defining characteristics of either role, I would contend that FP&A professionals who have developed a strong understanding of accounting are more effective than the quintessential Excel jockey who can quickly spin up a P&L model; of course, having both skill sets puts you in the upper echelon of FP&A professionals. ?

Let’s examine why accounting knowledge and experience is critical for being an effective FP&A professional:

1.????? Understanding Financial Statements

FP&A professionals need to deeply understand financial statements, which are grounded in accounting principles. This knowledge enables them to accurately read and interpret balance sheets, income statements, and cash flow statements. These documents reflect a company’s financial health and performance, heavily influenced by accounting rules such as GAAP (Generally Accepted Accounting Principles) in the U.S. If you want to effectively forecast the business, you need to start with a strong understanding of the actuals.

2.????? Capitalization vs. Expense

Large CapEx investments are typically capitalized, meaning the cost is recorded as an asset on the balance sheet and depreciated over its useful life. This treatment affects the balance sheet by increasing assets and impacts the income statement through depreciation expense rather than immediate expense recognition. Alternatively, if CapEx is treated as an expense, the entire cost impacts the income statement immediately, which can significantly reduce the profit for that period.

FP&A professionals must analyze which approach aligns with corporate financial goals. For instance, if maintaining a healthier EBITDA in the short term is crucial, capitalizing the expense and spreading it over several years through depreciation might be more strategic.

3.????? Depreciation Method

Different depreciation methods (straight-line, declining balance, units of production) affect the timing and amount of depreciation expense. The choice of depreciation method can influence the reported earnings and tax liabilities. For example, using an accelerated depreciation method can reduce taxes in the initial years but result in lower profits, which might not be appealing to investors seeking steady year-over-year growth.

4.????? Return on Investment (ROI) and Payback Period

Calculating the ROI and payback period involves understanding the incremental cash flows generated by the investment, minus the depreciated cost. These calculations help determine how long it will take for the investment to pay for itself and the total return expected over its useful life, influencing whether the investment aligns with the company’s long-term financial strategies.

5.????? Impairment Considerations

Assets must be regularly evaluated for impairment, a condition where the market value of an asset falls below its book value. If there’s a risk of impairment, the FP&A professional must factor in potential future losses and the impact on financial reporting. This is particularly important in industries where technological changes can rapidly make capital equipment obsolete.

6.????? Variance Analysis

In FP&A, variance analysis is a critical tool used to identify and understand the differences between planned and actual financial performance. A strong accounting background allows FP&A professionals to discern whether variances arise from operational performance or accounting treatments. For example, changes in revenue recognition criteria or depreciation methods can significantly impact reported revenue and expenses, which might be misconstrued as operational variances without proper accounting knowledge.

7.????? Strategic Decision Making

FP&A professionals support strategic decision-making by providing financial insights and forecasts that guide corporate strategy. Accounting knowledge is vital here because it provides the foundation for evaluating the financial implications of different strategic scenarios. Understanding concepts like amortization and depreciation is crucial when assessing investments in capital-intensive projects, as these accounting treatments affect the timing and recognition of expenses. Expense recognition is a critical input in weighing strategic investments.

8.????? Mergers and Acquisitions

FP&A professionals are instrumental in building comprehensive financial models that predict the future financial impact of the acquisition. These models include the expected ROI, synergies, and the effect of new asset valuations and potential goodwill on financial statements. FP&A professionals can play a key role in the valuation of the acquired assets and liabilities, which involves understanding fair value measurements.

FP&A needs to work closely with valuation experts and auditors to ensure that the fair values assigned are accurate and reflect the true worth of the assets acquired. Without an understanding of how assets and goodwill are valued, they will struggle to bridge those valuations to effective financial modeling internally within the company. It will be challenging to convey cost savings, additional revenue opportunities, and other operational efficiencies without an understanding of accounting levers in the business.

9.????? Understanding Purchase Price Accounting

Accuracy in Financial Statements: Knowing the specifics of PPA allows FP&A professionals to ensure that financial statements post-acquisition are accurate and compliant with accounting standards such as GAAP or IFRS. Misstatements due to incorrect asset valuations can lead to significant financial repercussions.

The way assets and liabilities are valued and integrated into the financial system can significantly impact key financial metrics such as EBITDA, net income, and asset turnover ratios. These metrics are often closely monitored by investors and analysts as indicators of the success of the acquisition.

10.? Recognition of Lease Liabilities and Right-of-Use Assets

Under the new standard, leases previously classified as operating leases must now be recorded on the balance sheet as right-of-use (ROU) assets and corresponding lease liabilities. This shift from off-balance sheet accounting means:

Increased Assets and Liabilities: FP&A professionals must account for a significant increase in both assets and liabilities on the balance sheet, impacting financial ratios such as debt to equity and asset turnover.

The need to forecast the impact of these leases on future balance sheets and cash flows, including interest expenses and depreciation of ROU assets.

11.? Distribution of New Stock to Shareholders

When a company issues new stock to shareholders, several accounting and financial aspects must be considered

Dilution of Earnings: Issuing new stock can lead to dilution of earnings per share (EPS). This happens because the net income is now spread over a larger number of shares. FP&A professionals must account for this dilution when forecasting future earnings and reporting EPS in financial projections.

Impact on Shareholders' Equity: The issuance of new stock increases the common stock and additional paid-in capital (APIC) within shareholders' equity. This needs to be accurately forecasted and reflected in the equity section of the balance sheet.

Cash Flow Considerations: If the new stock is issued for cash, there is an influx of cash, which improves the cash position of the company. FP&A professionals need to forecast how this cash will be used—whether it will fund new projects, pay down debt, or be held for future use.

12.? Employees Exercising Stock Options

When employees exercise their stock options, this too has significant accounting implications:

Compensation Expense: Stock options are generally accounted for as compensation expense, which is recognized over the vesting period of the options. The expense recognized is based on the fair value of the options at the grant date. FP&A professionals must forecast these expenses accurately to manage budgeting and financial planning effectively.

Tax Implications: The exercise of stock options can have tax implications for both the employee and the company. For instance, the company might receive a tax deduction for the compensation expense reported. This aspect must be included in tax expense forecasting.

Impact on Cash and Equity: When options are exercised, the company issues new stock. This increases the common stock and APIC in the shareholders' equity but does not typically involve cash inflow like a public stock issuance. This impacts the equity structure without affecting the company's cash position.

13.? Cross-functional Collaboration

How many times has the forecasting been delayed because FP&A was waiting for accounting to finish month end close with little ability to support and help their accounting counterparts get done faster? FP&A teams frequently collaborate with other departments, such as accounting, tax, and audit. Professionals with a strong accounting background can communicate more effectively with these departments, ensuring that financial plans align with broader corporate policies and accounting practices. This collaboration helps in harmonizing financial planning with tax planning, audit requirements, and regulatory reporting, leading to more robust and reliable financial management.

14.? Second Reviewer

If FP&A understands accounting, they can function as a second pair of eyes in sanity checking accounting’s work at month end. This is especially valuable in a smaller organization where resources are limited. Catching mistakes before they are published prevents restatements and mitigates risk.

15.? Enhancing Credibility

Professionals who can integrate both FP&A and accounting expertise are often viewed as more credible. Their ability to align financial analysis with accounting logic not only enhances the accuracy of their work but also boosts confidence among executive leadership and external stakeholders. This credibility is crucial for securing buy-in on major projects and strategic shifts. If the CFO or board asks you to refresh them on the current revenue recognition policy that the company is applying to better understand the forecast, you’ll earn greater respect and increase efficiency of communication.

Conclusion

A strong accounting foundation is not just about maintaining accurate books and records; it's about enriching your financial analysis, accelerating collaboration with accounting teams, ensuring compliance and accuracy in reporting, and supporting strategic decisions that drive business success. This dual expertise enables you to provide more value and insight, making you more indispensable; not to mention more competitive in the job market compared to FP&A professionals with little understanding of accounting.

If you found this article helpful, please send me a connection request and a message. I run an accounting and finance consulting and search firm called CFO’s Domain. We provide interim professionals and full-time candidates serving venture backed startups, private equity portfolio companies, and mid to large cap organizations.?