Top FP&A Considerations for Investment Firms
Top FP&A Considerations for Investment Firms
January 2019

As investment firms compete for capital, investors along with their consultants have been asking for more information and often want to understand the decision-making process undertaken by investment managers. A thorough analysis of new funds or strategies is required to determine the viability and profitability of new or existing businesses and therefore, whether it’s worthy of an investment.

As data becomes more accessible, GP’s want to leverage this data to help determine what businesses should be expanded or contracted or whether it may be necessary to shift resources.

To make informed decisions, it is critically important to plan and understand profitability and the factors that impact it. Profitability can be analyzed across business lines, geographic regions, office, strategy, product, etc. Many organizations capture costs at the cost center level which may or may not be equivalent to the above groupings. Similarly, income can be captured at the same level or a subset of the above.

The financial planning and analysis (“FP&A”) group within a company, is often responsible for forecasting and analyzing profitability. To fully understand whether a department or business line is profitable, it is necessary to allocate costs and income where applicable to these areas.

Expense Allocations

One of the more time-consuming tasks of the FP&A department is the allocation of costs. At investment firms, the allocation of actual expenses is typically used for management reporting purposes only (and therefore do not impact financial statements). In addition, the results of these allocations can be used as the basis for forecasting future periods.

There are a variety of different approaches to expense allocations with some companies seeking to allocate all management company or administrative expenses to revenue-generating business lines. With this approach, expenses associated with functional areas like IT, HR and Accounting are 100% allocated to revenue areas (e.g. Private Investments, Fixed Income, etc.). The result is a ‘fully loaded’ P&L for these departments. The methodologies used to allocate expenses can be just as varied.

Common allocation methodologies include square footage for rent, headcount for support functions (helpdesk, HR, etc.) and committed capital or AUM for other costs such as accounting fees, corporate legal expenses, and office supplies. Other costs such as market data and research can utilize third-party systems to determine actual usage and act as the basis for cost distribution. Some firms can allocate at a very granular level e.g. IT costs allocated by person who has a cell phone, or laptop, etc. Other firms choose to allocate at a higher level.

Some companies choose to allocate a subset of costs and keep residual balances as corporate expenses. This is often done to eliminate potential issues which may arise when allocated costs can be more ‘expensive’ to a business line than procuring services from third parties or to avoid disagreements over the necessity of certain expenses.

Revenue allocations / Revenue Sharing

When assigning or forecasting revenue, certain companies need to allow for revenue share agreements or for cases when portfolio managers work across multiple business areas. This requires a separate data set that houses this allocation data and can be used to distribute income across the firm.

Intercompany allocations

When allocating revenue or expense amounts across different legal entities, this will result in a ‘due to / due from’ entry in both the sending and receiving companies. It is important to note, that when allocating actuals across business lines, this will lead to a cash event that will require one entity to reimburse the other to clear the intercompany balances.

Above the Line vs. Below the Line

Finally, allocations can be at different levels on a financial statement. Some allocations are made using the same level of detail as the original journal. For example, IT allocations can be made using a specific account such as licensing costs or they can be done more generally as part of an allocation such as IT allocations. Senior management must decide how they would like their financial statements (or forecasted financial statements) to look and choose a methodology accordingly.


Projecting revenue and expenses is one of the more important tasks the Finance team performs. Typically, several iterations of a forecast are performed to predict results using a variety of factors. Firms can use an optimistic version to predict profitability when revenue is high, and expenses are low. Other iterations for pessimistic and likely scenarios are also used.

Rolling Forecasts

Rolling forecasts are useful to highlight actual costs to date against the original forecast. This should give firms insight as to how quickly the firm is burning through their budget and how much additional costs you can expect.

Forecasts using allocations

To properly forecast P&L for departments or business lines, FP&A teams typically utilize similar allocations as discussed above. The basis for forecasted allocations are usually based on actuals or using some assumptions for growth (e.g. headcount will grow at a higher rate for the Equities group and therefore will receive additional allocations in the future).


It is not uncommon to see Excel being used almost exclusively by FP&A departments at investment firms. The advantages and disadvantages of Excel are well documented, however, the sophistication and flexibility of new systems in the marketplace, make the case for using Excel much less appealing.

There are a variety of applications that streamline allocations, forecasting and the associated reporting. Some firms utilize robust ERP applications that have allocations and forecasting capabilities embedded in the product. The advantage to this approach is that the financial data is already in the software. If data not residing in the ERP package is required, it will need to be added through interfaces or manually through uploads or data entry.

Other solutions include BI tools and data warehouses. The advantage to BI tools is that they tend to make the user interface similar to Excel and therefore more readily adopted by the user community. They also include common spreading or allocation methodologies as part of the standard package.

Similarly, data warehouses can do a really nice job of aggregating all relevant data needed for allocations and forecasting. Depending on the product, certain functions may be easier or more difficult to customize.


The FP&A team can be a real competitive advantage to the Investment firms that employ them. A well thought out approach aided by technology can add tremendous value to senior management and assist with directional decisions that can lead to maximum profitability.

Understanding the various options from a functional and technical perspective is the first step in creating a best in class FP&A department.


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