Published on February 18, 2014
Proven Techniques for Optimizing Your Financial Planning and Analysis Process Tony Ard Director, Solutions Engineering, Axiom EPM
Agenda • Challenges for Planners • External & Internal • The Evolving Role of Finance • Best Practices in Planning • Initiative Based Scenario Planning • Elements of Driver Based Models • Rolling Forecasts 2 © 2014 Proformative
Volatility is Here to Stay Market Trends Driving Volatility Crude Oil Prices 2007-2012 • Economic Growth • Globalization • Regulation U.S. New Housing Starts – 2002-2012 • Sustainability • Demographics • Technology 3 © 2014 Proformative Source: David Axson, Partner, Accenture, March 2013
Challenges for Planners • Setting long term capital investment priorities • Establishing creditable targets, budgets & forecasts • Analyzing the impact of material events on strategies and plans • Effectively managing cash and capital • Recognizing competitive threats • Seizing opportunities 4 © 2014 Proformative Source: David Axson, Partner, Accenture, March 2013
Decision Making Flaws • Humans are bad at processing complex options and predicting the future • We think we are very good at it • Hindsight bias – “I knew it all along” • Math and probability are not intuitive • We prefer stories and narratives • The Monty Hall Problem • The Black Swan Theory • • 5 Low probability high magnitude events defy modeling Finance, business, and technology are susceptible to the problem © 2014 Proformative Source: Nassim Nicholas Taleb, Dean’s Professor, UMASS
More Data Does Not Lead to Better Insight • The haystack gets bigger 6 © 2014 Proformative
The Planner’s Paradox • Planning for the future is not an intuitive task • Your organizations need your skills and insights more than ever • The world in which we work continues to get more complex and unpredictable • You need the best practices and tools possible 7 © 2014 Proformative
Benefits of Optimized FP&A • Better formulation of strategic and tactical plans by helping companies think more broadly • Wider range of possible outcomes, opportunities as well as problems • New insights into the interaction of external and internal factors • Enhanced ability to make decisions in the face of uncertainly and ambiguity • Greater confidence in those decisions • A building block for superior performance • Organizational ability to generate proactive responses to market events • Communicate more effectively with investors, directors, and other stakeholders • Higher management credibility • Faster and more consistent growth of business value 8 © 2014 Proformative
The Evolving Role of Finance Analytic Capability Strategic Partner Analyst Measuring Advising Planning Growth focused Calculating Risk aware Modeling Present & future Past & future Connected Scorekeeper 3 4 1 2 Controller Reporting Gatekeeper Accuracy Expense focused Retrospective Governance Disconnected Retrospective Efficiency & Control 9 © 2014 Proformative Quadrant 4 Embodies all the characteristics of the other three quadrants plus leadership and outbound activities
Name That Company • Yesterday • Revenue of $16B • Market Cap of $31B • 5th Most valuable brand in the world • Growing business for over 110 years • 2012 Market cap $0 10 © 2014 Proformative
Best Practices in Planning • Scenario Planning • Initiative Based Planning • Driver Based Planning • Rolling Forecasts 11 © 2014 Proformative
Initiative Based Scenario Planning
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Initiative Based Scenario Planning Base Case Given current trends, what is our financial outlook 3-10 years? 14 © 2014 Proformative Base Case (Conservative) Forecasting methods include: • Driver-based model • Volume & Mix • Variable Labor, efficiency benchmarks • Capital constraints • Different versions for multiple external scenarios
Initiative Based Scenario Planning Forecasting methods include: Base Case Given current trends, what is our financial outlook 3-10 years? Base Case (Conservative) Initiatives As we prioritize growth or cost containment initiatives, what is the incremental impact? Initiative #1 Initiative #3 15 © 2014 Proformative Initiative #2 Initiative #4 • • • • Driver-based model Volume & Mix Variable Labor, efficiency benchmarks Capital constraints Examples: • Open new geographic region • Expand productive capacity • Back office automation • Divestiture of finance subsidiary
Initiative Based Scenario Planning Base Case Given current trends, what is our financial outlook 3-10 years? Base Case (Conservative) Initiatives As we prioritize growth or cost containment initiatives, what is the incremental impact? Initiative #1 Initiative #3 Initiative #2 16 © 2014 Proformative Examples: • Open new geographic region • Expand productive capacity • Back office automation • Divestiture of finance subsidiary Initiative #4 Scenarios What is the impact on our baseline projections given the initiatives we’ve proposed? Forecasting methods include: • Driver-based model • Volume & Mix • Variable Labor, efficiency benchmarks • Capital constraints Analysis contains: Consolidated Results • • • • Income Statement Balance Sheet Cash Flow Key Ratios
Next Steps with Initiatives • Roll into budgets and forecasts • Defines ownership and accountability • Frame of reference for scorecards; aligns strategy to execution • Identify leading indicators that will trigger an alternative scenario • Adjust as the base case changes • Upside – Previously marginal initiatives becomes attractive • Downside – Pull back on initiatives to weather the storm • Monitor the leading indicators • Gives you the ability to respond quickly and with confidence in times of uncertainty and volatility 17 © 2014 Proformative
Structural Elements of Driver Based Planning
Structural Elements of Driver Based Planning 1. Driver Assumptions • Define the key external and internal variables that influence your business and define your marketplace • Consider the level of certainty and the level of impact • History retention of driver information recommended • Automating the data capture is a best practice 19 © 2014 Proformative 1 Driver Assumptions Baseline V1 V2 V3 …Vn
Structural Elements of Driver Based Planning 2. Business Logic Layer 1 • The most critical aspect of your scenario planning model Driver Assumptions 2 Business Logic Layer • Goal: Define algorithms that emulate the organization • Logic layer should be transparent to stakeholders 20 © 2014 Proformative Baseline V1 V2 V3 …Vn e.g. (Price * Volume – (Regional Discount Factor * Volume) * Shipping Fee) – Return % = Net Sales
Structural Elements of Driver Based Planning 3. Collaboration & Inputs • Seldom is every line item governed by a rule • Regardless of the best business logic, stakeholders can and should be able to provide subjective input • Workflow processes should govern who has rights to make adjustments and overrides 21 © 2014 Proformative 1 Driver Assumptions 2 Business Logic Layer 3 Collaboration, Inputs and Overrides Baseline V1 V2 V3 …Vn e.g. (Price * Volume – (Regional Discount Factor * Volume) * Shipping Fee) – Return % = Net Sales
An Aside About Collaboration The Madness of Crowds 22 © 2014 Proformative The Wisdom of Crowds
Structural Elements of Driver Based Planning • Rapidly created scenarios need a home in the system • It is important that all data (models and metadata) be stored with a scenario 23 © 2014 Proformative Driver Assumptions 2 Business Logic Layer 3 Collaboration, Inputs and Overrides 4 4. Scenario Storage 1 Scenario Storage Baseline V1 V2 V3 …Vn e.g. (Price * Volume – (Regional Discount Factor * Volume) * Shipping Fee) – Return % = Net Sales Base V1 V2 V3…Vn
Structural Elements of Driver Based Planning • It is critical that scenarios can be viewed side-byside, with full drill-down • Operational drivers should be presented along with financial information • Flex-based analysis superimposing actual driver values into scenarios is great for model tuning 24 © 2014 Proformative 1 Driver Assumptions 2 Business Logic Layer 3 Collaboration, Inputs and Overrides 4 Scenario Storage 5 5. Scenario Presentation Scenario Presentation Baseline V1 V2 V3 …Vn e.g. (Price * Volume – (Regional Discount Factor * Volume) * Shipping Fee) – Return % = Net Sales Base V1 V2 V3…Vn
Rolling Forecast in the Context of the Finance Calendar 26 © 2014 Proformative
Benefits of Rolling Forecasts • Enable a consistent forward looking business perspective that aligns to the cadence of the business rather than the financial calendar • Saving prior forecasts enables insight and improvement of the process • Provide the ability to regularly monitor and course correct • Or seize opportunities • Allow for a stronger basis in reality rather than the aspirational nature of budgets 27 © 2014 Proformative
Waterfall Reporting • Highlights trends • Identifies errors in forecasting Problems with the model Problems with incentives • • • Sandbagging • Don’t create incentives for people to be less than honest Manage the human bias in decision-making • Q1 2014 Q2 2014 Q3 2014 Q4 2014 Q1 2015 Feb Forecast 10 12 11 15 11 May Forecast 11 13 12 15 11 14 August Forecast 11 14 13 15 12 14 13 Nov Forecast 11 14 13 15 13 14 13 Actual 28 © 2014 Proformative Forecast Q2 2015 Q3 2015 Out Period Q4 2015 16
Conclusion • Use Scenario Planning to build confidence in forecasts • Develop a robust driver based model • Use Rolling Forecasts to flag leading indicators and respond to material changes 29 © 2014 Proformative
Reveal the Mystery Company 30 © 2014 Proformative
& 31 © 2014 Proformative
Thank You For Attending Proven Techniques for Optimizing your Financial Planning and Analysis Process
Sources • The Wisdom of Crowds: Why the Many Are Smarter Than the Few and How Collective Wisdom Shapes Business, Economies, Societies and Nations • • • Book by James Surowiecki 2004 Extraordinary Popular Delusions and the Madness of Crowds • • • Book by Charles Mackay 1841 The Black Swan • • • Book by Nicholas Taleb 2007 Priceless: The Myth of Fair Value (and How to Take Advantage of It) • • • Book by William Poundstone 2010 Predictably Irrational, Revised and Expanded Edition: The Hidden Forces That Shape Our Decisions • • 33 Book by Dan Ariely 2008 © 2014 Proformative
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