Proven Techniques for Optimizing Your Financial Planning & Analysis Process

Proven Techniques for Optimizing Your Financial Planning and Analysis ProcessTony Ard

Director, Solutions Engineering, Axiom EPM

© 2014 Proformative

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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


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Volatility is Here to Stay

• Economic Growth

• Globalization

• Regulation

• Sustainability

• Demographics

• Technology

Crude Oil Prices 2007-2012

U.S. New Housing Starts – 2002-2012

Source: David Axson, Partner, Accenture, March 2013

Market Trends Driving Volatility


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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

Source: David Axson, Partner, Accenture, March 2013


Decision Making Flaws

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• 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• Low probability high magnitude events defy modeling

• Finance, business, and technology are susceptible to the problem

Source: Nassim Nicholas Taleb, Dean’s Professor, UMASS


More Data Does Not Lead to Better Insight

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• The haystack gets bigger


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The Planner’s Paradox

• Planning for the future is not an intuitive task

• The world in which we work continues to get more complex and unpredictable

• Your organizations need your skills and insights more than ever

• You need the best practices and tools possible


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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


The Evolving Role of Finance

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Analytic Capability

Efficiency & Control

Scorekeeper

Reporting Accuracy Retrospective Disconnected

StrategicPartner

Advising Growth focused Risk aware Present & future Connected

Controller

Gatekeeper Expense focused Governance Retrospective

Analyst

Measuring Planning Calculating Modeling Past & future

1 23 4

Quadrant 4 Embodies all the characteristics of the other three quadrants plus leadership and outbound activities


Name That Company

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• 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


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Best Practices in Planning

• Scenario Planning• Initiative Based Planning

• Driver Based Planning

• Rolling Forecasts

Initiative Based Scenario Planning


Hurdles to Scenario Planning

Other (please specify)

Lack of management interest

We don't have a good handle on our drivers

Our system is not set up to do it

Not enough time

0% 10% 20% 30% 40%

10%

12%

14%

28%

36%

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• Bandwidth Constraints

• Technology Deficiency

• Configuration Deficiency

• Lack of Institutional Knowledge

• Process Conflicts

• Cultural Conflicts


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Forecasting methods include:• Driver-based model• Volume & Mix• Variable Labor, efficiency benchmarks• Capital constraints• Different versions for multiple external scenarios

Base CaseGiven current trends, what is our financial outlook 3-10 years?

Base Case(Conservative)


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Forecasting methods include:

Examples:

• Driver-based model• Volume & Mix• Variable Labor, efficiency benchmarks• Capital constraints

• Open new geographic region • Expand productive capacity• Back office automation• Divestiture of finance subsidiary

Initiative #3


InitiativesAs we prioritize growth or cost containment initiatives, what is the incremental impact?

Initiative #1

Initiative #4


Initiative #2


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Forecasting methods include:

Examples:

• Driver-based model• Volume & Mix• Variable Labor, efficiency benchmarks• Capital constraints

• Open new geographic region • Expand productive capacity• Back office automation• Divestiture of finance subsidiary

Analysis contains:

• Income Statement• Balance Sheet• Cash Flow• Key Ratios

Consolidated Results

Initiative #3


InitiativesAs we prioritize growth or cost containment initiatives, what is the incremental impact?

ScenariosWhat is the impact on our baseline projections given the initiatives we’ve proposed?

Initiative #1

Initiative #4


Initiative #2


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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

Structural Elements of Driver Based Planning


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1. Driver Assumptions

Driver Assumption

s

Baseline

V1 V2 V3 …Vn1• 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


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Driver Assumption

s

Baseline V1 V2 V3 …Vn

Business Logic Layer

e.g. (Price * Volume – (Regional Discount Factor * Volume) * Shipping Fee) – Return

% = Net Sales

1

2

2. Business Logic Layer• The most critical aspect

of your scenario planning model

• Goal: Define algorithms that emulate the organization

• Logic layer should be transparent to stakeholders



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Driver Assumption

s

Baseline

V1 V2 V3 …Vn



% = Net Sales

Collaboration, Inputs

and Overrides

1

2

3

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


The Madness of Crowds

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An Aside About Collaboration

The Wisdom of Crowds

Click icon to add picture


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Driver Assumption

s




% = Net Sales


and Overrides

Scenario Storage

BaseV1 V2 V3…Vn

1

2

3

4

4. Scenario Storage• Rapidly created

scenarios need a home in the system

• It is important that all data (models and metadata) be stored with a scenario


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Driver Assumption

s




% = Net Sales


and Overrides

Scenario Storage

BaseV1 V2 V3…Vn

1

2

3

4

5. Scenario Presentation• It is critical that

scenarios can be viewed side-by-side, 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

Scenario Presentatio

n

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Rolling Forecasts


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Rolling Forecast in the Context of the Finance Calendar


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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


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Waterfall Reporting

10 12 11 15 11

13 12 15 11

13 15 12

15 13

11

11 14

11 14 13

Q1 201

4

Q2 201

4

Q3 201

4

Q4 201

4

Q1 201

5

Q2 201

5

Q3 201

5

Q4 201

5

14

14

14

13

13 16

Feb Foreca

stMay

Forecast

AugustForeca

stNov

Forecast

Actual Forecast

Out Period

• 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


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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


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Reveal the Mystery Company


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Q&A

Proven Techniques for Optimizing your Financial Planning and Analysis Process

Thank You For Attending


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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• Book by Dan Ariely

• 2008