Proven Techniques for Optimizing Your Financial Planning & Analysis Process
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Transcript of 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
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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
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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
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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
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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
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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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Initiative Based Scenario Planning
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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Initiative Based Scenario Planning
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
Base CaseGiven current trends, what is our financial outlook 3-10 years?
InitiativesAs we prioritize growth or cost containment initiatives, what is the incremental impact?
Initiative #1
Initiative #4
Base Case(Conservative)
Initiative #2
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Initiative Based Scenario Planning
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
Base CaseGiven current trends, what is our financial outlook 3-10 years?
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
Base Case(Conservative)
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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Structural Elements of Driver Based Planning
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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Structural Elements of Driver Based Planning
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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Structural Elements of Driver Based Planning
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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
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
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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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Structural Elements of Driver Based Planning
Driver Assumption
s
Baseline V1 V2 V3 …Vn
Business Logic Layer
e.g. (Price * Volume – (Regional Discount Factor * Volume) * Shipping Fee) – Return
% = Net Sales
Collaboration, Inputs
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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Structural Elements of Driver Based Planning
Driver Assumption
s
Baseline V1 V2 V3 …Vn
Business Logic Layer
e.g. (Price * Volume – (Regional Discount Factor * Volume) * Shipping Fee) – Return
% = Net Sales
Collaboration, Inputs
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