Best Practices in Financial Planning & Analysis
Dave Pooley – 617 797 2949
dpooley@pelotongroup.com
Vice President - Peloton Group
2013 ANALYTICS SYMPOSIUM
February 12, 2013
Grand River Center
Dubuque, Iowa
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Personal Overview
Background
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20+ year career - Industry &
Consulting
Accounting and Finance background
Enterprise wide solution selling,
delivery, and high client satisfaction
track record
Key developer of culture and
community in various start ups
Team Player, Team Builder and
Entrepreneurial Sprit
Credentials
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Fairfield University – Fairfield, CT
Bowater – Pulp & Paper
Navigator Systems / Painted Word
Peloton Group / Balanced Scorecard
Fidelity Investments
Peloton Group
Entrepreneur, Volunteer, and
Contributor
Expertise
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Professional for fee based external
training – hundreds of students thru
planning and reporting tool training
Center of Excellence programs &
leading practice sharing
Client “Chalk Talk” and knowledge
dialogue leader and contributor
Entrepreneur program at private high
school
Group facilitation and team building
Solutions
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Dashboard – Wal-Mart (BSCOL
concepts, KPI, and Standard
Reporting)
Planning – EMC (driver based rolling
planning P&L model using
headcount and capital modeling)
Profitability – Fidelity (driver based
allocation modeling and enterprise
wide reporting)
Concepts and key points serve as flexible guides – they are
not rigid rules
Approach & Background
I can share
Guiding Principles
Around which
You should adopt
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An approach that meets
your needs
Agenda
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What the experts are saying
• What does the data tell us
• What frameworks exist
• What are the leading practices
• What does success look like
• Q&A
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What are “experts” saying?
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It's clearly a budget. It's got a lot of
numbers in it.
— George W. Bush
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Never base your budget requests
on realistic assumptions, as this
could lead to a decrease in your
funding.
— Scott Adams, Dilbert
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The budgeting process in many
companies has become costly,
time-consuming, and inflexible
control system for rewarding and
punishing business managers.
— Robert Kaplan & David Norton
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The budget is an exercise in
minimalization. You’re always
getting the lowest out of people
because everyone is negotiating to
get to the lowest number.
– Jack Welch, GE Chairman & CEO
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CFO Top Concerns
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Consumer Demand
Global Financial Instability
Maintain Margins
Ability to Forecast Results
Other Key Executive Thoughts
I want to see the
forest, the trees,
the branches and
individual leaves
– Lee Scott, CEO
Wal-Mart
Senior executives
want scenarios and
simulations that
provide immediate
guidance on the
best actions to take
when disruptions
occur.
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What does the data tell us?
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Dark reality
93% of finance managers
are swimming in
spreadsheets
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Accuracy, Timeliness and Relevance Seen as Greatest
Weakness
Accuracy of
forecasts
43%
Timeliness of
forecasts
39%
Relevance of
forecasts
47%
33%
0%
Needs improvement
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44%
50%
20%
40%
Acceptable
60%
Excellent
12%
2%
14%
2%
16%
80%
3%
100%
Not sure
AQPC Study Shows the Need to Eliminate Talent Waste
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Best Practice Firms Metrics and Practices
Source: Hackett Group
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Best Practice Firms Reduce Effort and Focus on Analysis
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What frameworks are in place to
guide my journey?
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The guide highlights a few potential purposes of the planning process
Improved
Management
Budgeting
and
Planning
Managing Market
Perceptions
Better
Company
Forecast
Accuracy
Communicate
with Investor
Market
Expectations
Better Strategy
Formulation
and Execution
Management
Credibility
Performance
vs.
Expectations
More Time &
Cost Efficient
Planning and
Budgeting
Reproduced from “Driving Value Through Strategic Planning and Budgeting”, Accenture in
association with Cranfield University
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Company
Performance
Actual
Performance
Shareholder
Value
Best Practice Planning Process – Level 1
Predictive Modeling & Simulation
Long-Term
Financial
Planning
Workforce
Planning
Capital Assets
Planning
Project
Financial
Plans
Cost
Analysis
Planning, Budgeting & Forecasting
Financial
Detail
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Operational
Detail
A typical World Class Planning Process – Level 2
Run models based
on key strategies
Include operational
detail and model
variability of
financial plan
Set targets
Strategic plan
Annual
budget /
plan
Seed targets to
annual
operating plan
Start annual
process
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Include
operational
details
Update forecast
with latest budget
and actuals
Evaluate
workforce
and capital
Evaluate resource
and capital
requirements
Monthly /
rolling
forecast
Update
strategic
plan
Update strategic
plan with latest
forecast
Detailed World Class Planning Process – Level 3
Revise submitted plan
PS10
Basic
Planning
Steps
Iterative
Modeling
Set
planning
structure
PS01
Populate
plan
PS02
Set global
constants
PS03
Prepare
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PS04
Set
baseline/
default
plan
PS05
Provide
access/
distr.
plan
Input
plan
PS06
Submit
plan
PS07
Develop
Consolidate
plan
PS08
PS09
Sign off
working
plan
Review
plan
PS11
Review
Companies capture efficiencies from new planning solutions and can add value
to the firm. Eventually optimizing and driving strategy execution.
Maximum
Productivity
of Available
Resources
Better
Strategy
Execution
Step 3
(rolling forecast, continuous
resource allocation & relative
performance targets)
Better Company Forecast
Accuracy
Step 2
(driver-based modeling)
More Cost & Time Efficient Planning and Budgeting
(decentralized inputs & global plan consolidation)
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Step 1
What are the success stories?
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What results are firms achieving
Shortened budget
cycle. Replaced
1000’s of Excel
spreadsheets
Reduced annual budget cycle by
50%
Uncovered estimated
annual cost savings
of $1.2M in missing
shipping charges
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Cut Sales Forecasting cycle from 2
weeks to 3 days.
Reduced monthly forecasting cycle by
48% . 21 – 11 days. Reduced
forecast error by 20%
Standardized process
globally and improved
forecast accuracy by
30%
Cycle time
Accuracy
Effort & Cost
Standardization
Simplification
Continuous
Improvement
What are the leading practices?
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Leading Practices
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6
7
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Measure financial impact of strategic objectives
Develop rolling forecast process
Focus on drivers, not details
Link human resource and capital allocation plans
What-if scenario analysis
Mitigate risk and uncertainty
Anticipate management reporting changes
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Measure the financial impact of key business strategies
Evaluate strategic projects and initiatives
Simulate effects of M&A
Develop a culture of analytics
Use analytics and planning to facilitate the
conversation
Set annual targets
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Successful strategy execution requires linkage between strategy and
operations. The planning process provides the bridge …
Strategy
The planning process
is at the core of linking
strategy to operations
Operations
60% of organizations do
not link operational plans
to strategy
The planning process is how an organization can translate the
strategy into action
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Consider a strategy execution framework to link strategy to operations
FINANCIAL
Strategy
Scorecard
• Revenue
• Cost
• Margin
• Ratios (ROIC)
CUSTOMER
• Satisfaction • Loyalty
• Engagement • Market Share
Is your strategy clearly articulated and measured?
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What outcomes are you
trying to achieve?
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Develop rolling forecast process
Event-based
Lightweight process
Fast and flexible
Dynamic and integrated with business drivers
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Rolling Forecasts Require Process Change
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If rolling forecasts are interpreted
as just another control system, they
then will be perceived as just
another reporting burden and only
spurious data will result
Beyond Budgeting
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The traditional budgeting and forecasting cycle does not provide
visibility and insight into the future
2013
Annual
Plan
Q1
Q2
2014
Q3
Q4
2015
No information beyond the current fiscal year
• Is the organization making progress towards longerterm financial and non-financial objectives ?
Forecast
One
Q1
Q2
Q3
Q4
Forecast
Two
Q1
Q2
Q3
Q4
• Are there opportunities / threats on the horizon that
necessitate action today ?
• What is the longer-term impact of near-term decisions
being made today (eliminate programs, defer hiring,
etc.) ?
Forecast
Three
Q1
Q2
Q3
Q4
Annual
Plan
Q1
Q2
Q3
Q4
Actual Results
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• Is their an opportunity to deploy / redeploy resources
given expected financial performance ?
Q1
Forecast Results
Q2
Q3
Q4
The rolling forecast provides a continuous, extended view of expected
performance
2013
Forecast
Two
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Q3
Q1
Q2
Q3
Q4
Q4
Q1
Q2
Q3
Q4
Q1
The rolling forecast supports target setting activities by with estimates of expected financial performance based on known assumptions
Fcst Four /
Annual Plan
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Q4
2015
The rolling forecast supports strategic planning efforts including strategy refreshes
Forecast
Three
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2014
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
The rolling forecast provides the baseline for the annual plan
Forecast
One
Q1
Q2
Traditional Forecast
Actual Results
Q3
Rolling forecasts focuses on root cause analysis around business drivers
and action plans to address performance gaps
Driver-Based Root Cause Analysis
Driver Model Variable Values
Plan
Actual
Variance
200,000
20
225,000
20
12.5%
Calls per Agent Per Day
Capacity per Agent per Day
75
1,500
66
1,320
- 12.0%
- 12.0
Peak / Absence Factor
Agents Required
1.2
160
1.1
188
- 8.3%
17.2%
Inbound Calls per Month
Working Days per Month
Cost per Agent per Month
Salary Expense
$400,000
$ 2,500
$468,750
$ 2,500
17.2%
$400,000
Traditional Analysis
Plan
Actual
$468,750
17.2%
Variance
Variance analysis based on driver-based forecasts provides insight into both what happened and why it happened.
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What:
Salary expense 17.2% above plan
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Why:
(1) Call volume 12.5% above plan (2) Agent productivity 12% below plan (3) More agents required
Corrective Action: How do I address the performance shortfall ?
Detailed Causal Analysis
• Investigate the significant above plan call volume variance
• Timing, scope, and effectiveness of Marketing programs
• Other external demand drivers
• Agent Productivity
• Training program effectiveness
• Enabling tools / technology
• Agent proficiency, tenure, motivation, absenteeism
• Customer service metrics
Corrective Action Plans
Actions
Owner
Date
• Initiate forecast improvement project around
Marketing Program response rates
Marketing
10/1
• Provide remedial training for existing agents
Training
12/1
• Engage placement services for new hiring
• Complete assessment of agent talking scripts
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Focus on drivers, not details
Drivers should be logical, actionable and relevant
Leverage external indicators
Evaluate model sensitivity of new drivers
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Building Driver-Based Models
Logical – valid and coherent relationship
Actionable – ability to influence outcomes
Statistically Relevant – strong correlation between
driver and result
Simplifying Drivers Improves Agility and Increases Flexibility
to Change Assumptions and Re-Forecast
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Moneyball by Michael Lewis
The Art of Winning an Unfair Game (baseball)
Outcome
Win Games
(World Championship)
Strategy
RUNS
Driver
Weight/
Build
Expected Run Value
On Base Pct
Slugging Pct
Arm
Strength
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Speed
Striking the Right Balance on Detail
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Typical conversation.
Finance - We don’t have enough data….
Operations - We don’t have the relevant data…
50 account lines by major product group and entity should
be sufficient
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Link human resource and capital allocation plans
Incorporate the appropriate level of detail in the
enterprise planning process
Ensure you have the right amount of workforce
staffed
Ensure you have incorporate the right amount of
capital required
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Assess Resource and Capital Assets Requirements
Financial Plan
Workforce Plan
Detailed Headcount, Staff
Expenses, Salary & Compensation
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Capital Asset Plan
Detailed Depreciation, Asset
Purchase/Sell, Asset Expenses
Models should be modular based
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What-if scenario modeling thru technology advancements
Create sandbox for BU’s to test new assumptions
Define process for extending analytical models
Go beyond spreadsheets; keep process light
Create and enabling technology platform
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Without an integrated Information Architecture
Data Sources
Data Warehouse
Disparate Systems
Planning
CRM
Financial Management
Oracle
Query and Reporting
SAP
Legacy
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Analytics
Destination/End-Users
With an integrated Information Architecture
Oracle
SAP
Legacy
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OPERATIONAL
PLANNING
Destination/End-Users
INTERACTI
VE
DASHBOAR
D
CRM
Data Warehouse
FINANCIAL
REPORTIN
G
Data Sources
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Mitigate risk and uncertainty
Move from ‘possibility’ to ‘probability
Review full range of outcomes
Quantify the risk of not achieving your goals
Know the probability of a particular outcome
Understand key factors impacting your business
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Uncontrollable External Factors Most Likely to Lead to
Variances to Actual Performance
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Quantify Risk and Uncertainty
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Conventional
Advanced
Single Point Scenarios
Thinking in Ranges
Only 3 possible outcomes
Limited view of risk
What are most important risk factors?
What are the odds I’ll miss the target?
Which outcome is most likely?
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Full range of outcomes
Illustrate probability of outcomes
Immediate visibility into inherent risk
True risk analysis for financial models
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Anticipate management reporting changes
Develop strategy for governing change in reporting
structures
Centralize change management process into a hub
Provide what-if visibility into new structures before
implementation
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Organizations must invest in and develop strategies and processes to
address all of the major planning levers
Project Leadership & Controls
Functional
Process
Flows
Strategic
Intent
Users
&
Security
Financial
Accounts,
Dimensionality,
&
Consolidation
Governance
Model /
Management
System
Reports
&
Data Outputs
Statistical
Measures,
Allocations,
&
Adjustments
Data Sources,
Input Templates
&
Commentary
Change Mgmt & Communication
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Results
High Level Road Map
Establish the “Blue Sky” vision up front
Continuously make trade-off’s
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Balance short term desire to “get it done” with long term platform needs
Adopt a modular based approach
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Build out the “Blue Sky” vision over time
Select and standardize on the best of breed vendors & tools
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The whole platform as vendors products span the information platform
Establish standards and knowledge sharing forums early in the process
Build the environment with the vision to handle large data volumes
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Driver based applications can mean more, volumes and types of data, not less
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Technology can ripple impacts through the details quickly to derived new insights
How the books
described it
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What happened
the last time
How it sounded at
the conferences
How the speaker
explained it
What it feels
like at my firm
What we
really need
Thank You!
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Q&A
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Sample Case Study
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About Friendly’s
Based in Wilbraham, Massachusetts
Founded in 1935 with the intention to provide warm,
caring, neighborly service to all who visit
Serving handcrafted ice cream treats and classic comfort
foods for 77 years
Over 130 Restaurants
Held in Private Equity
Recently went thru bankruptcy
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The Business Challenge
Friendly’s planned to rapidly deploy a robust solution to support the budgeting and forecasting needs of the business
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Existing P&L budget and forecast process were facilitated through a combination of database files and ~60 Excel
workbooks that performed complex calculations
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The planning process was manually intensive, leaving limited time to perform value added analytic activities
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Lacked the ability to perform what-if modeling and analysis within the existing solution
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Budget owners were not held accountable to their plans due to a lack of visibility and clarity
Sales
Food Cost
Labor
Restaurant Plan
G&A Expense
Store
Planning
60 + Excel
Workbooks
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Corporate G&A Plan
Franchise Plan
Manufacturing Plan
Retail Plan
Distribution Plan
Eliminations
Project Charter
Objectives
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Planning: Provide the ability to develop the restaurant P&L (129 Stores, 50 Line P&L, etc), as well as the
ability to load in the budget for Manufacturing, Retail, Custom Pack. Develop the G&A Model on a
simplified level – excluding Headcount/Compensation Planning
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Efficiency: Remove repetitive and unnecessary work from the existing planning process, with a focus on
providing more time for value added analysis
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Visibility: Provide enhanced visibility to the P&L, allowing planners to see the impact real-time as they
update their forecast in the solution
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Clarity & Accountability: Drive clarity and accountably for the forecast/plan into the business process -specifically with Restaurant Operators
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Scenario Modeling: Provide the ability to perform what-if/ad-hoc planning, where required
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Inputs
Friendly’s Planning Process
Account |
Organization |
Actuals (.csv) |
Actuals (Lawson)
1
Activities
Nightly Load of Actuals
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Clear Actual Scenario
Load Metadata
Load Actuals from .csv
Load Actuals from
Lawson
• Calculate and Aggregate
the Database
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Demand Load |
Input % Change |
Input Customer
Count % Bump
2
LY FC % of Sales
| Price Change |
Cmdty Change |
Other | Gap
3
Sales Planning
• Load Demand Data
• Input Cust Count &
Guest Check % Change
• Review current variances
• Input % Bump to
Customer Count
• Calculate Sales Plan
Data Load Labor Model |
Data Load - HR |
Manual Input
4
Food Cost
Planning
• Calculate Price Change
by store
• Input Global Commodity
Change and Other
• Input Gap by store
• Calculate final FC % of
Sales and dollar amount
Copy in LY
Actuals |
Manually input %
Drivers
5
Labor Planning –
Hourly | Salary
• Load Hourly data from
Labor Model
• Load Salary data from
HR
• Manually input additional
expenses
• Calculate Labor Expense
Taxes | Fringes |
Benefits
• Data copy from LY
Actuals
• Input % Drivers
• Calculate expenses
• Manually override if
necessary
• Calculate final expenses
Friendly’s Planning Process
Inputs
Copy in LY
Actuals | Data
Load | Manually
input % Drivers
6
7
Activities
Supplies
• Data copy from LY
Actuals
• Input % Drivers
• Calculate expenses
• Manually override if
necessary
• Calculate final expenses
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Copy in LY
Actuals | Data
Load | Manually
input % Drivers
Copy in LY
Actuals | Data
Load | Manually
input % Drivers
8
Maintenance
• Data copy from LY
Actuals
• Input % Drivers
• Calculate expenses
• Manually override if
necessary
• Calculate final expenses
Copy in LY
Actuals |
Purchasing & IT
Data Load |
Manually input %
Drivers
9
• Data copy from LY
Actuals
• Input % Drivers
• Calculate expenses
• Manually override if
necessary
• Calculate final expenses
10
Administrative
Expenses
Utilities
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•
Copy in LY
Actuals |
Finance, RE, &
Accounting Data
Load | Manually
input % Drivers
Data copy from LY Actuals
Load data from files
Input % Drivers
Calculate expenses
Manually override if
necessary
• Calculate final expenses
Non-Controllable
Expense – Advertising
| Rent
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Data copy from LY Actuals
Load data from files
Input % Drivers
Calculate expenses
Manually override if
necessary
• Calculate final expenses
Friendly’s Planning Process
Inputs
Manual Input of
data
11
12
Activities
CC5000 Planning
• Manually input
expenses into CC 5000
• Calculate expenses
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# Store Openings
by Format | Avg
Sales by Format |
Expense Drivers
Select stores to
close with date |
Input other
closing expenses
13
Store Planning –
Opening
• Input # of new stores for
each format
• Input average yearly
sales for each format
• Input expense drivers by
format
• Calculate new store P&L
Store Planning – Closures
• Data form to select
stores to close
• Ability to close at a
monthly level
• Reverse out P&L line
items
• Calculate closed stores
Select stores to
remodel with date
| Input % Sales
Lift Driver
14
Store Planning – Remodel
• Data form to select
stores to remodel
• Ability to remodel at a
monthly level
• Increase sales evenly by
% Sales Lift
• Calculate remodel stores
Realized Benefits
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•
Eliminated the manual effort needed to update all 60 Excel workbooks when the
sales plan or labor plan changed
•
Provided clarity into the drivers and calculations used to build the Annual Budget
•
Drove the accountability of the Departments for the Annual Budget
•
Decreased the amount of time needed to update and maintain key management
reports
•
Eliminated the manual effort needed to perform “what-if” modeling
•
Reduced the level of effort and cost to the Annual Budget and the solution is
supportable by Friendly’s IT