2013 ANALYTICS SYMPOSIUMFebruary 12, 2013Grand River CenterDubuque, Iowa

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Best Practices in Financial Planning & Analysis

Dave Pooley – 617 797 2949

dpooley@pelotongroup.com

Vice President - Peloton Group

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Personal Overview

• 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

Background• 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

Expertise• 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)

Solutions

• Fairfield University – Fairfield, CT• Bowater – Pulp & Paper• Navigator Systems / Painted Word• Peloton Group / Balanced Scorecard• Fidelity Investments• Peloton Group• Entrepreneur, Volunteer, and

Contributor

Credentials

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Concepts and key points serve as flexible guides – they are not rigid rules

Approach & BackgroundApproach & Background

Guiding PrinciplesGuiding Principles

An approach that meets your needs

An approach that meets your needs

I can shareI can share

You should adoptYou should adopt

Around which

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Agenda

• 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

Consumer Demand Global Financial Instability

Maintain Margins Ability to Forecast Results

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I want to see the forest, the trees, the branches and individual leaves

– Lee Scott, CEO Wal-Mart

Other Key Executive Thoughts

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

33%

39%

43%

50%

47%

44%

14%

12%

16%

2%

2%

3%

0% 20% 40% 60% 80% 100%

Relevance offorecasts

Timeliness offorecasts

Accuracy offorecasts

Needs improvement Acceptable Excellent Not sure

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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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Budgeting and

Planning

Shareholder Value

Better Company Forecast Accuracy

Better Strategy Formulation

and Execution

More Time & Cost Efficient Planning and

Budgeting

Market Expectations

Performance vs.

Expectations

Actual Performance

Communicate with Investor

Management Credibility

Improved Management

Managing Market Perceptions

Company Performance

Reproduced from “Driving Value Through Strategic Planning and Budgeting”, Accenture in association with Cranfield University

The guide highlights a few potential purposes of the planning process

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Best Practice Planning Process – Level 1

Capital AssetsPlanning

Workforce Planning

Long-Term Financial Planning

FinancialDetail

OperationalDetail

Predictive Modeling & Simulation

Cost Analysis

Planning, Budgeting & Forecasting

ProjectFinancial

Plans

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Run models based on key strategies

Set targets

Seed targets to annual operating plan

Start annual process

Update strategic plan with latest forecast

Evaluate resource and capital requirements

A typical World Class Planning Process – Level 2

Include operational detail and model variability of financial plan

Update forecast with latest budget and actuals

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Detailed World Class Planning Process – Level 3

BasicPlanningSteps

Prepare Develop

Sign off working plan

Review

Provide access/distr. plan

Input plan

Submit plan

Consolidate plan

Review plan

Revise submitted plan

Set planning structure

Populateplan

Set global constants

Set baseline/default plan

PS01 PS02 PS03 PS04 PS05 PS06 PS07 PS08 PS09 PS11

PS10

IterativeModeling

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Companies capture efficiencies from new planning solutions and can add value to the firm. Eventually optimizing and driving strategy execution.

Step 1

Step 2

Step 3

Maximum Productivity of Available Resources

More Cost & Time Efficient Planning and Budgeting(decentralized inputs & global plan consolidation)

Better Company Forecast Accuracy

(driver-based modeling)

BetterStrategy

Execution(rolling forecast, continuous resource allocation & relative

performance targets)

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What are the success stories?

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What results are firms achieving

Uncovered estimated annual cost savings of $1.2M in missing shipping charges

Shortened budget

cycle. Replaced 1000’s of Excel spreadsheets

Reduced monthly forecasting cycle by 48% . 21 – 11 days. Reduced forecast error by 20%

Standardized process globally and improved forecast accuracy by 30%

Cut Sales Forecasting cycle from 2 weeks to 3 days.

Reduced annual budget cycle by 50%

Cycle time AccuracyEffort & CostStandardizationSimplificationContinuous Improvement

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What are the leading practices?

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Leading Practices

1 Measure financial impact of strategic objectives

3 Focus on drivers, not details

5 What-if scenario analysis

2 Develop rolling forecast process

4 Link human resource and capital allocation plans

6 Mitigate risk and uncertainty

7 Anticipate management reporting changes

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Evaluate strategic projects and initiativesSimulate effects of M&ADevelop a culture of analytics Use analytics and planning to facilitate the conversationSet annual targets

1 Measure the financial impact of key business strategies

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Successful strategy execution requires linkage between strategy and operations. The planning process provides the bridge …

Strategy OperationsThe planning process is at the core of linking strategy to operations

The planning process is how an organization can translate the strategy into action

The planning process is how an organization can translate the strategy into action

60% of organizations do not link operational plans

to strategy

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Strategy Scorecard • Revenue• Cost

• Margin• Ratios (ROIC)

• Satisfaction• Engagement

• Loyalty• Market Share

FINANCIAL

CUSTOMER

Is your strategy clearly articulated and measured? What outcomes are you trying to achieve?

Consider a strategy execution framework to link strategy to operations

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Event-based Lightweight processFast and flexibleDynamic and integrated with business drivers

2 Develop rolling forecast process

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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 resultBeyond Budgeting

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The traditional budgeting and forecasting cycle does not provide visibility and insight into the future

Q1 Q2 Q4Q3AnnualPlan

ForecastOne

Q1 Q2 Q4Q3

ForecastTwo

Q1 Q2 Q4Q3

ForecastThree

Q1 Q2 Q4Q3

AnnualPlan

Q1 Q2 Q4Q3 Q1 Q2 Q4Q3

2013 2014 2015

Actual Results

No information beyond the current fiscal year

• Is the organization making progress towards longer-term financial and non-financial objectives ?

• Is their an opportunity to deploy / redeploy resources given expected financial performance ?

• 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 Results

The rolling forecast provides a continuous, extended view of expected performance

ForecastTwo

ForecastThree

Q3 Q4 Q2Q1

2013 2014 2015

Q3 Q4

Q4 Q1 Q3Q2 Q4 Q1

Fcst Four / Annual Plan

Q2Q1 Q3 Q4 Q2Q1

ForecastOne

Q2 Q3 Q4 Q2Q1 Q3

• The rolling forecast supports strategic planning efforts including strategy refreshes

Q1

• The rolling forecast supports target setting activities by with estimates of expected financial performance based on known assumptions

• The rolling forecast provides the baseline for the annual plan

Actual ResultsTraditional Forecast

Rolling forecasts focuses on root cause analysis around business drivers and action plans to address performance gaps

Inbound Calls per Month 200,000 225,000 12.5%

Working Days per Month 20 20

Calls per Agent Per Day 75 66 - 12.0%

Capacity per Agent per Day 1,500 1,320 - 12.0

Peak / Absence Factor 1.2 1.1 - 8.3%

Agents Required 160 188 17.2%

Cost per Agent per Month $ 2,500 $ 2,500

Salary Expense $400,000 $468,750 17.2% $400,000 $468,750 17.2%

Plan Actual Variance Plan Actual Variance

Driver-Based Root Cause Analysis Traditional Analysis

Variance analysis based on driver-based forecasts provides insight into both what happened and why it happened.

• What: Salary expense 17.2% above plan

• 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

• Provide remedial training for existing agents

• Engage placement services for new hiring

• Complete assessment of agent talking scripts

Marketing

Training

10/1

12/1

Driver Model Variable Values

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Drivers should be logical, actionable and relevantLeverage external indicatorsEvaluate model sensitivity of new drivers

3 Focus on drivers, not details

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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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Outcome

Strategy

Driver

Win Games (World Championship)

RUNS

Moneyball by Michael LewisThe Art of Winning an Unfair Game (baseball)

SpeedWeight/

Build

ArmStrength

Expected Run Value

Slugging PctOn Base Pct

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Striking the Right Balance on Detail

• 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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4 Link human resource and capital allocation plans

Incorporate the appropriate level of detail in the enterprise planning processEnsure you have the right amount of workforce staffedEnsure you have incorporate the right amount of capital required

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Assess Resource and Capital Assets Requirements

Workforce Plan

Financial Plan

Capital Asset Plan

Detailed Headcount, Staff Expenses, Salary & Compensation

Detailed Depreciation, Asset Purchase/Sell, Asset Expenses

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Models should be modular based

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Create sandbox for BU’s to test new assumptionsDefine process for extending analytical modelsGo beyond spreadsheets; keep process lightCreate and enabling technology platform

5 What-if scenario modeling thru technology advancements

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Without an integrated Information Architecture

Legacy

CRM

SAP

Oracle

Analytics

Query and Reporting

Financial Management

Planning

Destination/End-Users Disparate SystemsData Sources Data Warehouse

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With an integrated Information Architecture

Destination/End-Users Data Sources Data Warehouse

Legacy

CRM

SAP

Oracle

OP

ER

AT

ION

AL

PLA

NN

ING

INT

ER

AC

TI

VE

D

AS

HB

OA

RD

FIN

AN

CIA

L R

EP

OR

TIN

G

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6 Mitigate risk and uncertainty

Move from ‘possibility’ to ‘probabilityReview full range of outcomesQuantify the risk of not achieving your goalsKnow the probability of a particular outcomeUnderstand 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

• 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?

• Full range of outcomes• Illustrate probability of outcomes• Immediate visibility into inherent risk• True risk analysis for financial models

ConventionalSingle Point Scenarios

AdvancedThinking in Ranges

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Develop strategy for governing change in reporting structuresCentralize change management process into a hubProvide what-if visibility into new structures before implementation

7 Anticipate management reporting changes

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Organizations must invest in and develop strategies and processes to address all of the major planning levers

FunctionalProcessFlows Governance

Model / Management

SystemUsers&

SecurityReports

&Data Outputs

Data Sources,Input Templates

&Commentary

Statistical Measures,

Allocations, &

Adjustments

FinancialAccounts,

Dimensionality, &

Consolidation

StrategicIntent

Results

Project Leadership & Controls

Change Mgmt & Communication

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©2006 Balanced Scorecard Collaborative, a Palladium company • bscol.com

High Level Road MapEstablish the “Blue Sky” vision up front

Continuously make trade-off’s • Balance short term desire to “get it done” with long term platform needs

Adopt a modular based approach • Build out the “Blue Sky” vision over time

Select and standardize on the best of breed vendors & tools• 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• Driver based applications can mean more, volumes and types of data, not less

• Technology can ripple impacts through the details quickly to derived new insights

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How the booksdescribed it

How it sounded at the conferences

How the speaker explained it

What it feels like at my firm

What we really need

What happened the last time

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©2006 Balanced Scorecard Collaborative, a Palladium company • bscol.com

Thank You!

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Sample Case Study

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About Friendly’s

Based in Wilbraham, MassachusettsFounded in 1935 with the intention to provide warm, caring, neighborly service to all who visitServing handcrafted ice cream treats and classic comfort foods for 77 yearsOver 130 RestaurantsHeld in Private EquityRecently 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

• Existing P&L budget and forecast process were facilitated through a combination of database files and ~60 Excel workbooks that performed complex calculations

• The planning process was manually intensive, leaving limited time to perform value added analytic activities

• Lacked the ability to perform what-if modeling and analysis within the existing solution

• Budget owners were not held accountable to their plans due to a lack of visibility and clarity

Restaurant Plan

Corporate G&A Plan Franchise Plan

Manufacturing Plan

Distribution Plan

Retail Plan

Eliminations

Sales

Food Cost

Labor

G&A Expense

Store Planning

60 + Excel Workbooks

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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

• Efficiency: Remove repetitive and unnecessary work from the existing planning process, with a focus on providing more time for value added analysis

• Visibility: Provide enhanced visibility to the P&L, allowing planners to see the impact real-time as they update their forecast in the solution

• Clarity & Accountability: Drive clarity and accountably for the forecast/plan into the business process -- specifically with Restaurant Operators

• Scenario Modeling: Provide the ability to perform what-if/ad-hoc planning, where required

Objectives

Project Charter

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Nightly Load of Actuals Sales Planning

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• Clear Actual Scenario• Load Metadata• Load Actuals from .csv• Load Actuals from

Lawson• Calculate and Aggregate

the Database

• Load Demand Data• Input Cust Count &

Guest Check % Change• Review current variances• Input % Bump to

Customer Count• Calculate Sales Plan

Inpu

tsA

ctiv

ities

Account | Organization | Actuals (.csv) |

Actuals (Lawson)

Demand Load | Input % Change | Input Customer Count % Bump

Labor Planning – Hourly | Salary

Food Cost

Planning

Taxes | Fringes | Benefits

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• Calculate Price Change by store

• Input Global Commodity Change and Other

• Input Gap by store• Calculate final FC % of

Sales and dollar amount

• Load Hourly data from Labor Model

• Load Salary data from HR

• Manually input additional expenses

• Calculate Labor Expense

• Data copy from LY Actuals

• Input % Drivers• Calculate expenses• Manually override if

necessary• Calculate final expenses

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LY FC % of Sales | Price Change | Cmdty Change |

Other | Gap

Data Load - Labor Model |

Data Load - HR | Manual Input

Copy in LY Actuals |

Manually input % Drivers

Friendly’s Planning Process

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MaintenanceSupplies UtilitiesAdministrative

Expenses

66 88 99

• Data copy from LY Actuals

• Input % Drivers• Calculate expenses• Manually override if

necessary• Calculate final expenses

• Data copy from LY Actuals

• Input % Drivers• Calculate expenses• Manually override if

necessary• Calculate final expenses

• Data copy from LY Actuals

• Input % Drivers• Calculate expenses• Manually override if

necessary• Calculate final expenses

• Data copy from LY Actuals• Load data from files• Input % Drivers• Calculate expenses• Manually override if

necessary• Calculate final expenses

Inpu

tsA

ctiv

ities

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Copy in LY Actuals | Data

Load | Manually input % Drivers

Copy in LY Actuals | Data

Load | Manually input % Drivers

Copy in LY Actuals | Data

Load | Manually input % Drivers

Copy in LY Actuals |

Purchasing & IT Data Load |

Manually input % Drivers

Non-Controllable Expense – Advertising

| Rent

1010

• Data copy from LY Actuals• Load data from files• Input % Drivers• Calculate expenses• Manually override if

necessary• Calculate final expenses

Copy in LY Actuals |

Finance, RE, & Accounting Data Load | Manually input % Drivers

Friendly’s Planning Process

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Store Planning – Opening

Store Planning – Closures Store Planning – Remodel

1313 1414

• Input # of new stores for each format

• Input average yearly sales for each format

• Input expense drivers by format

• Calculate new store P&L

• Data form to select stores to close

• Ability to close at a monthly level

• Reverse out P&L line items

• Calculate closed stores

• Data form to select stores to remodel

• Ability to remodel at a monthly level

• Increase sales evenly by % Sales Lift

• Calculate remodel stores

Inpu

tsA

ctiv

ities

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# Store Openings by Format | Avg

Sales by Format | Expense Drivers

Select stores to close with date |

Input other closing expenses

Select stores to remodel with date

| Input % Sales Lift Driver

CC5000 Planning

• Manually input expenses into CC 5000

• Calculate expenses

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Manual Input of data

Friendly’s Planning Process

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Realized Benefits

• 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