The latest meeting of the London FP&A Club, sponsored by Tidemark, looked at seven models professionals can use to better manage their corporate’s performance.
Michael Coveney, a thought leader in corporate performance management and veteran technology and finance professional, shared tips on operational activity, cash funding, forecasting, risk and strategy models. He is convinced that established planning procedures have had their day.
“Annual budgeting and quarterly reporting doesn’t make sense anymore,” he said. “It’s redundant in the modern 24x7 business world. That must impact the budget. Annual planning doesn’t make sense anymore and predicting business performance has only got harder as business has speeded up. That’s why I want to share seven interconnected modelling tips to help you cope with modern corporate demands.”
Seven FP&A models for managing performance
Coveney then presented interlinked seven FP&A models, which he believes are required to better manage corporate performance and speed up finance reporting.
Operational Activity Model: “This is typically used for setting budgets,” Coveney said. “For instance, you can use it for set revenue targets and measure them, or work out the whole business cycle from sales, through to marketing, lead generation, contract negotiations, to production, workloads and back again. The key question is to ask: ‘Have we got enough resource to hit the target?’ That is what this model should be used to answer.”
Cash Funding Model: This model should fund the activity model and answer the question: ‘how much money do we need and from what sources should it be funded?’ “It should look at cash inflows and outflows; the payment terms for suppliers and customers; and be able to cover any shortfalls via a bank loan or other instrument,” said Coveney.
Detailed History Model: This model will tell you what actually happened. It should be used to review past performance, analyze sales data by customer, region, product and so forth, while also examining customer sentiment via social media. The purpose is to learn how to budget better in the future, learning from previous data and evidence-based historical numbers.
Target Setting Model: The key question here is ‘where is the marketplace heading?’ and ‘is our target realistic’? According to Coveney, this model is typically driver-based and assesses the drivers for revenue, cost, units sold, etc. The aim is to align high-level goals with realistic ‘on the ground’ facts. Some supporting driver-based reporting technology would be helpful here.
Detailed Forecast Model: This model should provide the relevant detail behind the headline budget numbers, compare forecasts with plans, and be constructed from the bottom-up using realistic numbers and accurate predictions. “For instance, if you can align a potential sales forecast with revenue predictions, historical data and a salesperson’s guess of a 20, 50 or 80% chance of a sale closure, then you’ll have a much better forecast,” explained Coveney. Linking it all together is what matters.
Strategy Improvement Model: “This for me is the key model, as strategy is linked to improving specific business processes in accordance with the goals,” said Coveney. FP&A professionals must also be able to understand the impact of launching a new product or marketing campaign on the bottom line, on resource allocation and so forth. Known impacts can guide strategy and make sure it is the right strategy to follow. The key questions here are ‘what could we do differently?’ and ‘what would be the impact on the business?’, plus ‘how much would it cost if we implemented our strategy?’ “As a financial professional you’ll also need to be able to ‘time shift’ the data using appropriate technology to work out the budget impact in say one, three or six months’ time.”
Scenario Model: What happens if interest rates go up, or a currency depreciates? You need to be able to answer such traditional treasury questions, using scenario modelling as essentially a risk management and opportunity spotting tool.
“All seven models are connected and interlinked,” Coveney said. “You cannot leave one out and get the full benefit of following this approach.”
Coveney concluded by arguing that planning shouldn’t be driven by a date on a calendar. “It should be triggered by events and exceptions and be undertaken on a continual basis, responding to the marketplace as it changes,” he said. “The best companies have ‘de-coupled’, meaning that they’re not stuck in the annual budget/quarterly reporting cycle for the sake of it, but do rolling forecasting and budgeting to spot trends, threats and opportunities early on.”
After the presentation, attendees had plenty to say about Coveney and financial planning and analysis in general. Chris Whiddon, senior finance manager at Vodafone, said: “The most interesting aspect for me was the debate about how best to bring the complexities of the seven different performance models together, so that one influences the other, giving you a more dynamic and complete whole. The seven models are all interlinked, but making that evident and ensuring they all feed into each other is the challenge.”
Added Oonagh Mason, finance director, Americas, at the British Council: “FP&A is an emerging discipline I want to understand better as it develops. My organization is also looking at the Association for Financial Professionals’ FP&A Certification. We need to decide if it’s something we wish to pursue in terms of training our staff to improve their planning and predictive capabilities. I’m especially interested in the corporate program on offer.”