In this session, you will learn best practices for optimizing the planning process including how to adopt a driver-based model, efficiently manage rolling forecasts, embrace “what if” scenario modeling and provide more meaningful reporting and analysis to impact decision making. You will gain insights from comprehensive industry research recently conducted with hundreds of financial professionals around the world in order to understand key industry trends and best practices that are working for leading edge organizations today. In addition to the research, subject matter experts will share numerous practical steps for improving performance management processes in your organization. You will come away with real-world methodologies to help you improve and shorten your budgeting process and will also enable better decision making and organizational alignment that will help you to optimize performance. Speaker: Tony Ard, Director of Solutions Engineering, Axiom EPM Presentation delivered at ProformaTECH 2014 - http://www.proformatech.com Track: Operational Advantage | Session: 5

1. Proven
Techniques for
Optimizing Your
Financial
Planning and
Analysis Process
Tony Ard
Director, Solutions Engineering,
Axiom EPM

2. 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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3. Volatility is Here to Stay
Market Trends Driving
Volatility
Crude Oil Prices 2007-2012
• Economic Growth
• Globalization
• Regulation
U.S. New Housing Starts – 2002-2012
• Sustainability
• Demographics
• Technology
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Source: David Axson, Partner, Accenture, March 2013

4. 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
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Source: David Axson, Partner, Accenture, March 2013

5. Decision Making Flaws
• 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
•
•
5
Low probability high magnitude events defy modeling
Finance, business, and technology are susceptible to the problem
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Source: Nassim Nicholas Taleb, Dean’s Professor, UMASS

6. More Data Does Not Lead to Better Insight
• The haystack gets bigger
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7. The Planner’s Paradox
• Planning for the future is not an
intuitive task
• Your organizations need your skills
and insights more than ever
• The world in which we work
continues to get more complex and
unpredictable
• You need the best practices and
tools possible
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8. 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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9. The Evolving Role of Finance
Analytic
Capability
Strategic
Partner
Analyst

Measuring

Advising

Planning

Growth focused

Calculating

Risk aware

Modeling

Present & future

Past & future

Connected
Scorekeeper
3 4
1 2
Controller

Reporting

Gatekeeper

Accuracy

Expense focused

Retrospective

Governance

Disconnected

Retrospective
Efficiency & Control
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Quadrant 4
Embodies all the
characteristics of the
other three quadrants
plus leadership and
outbound activities

10. Name That Company
• 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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11. Best Practices in Planning
• Scenario Planning
• Initiative Based Planning
• Driver Based Planning
• Rolling Forecasts
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12. Initiative Based Scenario Planning

13. ‹#›
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14. Initiative Based Scenario Planning
Base Case
Given current trends,
what is our financial
outlook 3-10 years?
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Base Case
(Conservative)
Forecasting methods include:
• Driver-based model
• Volume & Mix
• Variable Labor, efficiency benchmarks
• Capital constraints
• Different versions for multiple external scenarios

15. Initiative Based Scenario Planning
Forecasting methods include:
Base Case
Given current trends,
what is our financial
outlook 3-10 years?
Base Case
(Conservative)
Initiatives
As we prioritize growth or
cost containment
initiatives, what is the
incremental impact?
Initiative #1
Initiative #3
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Initiative #2
Initiative #4
•
•
•
•
Driver-based model
Volume & Mix
Variable Labor, efficiency benchmarks
Capital constraints
Examples:
• Open new geographic region
• Expand productive capacity
• Back office automation
• Divestiture of finance subsidiary

16. Initiative Based Scenario Planning
Base Case
Given current
trends, what is our
financial outlook 3-10
years?
Base Case
(Conservative)
Initiatives
As we prioritize growth or
cost containment
initiatives, what is the
incremental impact?
Initiative #1
Initiative #3
Initiative #2
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Examples:
• Open new geographic region
• Expand productive capacity
• Back office automation
• Divestiture of finance subsidiary
Initiative #4
Scenarios
What is the impact on our
baseline projections given
the initiatives we’ve
proposed?
Forecasting methods include:
• Driver-based model
• Volume & Mix
• Variable Labor, efficiency benchmarks
• Capital constraints
Analysis contains:
Consolidated Results
•
•
•
•
Income Statement
Balance Sheet
Cash Flow
Key Ratios

17. 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
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18. Structural Elements of Driver Based
Planning

19. Structural Elements of Driver Based Planning
1. Driver Assumptions
• 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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1
Driver
Assumptions
Baseline
V1
V2
V3
…Vn

20. Structural Elements of Driver Based Planning
2. Business Logic Layer
1
• The most critical aspect of
your scenario planning
model
Driver
Assumptions
2
Business
Logic Layer
• Goal: Define algorithms
that emulate the
organization
• Logic layer should be
transparent to stakeholders
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Baseline
V1
V2
V3
…Vn
e.g. (Price * Volume – (Regional Discount Factor
* Volume) * Shipping Fee) – Return % = Net
Sales

21. Structural Elements of Driver Based Planning
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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1
Driver
Assumptions
2
Business
Logic Layer
3
Collaboration,
Inputs and
Overrides
Baseline
V1
V2
V3
…Vn
e.g. (Price * Volume – (Regional Discount Factor
* Volume) * Shipping Fee) – Return % = Net
Sales

22. An Aside About Collaboration
The Madness of Crowds
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The Wisdom of Crowds

23. Structural Elements of Driver Based Planning
• 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
Assumptions
2
Business
Logic Layer
3
Collaboration,
Inputs and
Overrides
4
4. Scenario Storage
1
Scenario
Storage
Baseline
V1
V2
V3
…Vn
e.g. (Price * Volume – (Regional Discount Factor
* Volume) * Shipping Fee) – Return % = Net
Sales
Base
V1 V2
V3…Vn

24. Structural Elements of Driver Based Planning
• It is critical that scenarios
can be viewed side-byside, 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
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1
Driver
Assumptions
2
Business
Logic Layer
3
Collaboration,
Inputs and
Overrides
4
Scenario
Storage
5
5. Scenario Presentation
Scenario
Presentation
Baseline
V1
V2
V3
…Vn
e.g. (Price * Volume – (Regional Discount Factor
* Volume) * Shipping Fee) – Return % = Net
Sales
Base
V1 V2
V3…Vn

25. Rolling Forecasts

26. Rolling Forecast in the Context of the Finance Calendar
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27. 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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28. Waterfall Reporting
•
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
•
Q1
2014
Q2
2014
Q3
2014
Q4
2014
Q1
2015
Feb
Forecast
10
12
11
15
11
May
Forecast
11
13
12
15
11
14
August
Forecast
11
14
13
15
12
14
13
Nov
Forecast
11
14
13
15
13
14
13
Actual
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Forecast
Q2
2015
Q3
2015
Out
Period
Q4
2015
16

29. 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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30. Reveal the Mystery Company
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31. &
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32. Thank You For Attending
Proven
Techniques for
Optimizing your
Financial
Planning and
Analysis Process

33. 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
•
•
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Book by Dan Ariely
2008
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