Last week we discussed the operational planning process within an organization, and this week’s post picks up where it left off.  We’ll focus on monetizing the operational plan as well as adding other financial items to create a baseline financial plan.  These additional financial drivers and costs include things like facilities expense, selling and administrative expense, distribution expense, and human resource expense that are not related to the operations process.  However, the bulk of the risk in accuracy resides in monetizing the operational planning areas.  The remaining items at operating divisions tend to either be project oriented, or periodic expenses that are manageable to the original budget and require minimal effort to update.

Financial Planning

The diagram below highlights key components/models for a typical financial planning process.

Financial Planning Process Diagram

The boxes represent the models, drivers and assumptions used to forecast the key financial statements and supporting schedules.  The items in dark green indicate that the output stems from the Sales and Operational Plan.  Product drivers and Sales drivers typically represent production and sales unit volumes broken out at a level of detail needed to plan production operations (or service delivery).  These inputs are monetized by the “Gross Sales,” “Direct Labor” and “COGS” models to calculate sales and cost of sales dollars as well as machine time and labor hours.

 In addition, other drivers and assumptions provide inputs to calculate Selling and Administrative expense as well as account for timing differences in the business cycle that impact the balance sheet and cash flow.  The result is a projected set of financial statements of the future.

For a more detailed look at the templates and models behind this process check out the white paper “Achieving superior financial flexibility through driver-based budgeting and planning”.

Driver Based Planning

Transparency and flexibility are vital to the planning process.  This transparency and flexibility is achieved through driver-based plans for both operational and financial plans and the integration between the two.  As mentioned above, results from the operational plans (production and sales unit volumes) drive key aspects of the financial plans.  When defining driver based plans, it is important to identify the key business drivers of an operation and create the necessary business models that use these drivers to predict future results.  Organizations can become more agile and more effectively plan for different economic scenarios by building flexible plans based on key business drivers.  These key business drivers will also “bubble up” and help lay the framework for the key metrics in the strategic plan which I’ll discuss in an upcoming blog.

The models above fit in the overall IBP framework of the post on July 25, 2011 (click here to review) as shown in the diagram below:

Financial Planning within Integrated Business Planning

Once the financial planning iteration is complete from integrating in the most current operational plan, Finance will also need to update the plan for any changes in Strategic Expenditures (Stratex), Capital Expenditures (Capex) and key projects which will be covered in next week’s blog.

In my previous post, I discussed the need for external information when doing business planning.  The two key challenges preventing this are:

1)      Understanding what  should be tracked

2)      The need to systemize the information to place it “in context “ with the plan

Understanding what should be tracked is always a challenge.   I’ve typically seen this result in a process of trial, error, and enlightenment.  It starts with me thinking I know some of the leading external indicators for my business;  benchmarking them against my business to understand if they are truly leading indicators; throwing a few (or all) of them out;  and adding a few more that I find have a tighter correlation with my business.  

The bigger challenge is systemizing the information so I can:

-          Consistently access the information

-          Place the information “in context” with my plan

Access to information is everywhere.  In a matter of a few minutes, I can view all the interesting indicators via websites like:

-          Data.gov, Bls.gov, sec.gov

-          epp.eurostat.ec.europa.eu, indiacore.com, ihsglobalinsight.com

-          TDAmeritrade (used their “thinkorswim” product to produce the graphs in the previous blog)

The challenge is making it usable and consistently available.  As an example, try to compare four public companies financial results across a specific industry.  Go to www.sec.gov, key in the company names and download their 10Ks in HTML.  Within five minutes, you have all the 10K information.   Then take the time to rekey the financial statements into Excel and tie out the numbers for a valid comparison.  It took me two days (with interruptions) to create a valid comparison report in Excel. 

As another test, if you have an IPAD you can go to a webpage http://cascadesoft.net/Economy.aspx.  It provides an interesting application where you can access a number of economic indicators and can use the graphic tool to navigate around the data.  The challenge is you can only do it one graph/indicator at a time.

The problem is these approaches don’t scale.  The worst case scenario is you do a “science fair” experiment and include external indicators in some reports and people begin to want it every month.  You lose another two days of your life preparing this information (this is the story of my life). 

I’m interested in what other are finding.  Has anyone found a scalable method of including external indicators into their budget process or even their business intelligence processes?  Are companies using external indicators and if so, which ones?

The fourth annual Host Analytics Customer Conference, Focus 2011, took place in San Diego, California. It was attended by almost 200 customers and partners with activities including hands on training, deep dives into Host Analytic products, partner presentations and customer sessions.

A highlight of the customer sessions was a presentation by Tom Sullivan, Manager of Financial Planning and Analysis at Acciona Energy, based in the Chicago area.

In his presentation, Tom recounted the impetus for selecting a new financial software: a desire in 2008 to improve Acciona’s closing and financial reporting processes along with its Excel based budget process, which consolidated input from 50 people into a budget with 90 intricately linked Excel workbooks.  Once the company decided to go with the Host Analytics SaaS-based solution, Tom and team had the system up and running within 60 days.  Not only is the system used for budgeting, but many of the systems 50+ users also do ad-hoc reporting.  These ad hoc reports, which are available at the individual department level, have helped the company by providing more detailed information, and have also helped the company uncover data anomalies.  In summarizing their success, Tom stated Acciona had obtained a much smoother financial close process, which is less prone to errors and less labor intensive. “Overall, we were able to provide a deeper level of information and up level the role of finance within the company.”

For more information on Host Analytics CPM product offerings visit http://bit.ly/mg6mEU

This week, Host Analytics kicked off its fourth annual Host Analytics Focus11 Customer Conference in San Diego, Calif. with more than 200 customers and partners in attendance.

Customers gathered to focus on sharing the latest trends in Software as a Service (SaaS) and corporate performance management by discussing ways customers can get the most out of their investments, as well as discussions of best practices and strategies.

Highlights of the day included a customer roundtable with discussion focusing on the changing role of the finance organization, as it becomes more central to the company’s success equation.

Kerisa Armstrong from New West Health in Montana talked about the power of its Host Analytics implementation, which has allowed his team to up level daily activities. No longer are they spending time keying in information to an Excel spreadsheet. The team is now much more involved in the strategic areas of the budget.

David Gosnell of Calypso Technology has a history of working for large corporations and has used Hyperion for financial needs. He recently moved to Calypso Technology to head up its finance efforts. He recounted how he initially thought Hyperion might be a solution for Calypso, but its implementation overhead was an issue for the startup. Luckily he discovered Host Analytics and was amazed at the speed and ease of implementation. He hasn’t looked back since.

Irene Wong of Baxa Corp recounted how its first module of the CPM suite, Host Analytics Consolidator, was up and running in about a month. The finance users saw immediate simplification and time savings, and in particular allocations function that use to take hours to build from multiple reports and spreadsheets now takes minutes.

Sean Finneran, Sea Island, Co. explained how his goal was to get its operations team at this five-star resort to be more accountable, as there was no departmental ownership of the numbers. When they started ad hoc reporting with Host Analytics, it really helped the team understand where the numbers came from and led to the cultural shift within the organization that Sean was looking for. More importantly, Sean and his team have moved from being disciplinarians to trusted advisors. “We’re now seen as a partner to the various departments. They come to us for guidance to help them understand their business better.”

To read more about how companies are using Host Analytics to move from finance from the back office to the front office visit http://www.hostanalytics.com/Customers/Customer-Overview.aspx.

One of the key pieces of information organizations may overlook when planning their business is the value of external information.  Ironically, organizations can execute flawlessly on their plan and have financial results roiled because they have not anticipated changes external to the business. For example:

Imagine your business is driven by food prices and look at the attached graphs (ran on 5/12). 

Daily prices of argicultural commodoties for the 12 mos as of 5/12/2011

These graphs show:

1)      Price change in soybean oil over the last year (upward sloping graphs are bad).

2)      Price change of feeder cattle

3)      Price change of lean hogs

4)      Price change of sugar

5)      Price change of corn

6)      Price change of soybean meal

With the exception of Sugar (graph 4) if your business uses any of these other food ingredients as part of your products, cost of raw materials has done nothing but increase over the last year.

The second example applies to international companies or non-U.S. based companies that sell products in the U.S. The top row of graphs show changes in exchange rates if the exchange currency is in the numerator and the U.S. dollars are in the denominator.  The net of this is an upward sloping graph is bad for the U.S. dollar.  An upward sloping graph means it takes more U.S. dollars to buy the same amount of a foreign currencies.  The bottom row of graphs shows the changes in exchange rates if  the U.S. dollars is the numerator and the foreign currency is the denominator.  A downward sloping graph means it takes more U.S. dollars to buy the same amount of a foreign currency.  (I am limited in my data source and cannot show all currencies with U.S. dollars as just the numerator or just the denominator).

The following currencies are covered:

1)      Euro’s to USD

2)      British Pounds to USD

3)      Australian dollars to USD

4)      USD to Canadian dollars

5)      USD to Japanese yen

6)      USD to Swedish Krona

Do these examples hit home?  Are you using external information in your planning process?  I’d be interested in your reaction and if this applies to you.

Back on October 28^, 2010 I started a blog series titled Accountants are From Mars, Operations are From Venus.  From then until now I’ve walked through key steps to help evolve an organization toward a performance driven culture to mitigate these issues.  Key steps included:

1)      Taking a metric approach to measuring and driving the business (12/1/2010)

2)      Identifying operational metrics that drive the financial metrics (12/15/2010)

3)      Transitioning Account Centric budgets that finance requires to operational level plans that drive operations (1/15/2011)

4)      How to transition the interim approach defined on 1/15/2011 with a robust operational planning environment.  This included a storyboard of how a process may work and ran from 2/14 through 4/8.

Although these blogs worked through examples and key steps, they didn’t identify the cultural transition required to resolve these issues.  That is, both finance and operations not only have two different perspectives, but they have different vocabularies and think about the levers of profitability and operational issues differently. 

A classic example I see often on the floor of a manufacturing facility is someone from operations rolling their eyes when talking about recent financial management decisions and starting a sentence with “Doesn’t finance understand that……”.  Likewise when I’m in the finance department they will roll their eyes when commenting on an operational decision and say “Don’t they understand that…..”

The answer to both questions is “No, they don’t understand and I’m sure if they did they would either correct your thinking, you would correct their thinking, or you both would agree on a better alternative solution”.  The key is both sides need to see the issues from the other department’s perspective and understand the complete perspective on the decision, both risk and reward from all angles.   The above steps around planning help accomplish this but companies must become proactive in building the multi disciplined training approach through job rotation or establishing common goals for all departments to resolve these cultural issues.

Just as a mental model for success, the areas where I have seen companies be most effective in bridging these cultural differences are manufacturing firms that have successfully implemented a Sales and Operations Planning process.

I’m interested in your experience.  Do you see challenges in your organization because of a lack of perspective on other departments view point?  If so, is it the results of not understanding different terminologies?

Click to download a whitepaper on an example of the different perspectives of finance and operations.

The following is the final segment of the storyboard on modeling interface started on 2/14/2011.  This segment focuses on a key modeling component often overlooked when creating a modeling workbench:  “The ability to look at the model history and understand what rules and models have been run, how many times and what parameters have been used.” 

The screen shot below allows the budget preparer to understand how often models and rules have been run as well as the drivers used when running the model.  While this may seem like a trivial feature, I’ve talked to customers who have run 18 different model version in a four hour time span and they have found it very helpful when the system self documents the parameters, scenarios and results of the model.

Click the thumbnail to enlarge image

The following is a continuation of the storyboard on a modeling interface started on 2/14/2011 and provides examples of:

• Interactively processing the model
• Running reports to show the results of the model

The significance of the interactive processing feature is:

• Letting the user know the status of the process
• Allowing the user to cancel at any time
• Off loading the process to separate servers/processing instances to reduces web traffic and load on the user’s computer.  The user still requires the ability to monitor completion of the process.

Click the thumbnail to enlarge image

The next example provides a sample of showing results of a model. This is a significant features because as you “war game” with the model and try to understand sensitivities in the business model it is important to be able to quickly see (and print) summary model results so you can then go back and tweak parameters. The screen below shows the results of running a report from item 5 on the screen shot on the original blog dated 2/14/2011.

Click the thumbnail to enlarge image

In my previous blog I talked about four steps to help scope the XBRL process for first time filers. The second step I described is:
“Review three to four of your key financial statements in the context of the current XBRL taxonomy.”

This should help you to understand the scope of the tagging challenge. You can review the XBRL Taxonomy, by clicking here. I thought I would provide a brief video as an example of how you could review the taxonomy.

Note: This Youtube video is best viewed in Full Screen mode, at 480px. Otherwise, download the file.

As many XBRL software and service providers spread “Fear, Uncertainty and Doubt” on the perils of the XBRL process, this article serves to reduce the uncertainty with information on the best approach for XBRL first time filers.

1. Start by talking to some XBRL service providers to become more informed about available solutions to understand available solutions and approaches.   �
2. Review three to four of your key financial statements in the context of the current XBRL taxonomy. This will help you to understand the scope of the tagging challenge. To review the XBRL Taxonomy, click here.
3. Decide on the approach to filing the first time and price alternative options. There are basically three approaches to filing (1) File through your existing printer or CPA firm; (2) Purchase XBRL tagging software and bring the process in-house; (3) Use a collaborative approach that merges options 1 and 2 by using a software as a service provider.
4. Start the mapping and tagging process early with a practice run on an existing quarterly filling at least one quarter before your filing deadline.

To help with Step 3, Host Analytics is offering a free interactive mapping report for companies that are required to file for the first time in 2011.  Click here to register for the free offer.