david mann metrics article - page 5

www.AFPonline.org Copyright © 2010 Association for Financial Professionals, Inc. All Rights Reserved

Spring 2011

Welcome to the spring edition of FP&A newsletter. Since the Winter 2010 issue we’ve been quite busy. We held two financial planning and analysis webinars and one seminar, and I was privileged enough to host a number of roundtables in Chicago, Houston and Nashville. These events were wonderful opportuni-ties for FP&A professionals to discuss, face to face, the critical issues confront-ing their organizations and profession.

Just last week, we released Current Trends in Estimating and Applying the Cost of Capital, a first-of-its-kind study. This research provides unique insight into how companies around the country are modeling and forecasting their cost of capital. I believe these findings will be quite eye-opening to the profes-sion—and portions of the study can be found in this issue.

We have a number of webinars and seminars planned for you, and we will host more lunch roundtables around the U.S. and, for the first time, in Canada. Plus, we are building a full FP&A track—10 educational sessions in all—at AFP’s Annual Conference in Boston, November 6-9. This Annual Confer-ence is a fantastic opportunity to learn, network, and interact with over 5,000 finance professionals.

I greatly appreciate the support and encouragement from the members of the FP&A community. Please continue sending me your ideas and articles so we can continue to support one another in our drive for personal and professional excellence.

Brian [email protected]

s

AFP—Your Daily Resource

FP&A Overview James Robertson, Jr., CTP

Continued on page 2

FPA& Financial Planning and Analysis

http://www.afponline.org/pub/ed/ed_marketplace/virtual_seminars.html#28031.

www.AFPonline.org/CFP

With a record $2 trillion in cash and short-term liquid assets on hand, U.S. businesses are

poised to expand but they are unsure about which initiatives to fund. Furthermore, U.S. firms

lack confidence in the accuracy of the cost of capital projections that underpin their decisions.

Those are two of the findings in the first Cost of Capital Survey by the Association of Financial

Professionals. Fully 55 percent of respondents believe their cost of capital estimates are off by

more than 50 basis points (see Figure 1), while only 17 percent believe their estimates are ac-

curate within 25 basis points. Little wonder, then, that only 15 percent of businesses surveyed

communicate their weighted average cost of capital estimates company-wide (see Figure 2).

AFP conducted the Cost of Capital Survey in October 2010 and received answers from 309

chief financial officers, treasurers, vice presidents-finance and assistant treasurers. Their answers

Cost Uncertainty Ira Apfel

Not an AFP Member? Join today. www.AFPonline.org/Join

Under $1 Billion Over $1 Billion Privately Publicly All Revenue Revenue Held Traded

0 bps—Estimate accurately reflect actual cost of capital 2% 2% 2% 2% 1%

Within +/- 25 bps 15 20 12 17 14

Within +/- 50 bps 28 33 27 27 31

Within +/- 75 bps 7 9 7 10 5

Within +/- 100 bps 38 30 41 37 39

Greater than +/- 100 bps 10 6 11 7 10

Under $1 Billion Over $1 Billion Privately Publicly All Revenue Revenue Held Traded

The cost of capital is communicated companywide 15% 11% 18% 15% 16%

The cost of capital is communicated on a need-to-know basis 85 89 82 85 84

Figure 1: Perceived Accuracy of Cost of Capital Estimates (Percent Distribution)

Figure 2: Internal Visibility of Organizations’ Cost of Capital Estimate (Percent Distribution)

Source: AFP Cost of Capital Survey.

Source: AFP Cost of Capital Survey.

revealed that calculating the cost of capital today is an art, not a science. There was little consensus

about cost of capital practices; instead, respondents typically deployed a plurality of techniques.

Good and bad newsThe vast majority of companies do practice some form of cost of capital estimations. Fully 79

percent of companies, including 91 percent with annual revenues greater than $1 billion, use

Copyright © 2011 Association for Financial Professionals, Inc. All Rights Reserved Spring 2011

discounted cash flow tech-

niques. (One wonders what

the remaining 9 percent with

annual revenues greater than

$1 billion do.)

There is less consistency, however, in how organizations

estimate cash flows and determine the weighted average cost

of capital at which those cash flows are discounted.

Five years is the most common period over which orga-

nizations explicitly forecast the cash flows associated with a

project—a span cited by 46 percent of survey respondents.

More than one-third of organizations forecast explicit cash

flows for the first 10 years of a project.

There is great diversity in how organizations determine

the value of cash flows for the remaining life of a project, i.e.,

terminal value. Only 46 percent use the perpetuity growth

model, while 27 percent develop an explicit cash flow fore-

cast for the entire life of a project. Fully 72 percent develop

multiple cash flow scenarios representing the expected out-

come as well as best and worst-case outcomes, which are then

discounted. A significant share of organizations (28 percent)

uses only a single cash flow scenario.

There is even greater diversity among organizations in

the methods they use when estimating the weighted aver-

age cost of capital. In estimating the cost of equity, nearly

nine of 10 organizations use the, which calculates the cost

of equity using a risk-free rate, beta factor, and a market

risk premium, each of which introduces significant variabil-

ity. While nearly half of organizations (46 percent) use the

10-year Treasury note to estimate the risk-free rate,

16 percent use the 90-day Treasury bill, five-year Treasury

(12 percent), and even the 30-year Treasury bond. Given

that the historical spread between 90-day Treasury bills

and 30-year Treasury bonds is approximately 3 percent,

this wide variation in choices for the risk-free rate will have

dramatic effects on project valuation.

There is also little consistency in the methods organiza-

tions use to estimate the cost of debt. More than

one-third use either the current rate on their existing debt

(37 percent) or the forecasted rate for newly issued debt

(34 percent). More than one in five reduces the volatility

of the cost of debt by using an average rate on outstanding

debt over some period of time. Results from the survey are

more consistent for the tax rates that organizations apply

to calculate the after-tax cost of debt. Fully 64 percent use

their effective tax rate, but 29 percent use the marginal tax

rate, and 7 percent use a target tax rate. s

Cost Uncertainity from page 1 A Corporate’s Perspective on Cost of Capital

So how do treasury and finance professionals determine their cost of capital? FP&A asked one executive, Mark W. Scott, CTP, Manager, Treasury, Corporate Finance for Verizon, for his insights.

FP&A: Why did you undertake this survey?

Mark Scott: We thought that this was an important study to do because it provides treasury finance professionals and academics with valuable benchmarking information about how and when the CAPM is currently being used by practitioners, and which inputs they populate the model with. This is particularly pertinent when considering that one of the most critical issues owing the recent financial turmoil concerns asset prices, and the capital asset pricing model is one of the most widely used valuation models.

FP&A: Looking at the results, what surprised you?

Scott: I’m surprised that this study even occurred, considering the confidential nature of the information, the number of responses, and the broad array of the firms they represent.

FP&A: For many of the questions, there seems to be little consen-

sus. How surprising did you find that and why?

Scott: Not surprising at all. It is no secret that applying the CAPM is as much an art as financial science. However, two thoughts readily come to mind when thinking about the number of variations that are associ-ated with the CAPM.

First, despite the differences in model inputs, many of the final WACC estimates will still manage to fall within a reasonably close grouping. This occurs precisely because of the wide variety of inputs and inter-pretations of the model.

One practitioner might use the 1-year Treasury as their risk-free rate, while others may use the 10 or 30-year. However, the practitioner using the 1-year Treasury may also be using the higher Ibbotson long-term market risk premium, while the others use a more recent lower valued risk premium. So while there may be a significant disparity among the inputs that does not necessarily result in significant discrepancy in results.

The other thought is that the lack of consensus in CAPM interpreta-tion actually supports healthy and efficient markets. It has been said that a seller of stock sells with the belief that the value of that security is about to decline, to a buyer with an equal conviction that the stock will go up. How can that be when the same information about the stock’s underlying company and markets are available to both? It is because the buyer and seller interpret that same information differently. The same is true for the CAPM.

FP&A: Was there any practice that you had never heard of before?

Anything you will adopt?

Scott: While the survey provides fertile terrain for debate and further re-search, in general, it appears that responses follow academic theory—albeit, the wide range of responses indicates different interpretations of

the theories. s

2011 AFP Current Trends in Estimating and Applying the Cost of CapitalReport of Survey Results


Continued on page 4

Published by the Association for Financial Professionals, Inc.

EditorIra Apfel

Director, Finance PracticeBrian Kalish

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FPA&

AFP’s FP&A resources are available at www.AFPonline.org/FPA

One of FP&A’s primary functions is to facili-

tate the strategic planning process and help

management develop goals, objectives and

strategies for the organization. Typically, the

lion’s share of attention during this process is

devoted to operating strategy development.

While this allocation is appropriate, a compre-

hensive strategic plan should also include a

well articulated capital structure strategy.

Capital structure strategy should have

two main objectives: align with the operat-

ing strategy; and maximize total shareholder

returns (TSR). Too much leverage can lead

to credit default and insolvency while too

little may result in sub-optimal shareholder

value creation. Key components of the capital

structure strategy include:

• Capitalspendingandexpectedreturns

• Optimaldebtlevels

• Liquidityandcashbalances

• Interestrateriskmanagement

• Dividendpolicy

• Sharerepurchasesandshare-based

compensation.

Capital spending and expected returnsCapital structure assumptions are reflected

in the “three statement model” primarily on the

Developing Capital Structure StrategyDavid Mallicoat, MBA, CMA, CFM

balance sheet and in cash flow related to financ-

ing activities. Before assumptions related to

financing activities can be developed, it is neces-

sary to first deal with anticipated levels of cash

flow from operating and investing activities.

Clearly, whether external financing is required

or excess cash is available depends largely on

operating and capital spending assumptions.

From a modeling perspective, it is generally

advisable to reflect returns on planned capital

investment at levels consistent with economic

value creation; that is, at or above the weighted

average cost of capital (WACC). An updated

WACC analysis should, therefore, also be in-

cluded in the strategic planning process.

Optimal debt levelsAt the heart of capital structure strategy is

a fundamental question: how much debt is

too much, and how much is too little? Hold-

ing operating cash flows constant, enterprise

value is maximized where the after-tax WACC

is minimized (figure 1). In a world where

interest (and lease) payments are tax deduct-

ible, the WACC benefits from each marginal

dollar of debt capital up to the point at which

elevated default risk premiums are mani-

Figure 1: Optimal Capital Structure

Debt/Total Assets


Developing Capital Structure Strategy continued

More than 300 financial planning and analysis professionals provide insight into practices currently being used in the profession to deploy corporate capital.

Visit www.AFPonline.org/FPA to read this unique survey. 2011 AFP Current Trends in Estimating

and Applying the Cost of Capital

Report of Survey Results

Current Trends in Estimating and Applying the Cost of Capital Report of Survey Results

fested. The precise amount of leverage that

represents is difficult to know, but, one thing

is certain: operating cash flow is anything but

constant. One approach to estimating an ideal

debt level is to model minimum acceptable

debt metrics (e.g., debt covenant cushions)

under downside or worst-case scenarios. This

approach helps the firm balance default risk

with the opportunity costs of over-weighting

equity in the capital structure mix.

It is also important to consider sources of

debt capital. For instance, diversifying sources

of debt capital with a mixture of bank debt

and corporate bonds, as well as staggering

debt maturities, may help reduce refinanc-

ing risks should shocks occur in the credit

markets at inopportune times.

Liquidity and cash balancesIt is important to consider the adequacy

of available liquidity in the planning process.

Analysis should be developed to determine

peak working capital requirements based on

a variety of scenarios. Liquidity requirements,

however, should be balanced against the

prospect of holding excessive cash balances

idly on the balance sheet. Modeling the accu-

mulation of cash on the balance sheet implies

the lack of a comprehensive capital structure

strategy (unless earmarked for some specific

purpose such as an acquisition).

Interest rate risk managementIf the firm anticipates including debt

in the capital structure, interest rates and

expense must be projected. This exercise

calls into question the firm’s strategy for

interest rate risk management, which ideally

includes developing targets for fixed versus

floating rate exposure. There are many

diverging views on interest rate risk manage-

ment. Some CFOs and boards of directors,

may place a premium on certainty and seek

to minimize floating rate exposure. Others

may adopt a more balanced approach to

hedging interest rate risk.

Dividend policyIn practice, dividend policy should be

considered within the context of an overall

investor strategy. It is important to consider

how current and prospective investors view

and value dividends. For instance, some

funds/portfolio managers may exclude non-

dividend paying companies from consider-

ation while others may prefer the company

to reinvest its cash. Competitive yield

comparisons and expected growth rates are

also important factors to consider.

Share repurchases and share-based compensation

Another way of returning capital to

shareholders is by repurchasing shares.

Share repurchase programs have become an

important way for firms to enhance share-

holder returns by driving EPS accretion

through reduced share counts. Using an EPS

accretion framework, share repurchases are

almost always favorable to debt reduction as

a use of cash. There are a number of impor-

tant considerations in the share repurchase

analysis, including issues related to share

price. If management is agnostic about share

price when repurchasing shares, it risks the

potential perception of over-paying. How-

ever, if the firm adopts a more opportunistic

approach, a lack of buybacks may signal the

market that management believes shares are

over-valued.

Inextricably linked to the share repur-

chase strategy, is the firm’s strategy for share-

based compensation. On one hand, the firm

dilutes the current shareholder base in order

to better align the interests of employees

and owners. On the other, the firm uses a

portion of its excess cash to simply offset the

dilutive effects of share-based compensation.

It is important in the capital structure strat-

egy development process to ensure these

programs are philosophically aligned. s

David Mallicoat is Manager, FP&A at Cracker

Barrel Old Country Store


The traditional role of financial planning and analysis (FP&A) is to

establish plans that ensure investments align with strategy to maxi-

mize return on investment (ROI). However, FP&A increasingly is

relied on to play a strategic role in driving business operations.

Why the transformation?

Organizations increasingly recognize that FP&A brings a

holistic and unbiased view of the business, and is highly vested

to ensure operations are smart and efficient to drive financial

performance. FP&A also is in the unique position to bring a

metric-centric view of the entire business that, if designed cor-

rectly, can ensure an organization is on track with its goals.

Metrics are a key component of successful operations. There

are three primary advantages for using metrics:

1. Accountability. In a nutshell, metrics don’t lie. Metrics

force accountability to the agreed-upon goal. It is a much

better approach than allowing people to “spin” how they

talk about their respective areas.

2. Empowerment. It may seem counterintuitive, but if met-

rics are used appropriately, then they will serve to support

an entrepreneurial culture, one that empowers people to

make their own decisions. With well-defined metrics, there

is no need to micromanage. The goals are clear and people

know how they will ultimately be measured, so they are

more willing to try new or creative approaches to solve a

problem, and also to take risks and move quickly.

3. Front Lines. By establishing a smart, collaborative ap-

proach for using metrics, FP&A teams move to the front

lines and become key business partners in the organiza-

tion—consulting, collaborating and driving better and

smarter decisions.

Now that you understand the goals of a sound metrics-driven

finance strategy, here are 10 strategies for making metrics work

within a company:

1. Align with strategy. The first place any company should

begin is by establishing a long-term vision and strategy and

short-term goals that are aligned with the strategy. Once

these plans are crystallized, a set of complementary metrics

can be designed that align with this framework.

2. Be flexible in the use of metrics. Just like people, all

companies are different. There are numerous approaches

to using metrics and you need to find a solution that works

well for your company. Some companies may choose to drive

individual metrics through all levels of the organization, while

other companies may establish a handful of key metrics that

drive the right collective behavior through the company.

3. Balance simplicity vs. perfection. Lean toward metrics that

can be readily understood and communicated easily vs. the

“perfect” metric that is difficult to grasp.

4. Be data-driven. While you may be able to dream up many

interesting metrics, the metric has no value if you cannot get

data to track the metric.

5. Start with a baseline. When using metrics and setting tar-

gets, always start with a baseline, whether through historical

trends or external benchmarking. This will give you a better

sense for patterns and proposed targets.

6. Communicate. Metrics should be communicated consis-

tently, in various forums and with regularity.

7. Look to the future. Take a long-term view in managing

metrics. Small blips up or down are fine, as long as the trend

moves in the right direction.

8. Consider costs. When appropriate, it is valuable to factor

cost into a metric. We have a large customer support team

at Constant Contact and, being a customer-centric company,

we focus on answering the phones quickly when custom-

ers call with questions. One way the management team can

ensure we answer the phones quickly is by overstaffing the

organization. To manage this, we monitor the cost per call

and look at the longer-term trend.

9. Don’t forget the customer. When feasible, incorporate

customer satisfaction as one of the metrics. In the example

above, the customer support team can influence the cost per

call by hiring less experienced folks with lower salaries who

may or may not be meeting the needs of the customer call-

ing in for support. That is why it is important for us to also

measure customer satisfaction, to ensure we are doing right

by our customers.

10. Tie in compensation. It may be tricky to find the right

structure, but I have found that when you tie compensa-

tion to metrics, things get done. Always involve key stake-

holders in the formulation of metrics to ensure you have

understanding and buy-in. Just imagine how you would

feel if someone established a metric for you to achieve your

bonus, one that you didn’t feel you could influence, and the

company fell short of the metric. s

David P. Mann is Director of Finance and Assistant Treasurer for Constant Con-

tact. David has more than 15 years experience in FP&A, treasury, M&A, and

investment banking. Reach David at [email protected].

Metrics MattersDavid P. Mann

cross-department repository of BI expertise

and experience is essential to the long-term

success of a company’s BI solution. Skills

and functions incorporated into this body

Navigating the BI Selection ProcessMichael Merrill

This article is the second of a series. Read the first here.

because they typically understand the

challenges of the business users and the

technical limitations faced by the tech-

nology group. Members of this group can

be pulled from the Business Intelligence

Competency Center discussed above.

Information Technology Specialists -

Giving information technology specialists

a voice in the selection process will ensure

that the BI solution provider does not

over-promise the abilities of the product.

It also allows the IT group the ability to

make sure they have the infrastructure and

staff in house to support the new software

product(s). Members of this group can be

pulled from the Business Intelligence Com-

petency Center discussed above.

Product demoIt is important for your organization to

be an active driver of the product demo

process rather than a passive participant. Be

prepared to provide the software company

a detailed list of business requirements

and functionality essential to the solution

implementation.Duringthedemokeep

these things in mind:

• Doesthedemonstratedfunctionality

meet the current business need(s)?

• Whichproduct(s)arebeingshown,

but more importantly which

product(s) are needed?

• Whatwillittaketoimplementthe

product?

• Doestheproductsupportanability

to share information across organiza-

tional silos?

• Don’tbeafraidtoaskdetailedquestions

• Don’tgetsidetrackedbythe“bells

and whistles”Continued on page 7

Understanding that the three major Business

Intelligence (BI) players, Oracle, SAP and

IBM, have comparable solutions, it is now

time to choose a solution for your company.


Many companies have multiple BI solutions that have been developed within silos across the organization with no ability to share information across departments.

Create a foundation for successStart by surveying your company for exist-

ing BI solutions so that you can build on what

is working for your organization. This may

seem like an obvious step, but many compa-

nies have multiple BI solutions that have been

developed within silos across the organization

with no ability to share information across de-

partments. For example, if your company uses

Oracle Financials and bases all custom applica-

tions on Oracle databases with an army of PL/

SQL developers on staff, then Oracle Business

Intelligence Enterprise Edition (OBIEE) would

be a natural fit.

Also, this type of organization-wide

assessment can be the foundation for the

creation of a Business Intelligence Compe-

tency Center. An Aberdeen Group October

2010 study suggests that a Business Intel-

ligence Competency Center that serves as a

might include BI project assessment and

feasibility, BI design and development, proj-

ect management expertise, integration and

data cleansing resources, support staff, and

a library of business best practices.

Product selection teamWhen choosing the BI products, it is impor-

tant to put together the correct selection team.

The team needs to be comprised of executives,

business users, power users and information

technology professionals. Without the support

and buy-in of any of these groups, even the

best software products being implemented

with the best plans will fail.

Executives - The executives have their

eyes on the direction of the company and

will monitor the ROI of the BI imple-

mentation. They need to know if the

solution wins more customers, makes the

company more efficient, or reduces the

total cost of ownership.

Business Users - The business users

will use the BI solution on a daily basis,

so they need to feel that it makes their

job easier or offers more functionality.

Typically, they are the ones affected the

most after the implementation, so their

opinion should carry the most weight.

Power Users - Power users are a great

group to have in the selection process

http://www.afponline.org/pub/newsletters/newsletter_archive.html#fpa


Creating a product scorecard for the se-

lection team to fill out will help ensure that

theentireteam’svoiceisheard.Develop-

ing a good scorecard can be tricky; most

effective ones keep the measuring range

simple (scale of 1 to 4), limit the number of

measurements to 15 key factors or less, and

allow for comments. After the demos are

completed get the selection team together

and review the scorecards.

A word about out-of-the-box, pre-built solutions

It can be very easy during a product

demo to be swept away by out-of-the-box,

pre-built solutions. The Aberdeen Group

October 2010 study found that respondents

who used pre-built dashboard solutions

were able to deploy their first dashboard

project in 60 percent of the time required

by organizations that were building custom

dashboard solutions. However, the study is

quick to point out that “there is still work

to be done to complete the implementation

before the go-live date. When assessing pre-

built solutions, consider the following:

• efforttointegrateyoursourcedatainto

these pre-built solutions

• efforttomapandtailorthepre-built

solution to your specific business needs

and business processes

• efforttoconfigureappropriatesecurity

• existenceofextensionsorenhance-

ments to augment the out-of-the-box

pre-built solution.

The same Aberdeen Group study found

that firms using pre-built dashboards said that

36 percent of the key performance indica-

tors associated with strategy are represented in

their dashboards. By comparison, 48 percent of

strategic KPIs are present in dashboards or orga-

nizations that pursue a custom built approach.

Proof-of-conceptOnce the selection committee has nar-

rowed the field to the product believed

to be the best fit, it is time to contact that

company for a proof-of-concept (POC).

The typical POC takes a couple days to two

weeks. Most companies will allow your or-

ganization 30-60 days to evaluate the POC.

The POC is the best and last chance to

make sure the product will meet the business

needs. Run the POC like a mini-project.

Developspecificgoalstobeachievedbythe

POC. Hold a kick-off meeting to make sure

everybody knows what products are going

to be used and who has what responsibili-

ties. Make sure the business users get enough

hands on experience with the product. Wrap

up the POC with a presentation that shows

how the product(s) will be used.

Solution negotiationAfter the BI solution of choice has

survived the selection team and POC, it

is time to negotiate acquiring the appro-

priate product(s). Every BI company has

“street” prices for their products, but very

few companies pay that price. The typical

software discount is from 20-40 percent.

Don’tforgettoinquireaboutothercontract

concessions that can be offered by the BI

companies. BI deals often include services

at a discount. However, it is important to

seek multiple client references in your field

to ensure that the services offered are what

you expect.

When looking at the final BI solution

package, pay close attention to the mainte-

nance. Make sure your team understands

how much annually the company will

need to continue to spend to protect the

BI investment. Maintenance is based on

the software sold, so if the deal includes

software and services, be sure to have the

software discounted as deeply as possible,

and pay more for the services. The timing

of the deal is also very important. End of

quarter or end of fiscal year deals can give

your company more leverage. s

Michael Merrill is a partner with Elire. Reach

him at [email protected].

Navigating the BI Selection Process continued

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3 Budgeting Challenges—and 6 SolutionsJenny Okonkwo, MBA

Annual budgets are ideally based upon an agreed-upon business

strategy. Group/head office management set subsequent targets

around revenue, profit, operating expenses and headcount, using

a set of assumptions. This leads to a business plan, from which

the company budget for the coming year will be created. This all

sounds very straightforward, so what are some of the practical chal-

lenges that affect the budget cycle?

1. Agreeing a set of assumptions

I once worked for a prominent consumer electronics firm that

changed the sales organization structure every year. It was auto-

matic to ask “What will the new company structure be?” before

calculating the numbers. The challenge would then be how best to

break out the previous years numbers to provide sensible budget

versus actual comparatives.

When I worked for a food manufacturer, my key challenge was

agreeing to suitable standards for certain products that were subject to

wide price fluctuations. This was particularly challenging in the wake

of unforeseen events, such as droughts or sudden freezes.

Competitive action within a sector often has a highly visible

effect on company performance. Beer, in particular, may often be

subject to brand switching as customers react to limited time pro-

motions. Competitive activity, outside specific periods, may often

be difficult to predict in advance.

2. Non-involvement of budget stakeholders

Company culture often dictates whether the budget is an annual

chore left exclusively to the finance department, or whether it is

viewed as a company-wide process with active engagement at all

levels. In environments where the process is centralized within

finance, it becomes virtually impossible to implement an ongo-

ing business review process. The operative term is “these are not

my numbers.” Performance target setting processes are adversely

impacted and accountability is unclear.

Treating the budget process as a finance exercise also results in

key business interdependencies and risks being overlooked. In my

experience, what has worked best is a situation where the business

builds their own budgets within group guidelines, with review,

coaching and assistance from finance throughout the process.

3. Ownership and accountability

Ideally, companies should strive for shared ownership and

accountability of the business plan between finance and the rest

of the organization. Finance has an active business partnering

role to play in bringing potential risks and issues to the attention

of senior management. They can also be process owners in the

task of flexing original budgets to reflect changes in the business

environment. A widely held opinion is that sales are responsible

for achieving revenue targets; equally, finance has a role to play in

monitoring company expenses, in line with sales trends, high-

lighting any potential risks to meeting bottom line profit targets.

Based on the above, here are some tips to improve the budget-

ing process:

• Collectivelyagreeasetofbudgetassumptionsinadvance

• Identifyandengageallpotentialstakeholders

• Identifyanddocumentkeyinterdependencies,risksandissues

• Agreewhethertocentralizeordecentralizetheprocessof

building the numbers

• Agreetoroleboundariesbetweenfinanceandbudgetholders

• Shareaccountabilityandownership.

It is important to recognize that in most instances, budgeting

is an iterative process, and can go through several rounds prior to

being approved.

Once a company budget has been established, it needs to be

brought to life via a continuous performance review process. The

frequency of business performance reviews vary within companies

(monthly, quarterly, etc). These reviews form the basis for produc-

ing a forecast, based on an actual versus budget comparison for a

particular timeframe and flexing the original numbers for unfore-

seen changes, budgeting errors and risks.

There should also be time set aside for an in-depth review of

the past budget process, identifying lessons learned and ways to

improve the process for future cycles. This may involve a review of

the systems and tools used as well as gathering feedback from those

involved in the process. s

Toronto-based Jenny Okonkwo, MBA, (CIMA Associate Member, UK),

is finance manager for Transform Consulting. Email: okonkwoj@gmail.

com. Web: http://ca.linkedin.com/in/jennyokonkwo.


Collaboration Counts Thomas W. Smith, CMA, MBA

Most experts are clear in their beliefs about the

importance of traditional financial skill sets as

imperatives for entry into the FP&A ranks.

But what are the keys to advanced FP&A

success? Cross-functional collaboration and

other soft skills.

Business leaders tend to value financial

professionals who understand the business and

contribute to operational success. Meanwhile,

finance leaders, faced with unique pressures

and influences, have different views about how

business support activities stack up in priority

against closing the books, updating rolling

forecasts, and building budgets. Largely a

matter of differing perceptions and compet-

ing priorities, it is exactly within this gap—of

who thinks what is important—where FP&A

is squarely caught in the middle. Somewhat

paradoxically, this is also a golden road of op-

portunity for FP&A.

FP&A professionals need collaborative and

other soft skills to constantly reconcile this ap-

parent dichotomy and to seize the opportunity.

Moving beyond our traditional accounting and

finance skill sets is developmentally essential, as

we look to improve ourselves and to help oth-

ers who look to us for leadership and mentor-

ing. This is not to suggest in any way, shape, or

form that functional excellence be cast aside or

that technical knowledge, financial models, and

analytical methods be replaced with glad-hand-

ing, back-slapping, and an aversion to heavy

lifting. As financial professionals, we cannot

and should not forsake the very skills that got

us to where we are.

Rather than representing a single set of abso-

lutes, the list that follows is intended to evoke

imagery and be an illustrative look at a very

important topic.

“The Gymnast”

Be flexible, balanced, and precise. Flexibility in approach is critical. Balance financial

and business priorities. Be precise when it counts. Know that constant precision can

wear on others.

“The Tailor”

Work the seams. Find loose change in the pockets of opportunity that even

the best business processes and change efforts leave. Be on the lookout for seam

dwellers that need help.

“The Ambassador”

Build rapport and trust. Span the boundaries between Finance and other company units.

Be the broker for solutions that engender organizational stability and forge process

improvement.

“The Interpreter”

Remove the language barrier. Recognize that colleagues may see even the most basic

financial terminology as a foreign language. Assemble a vocabulary and desk-side

manner that works.

“The Educator”

Simplify and clarify. Help others to understand financial concepts and initiatives.

Invest in the power of financial education across the business. Make it easy for others

to support FP&A.

“The Individualizer”

Adapt to differences among colleagues. Recognize the diversity of skills and talents

that exists in an organization. Modify approach and style to achieve the best results.

“The Integrator”

Put the pieces together. Create a mosaic by assembling the seemingly disparate perspec-

tives and information that we encounter. Embrace the opportunity to unify.

“The Raconteur”

Tell the FP&A story. Be the soundtrack. Inject personality and enthusiasm. Be inter-

esting. Focus on a few overarching themes. Create a story that encourages others to

want to work with us. s

Thomas W. Smith is Director, FP&A, Home Systems Division, Legrand North America. Reach

him at [email protected].


How to Get What You Want When You Want ItKristin Castille, CTP

For FP&A professionals to succeed, they must work with multiple

departments to gather information used in their financial and business

analysis. The quality and timeliness of the work is paramount as the

analysis is relied upon by the senior leadership team including the

President,ChiefFinancialOfficerandtheBoardofDirectors.

Dataandinformationarerequiredfromnumerousdepartments.

For example, data may include the specific business volume from

the commercial team, or tax and depreciation estimates from the

accounting department. Information includes the commercial

outlook and reason for volume and price fluctuations from prior

periods or strategic initiatives from the executive team.

It is the responsibility of the FP&A team to verify the inputs.

Here are a few pointers to help achieve this goal:

1. Communicate clear and specific deadlines.

Information requests should be accompanied by an exact date

and time. Avoid using the phrase ASAPas there is no agreed upon

meaning. While one person could interpret this to mean in the

next five minutes, someone else could understand this to be in

the next five days. By providing a deadline, you are better able to

ensure your own deadlines will be met.

2. Be detailed in your requests.

You know exactly what you’re trying to do with the informa-

tion, but others aren’t mind readers. Tell them exactly what you’re

looking for. For example, asking the VP of Sales for “2010 vol-

umes” is too vague. Asking the following is much more helpful:

“Could you please provide me with volume by product line for

2010 broken out by month, which ties to the summary number?”

This eliminates precious time wasted

with needless back-and-forth as you

attempt to get exactly what you want.

An even more fool-proof method is

providing an Excel template in which

the cells to be populated are high-

lighted. This visual guide will often

prove easier than verbal instructions.

3. Take a collaborative

approach.

Share the reason for the request

with your coworker providing the

information. By knowing why you need the data, they can better

allocate their time and resources to the request. For example,

if you just need rough numbers for a back-of-the-envelope

calculation, communicating this might save needless hours as

someone attempts to gather exact numbers to the penny. To the

contrary, when the information is being used for a public filing

or board report, you will gain buy-in as your source will share in

the excitement and importance of this work.

4. Recognize language differences.

While you know exactly what you want, your finance lan-

guage might have a different meaning to a non-finance profes-

sional. For example, something that is considered an expense

by the commercial team may not be an expense that hits the

income statement. Even though cash is going out the door, it

could instead be classified as inventory and only impact the

balance sheet. So exercise caution and ask plenty of questions to

make sure everyone is on the same page when you’re trying to

get that income statement forecast right.

5. Build personal relationships.

People prefer to say “yes” to individuals they know and like. It

maynottakeaPhDtofigurethisout,butonedid:Accordingto

Robert Cialdini, Professor Emeritus of Psychology and Marketing

at Arizona State University and author of “Influence,” compliance

with requests is more likely to be achieved if people are familiar

with and have positive feelings towards the person making the

request. So take the time to get to know your colleagues, and

instead of eating at your desk, invite them out to lunch.

All the technical knowledge and

spreadsheet wizardry will not do

you a lick of good if you can’t get

accurate information in a timely

manner from your coworkers. Fol-

lowing these five steps will put you

on a path to success in meeting your

deadlines and endless reporting

requirements. s

Kristin Castille, CTP, is Manager of

Financial Planning & Analysis for

SPT Inc.


Managing capital costs and capital structure

is complicated, even in the best of economic

times. Yet, the ability to access cash for capi-

tal investments is not a mystery and can be

managed—even in challenging times. Three

critical planning steps that can help mitigate

cost of capital problems include:

• Understandingthenearandmid-term

external economic environment

• Tyingacomprehensiveenterpriserisk

management strategy to capital planning

• Focusingonmarketsandcashflow.

In February 2010, Richard Fisher, Presi-

dentoftheDallasFed,sharedthattheDallas

Fed pegged Federal unfunded liabilities at

$104 trillion, growing at $2-3 trillion per

year. Federal debt has climbed north of $14

trillion. All told, debt in the United States

is now over $50 trillion. In short, there is

tremendous pressure on capital markets and

there will be pressure for a protracted period.

Large government, consumer, and business

borrowing will create real competition for

precious capital investments. At the same

time, commodity prices continue to climb

and the value of the U.S. dollar is under

tremendous pressure. Even with growth in

consumer and investment demand, there are

serious challenges—many of the fixes to the

debt issues will diminish consumer demand.

So, businesses that want to maintain access

to capital need a very clean balance sheet,

an effective value proposition for good and

bad times, and a risk strategy that convinces

capital markets that your organization has a

serious handle on risks.

Smart companies have a comprehensive

risk management strategy that links opera-

tional and strategic plans to markets and

ultimately the value creating capital of the

organization. Capital includes current and fu-

ture cash flows (financial capital), right-sized

physical capital, structural capital (processes,

procedures, culture, customer relationships,

supply chain, and reputation—as some have

suggested, structural capital is the knowl-

edge that resides in the organization when

the employees leave at night), access to intel-

lectual capital, and well honed and aligned

human capital. Smart investors want to see

the risk mitigation strategies.

access to affordable capital. What types of

tools exist within treasury to do this type

of planning?

It is fundamental that all forms of capital

available to an organization receive effec-

tive capital budgeting—all investments

should mitigate risk and enhance organi-

zational cash flow. Essentially, this form

of holistic capital budgeting is part of a

thoughtful risk management strategy. Trea-

Managing Liquidity in Tough TimesRod Hewlett, CTP

It is fundamental that all forms of capital available to

an organization receive effective capital budgeting—

all investments should mitigate risk and enhance

organizational cash flow.

Enterprise risk management tracks all

major risks that can impact the organization

and uses an integrated, and systematic, ap-

proach to share or mitigate risks. Good risk

strategies also include scanning strategies

to identify and adapt to the “black swan.”

Ultimately, a solid risk management plan

mitigates risk that affects the price of cash,

or the cost of capital.

All organizations face the hard reality

that their missions require cash—and that

also includes access to future cash. Good

organizations manage liquidity holistically.

They plan for current cash, future access to

cash, and use this cash to shape the organi-

zation to meet the market. Good businesses

manage and make mid-course corrections

to manage to cash. Without cash, great

ideas die and capital is employed ineffec-

tively and eventually evaporates. Under-

standing the organization value proposition

through market-capital-risk-cash flow

links is the critical element to ensure ready

sury must become adept at integrating ex-

ternal market cues into capital and liquidity

planning. Enterprise risk management must

be considered as a holistic management

tool that links markets to cash flow. Risk

management is more than insurance and

netting activities. One has to look no further

than talent acquisition, management, and

retention in a knowledge-based business to

understand that employee benefits and the

regulatory environment are important risk

areas. If a knowledge-based business cannot

attract knowledge talent, their access to and

cost of capital will become prohibitive.

The treasury group is the critical orga-

nizational player in liquidity management.

Risks shapes value and value governs access

to capital and cost of capital, which impacts

liquidity. Twenty-first century economics has

creating an expanded role for treasury. s

Rod Hewlett, DA, CFM, CTP, is Dean, College

of Business, Bellevue University.

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