Financial Planning & Analysis and Performance Management E-Book

Jack Alexander

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Serie: Wiley Finance Editions
• Sprache: Englisch
• Veröffentlichungsjahr: 2018

Seitenzahl: 675

Beschreibung

Critical insights for savvy financial analysts Financial Planning & Analysis and Performance Management is the essential desk reference for CFOs, FP&A professionals, investment banking professionals, and equity research analysts. With thought-provoking discussion and refreshing perspective, this book provides insightful reference for critical areas that directly impact an organization's effectiveness. From budgeting and forecasting, analysis, and performance management, to financial communication, metrics, and benchmarking, these insights delve into the cornerstones of business and value drivers. Dashboards, graphs, and other visual aids illustrate complex concepts and provide reference at a glance, while the author's experience as a CFO, educator, and general manager leads to comprehensive and practical analytical techniques for real world application. Financial analysts are under constant pressure to perform at higher and higher levels within the realm of this consistently challenging function. Though areas ripe for improvement abound, true resources are scarce--until now. This book provides real-world guidance for analysts ready to: * Assess performance of FP&A function and develop improvement program * Improve planning and forecasting with new and provocative thinking * Step up your game with leading edge analytical tools and practical solutions * Plan, analyze and improve critical business and value drivers * Build analytical capability and effective presentation of financial information * Effectively evaluate capital investments in uncertain times The most effective analysts are those who are constantly striving for improvement, always seeking new solutions, and forever in pursuit of enlightening resources with real, useful information. Packed with examples, practical solutions, models, and novel approaches, Financial Planning & Analysis and Performance Management is an invaluable addition to the analyst's professional library. Access to a website with many of the tools introduced are included with the purchase of the book. Please see About the Website page for access instructions.

Leseprobe

Table of Contents

COVER

PREFACE

WHY THIS BOOK?

USING THIS BOOK

ABOUT THE WEBSITE

WHAT'S ON THE WEBSITE

GLOSSARY

1 FINANCIAL PLANNING & ANALYSIS AND BUSINESS PERFORMANCE MANAGEMENT

THE PROBLEM WITH TRADITIONAL MEASUREMENT SYSTEMS

OBJECTIVES OF FINANCIAL ANALYSIS AND PERFORMANCE MANAGEMENT

PREVIEW OF THE BOOK

SUMMARY

Part One: Fundamentals and Key FP&A Capabilities

2 FUNDAMENTALS OF FINANCE

BASICS OF ACCOUNTING AND FINANCIAL STATEMENTS

FINANCIAL RATIOS AND INDICATORS

SUMMARY

NOTE

3 KEY ANALYTICAL TOOLS AND CONCEPTS

BASIC STATISTICAL TOOLS

THE BUSINESS MODEL

SUMMARY

4 DEVELOPING PREDICTIVE AND ANALYTICAL MODELS

WHAT IS A FINANCIAL MODEL?

SUMMARY

APPENDIX: ILLUSTRATIVE MODEL

5 BUILDING ANALYTICAL CAPABILITY

FOR THE INDIVIDUAL

FOR THE ORGANIZATION

SUMMARY

6 COMMUNICATING AND PRESENTING FINANCIAL INFORMATION

LAYING THE FOUNDATION FOR SUCCESS

DEVELOPING EFFECTIVE PRESENTATIONS AND REPORTS

DELIVERING THE PRESENTATION

DATA VISUALIZATION AND PRESENTATION: A PICTURE IS WORTH A THOUSAND WORDS

SUMMARY

NOTE

Part Two: Performance Management

7 BUSINESS PERFORMANCE MANAGEMENT

WHAT IS BUSINESS PERFORMANCE MANAGEMENT?

DEVELOPING OR ENHANCING BPM IN AN ORGANIZATION

SUMMARY

NOTES

8 DASHBOARDS AND KEY PERFORMANCE INDICATORS

OBJECTIVES OF DASHBOARDS AND KEY PERFORMANCE INDICATORS

SELECTING APPROPRIATE PERFORMANCE MEASURES AND KEY PERFORMANCE INDICATORS

CREATING PERFORMANCE DASHBOARDS

SAMPLE DASHBOARDS FOR SELECTED INDUSTRIES

SUMMARY

9 INSTITUTIONALIZING PERFORMANCE MANAGEMENT

GAINING TRACTION

INTEGRATING BUSINESS PERFORMANCE MANAGEMENT WITH OTHER MANAGEMENT PROCESSES

AVOIDING COMMON MISTAKES

SUMMARY

10 MEASURING AND DRIVING WHAT'S IMPORTANT

INNOVATION

MEASURING AND DRIVING BUSINESS AGILITY

HUMAN CAPITAL MANAGEMENT

HCM DASHBOARD

SUMMARY

11 THE EXTERNAL VIEW

ANALYSIS OF MARKETS, CUSTOMERS, AND COMPETITORS

BENCHMARKING TO EVALUATE PERFORMANCE

USING BENCHMARKS TO SET ENTERPRISE GOALS FOR PERFORMANCE AND VALUE CREATION

SUMMARY

Part Three: Business Projections and Plans

12 BUSINESS PROJECTIONS AND PLANS

OVERVIEW OF BUSINESS PLANNING AND PROJECTIONS

BEST PRACTICES IN PROJECTING FUTURE FINANCIAL RESULTS

SUMMARY

13 BUDGETS, OPERATING PLANS, AND FORECASTS

THE BUDGETING PROCESS

THE OPERATING PLAN

BUSINESS FORECASTS AND OUTLOOKS

SUMMARY

NOTE

14 LONG‐TERM PROJECTIONS

UNIQUE CHALLENGES IN ESTIMATING LONG‐TERM PERFORMANCE

APPLICATIONS OF LONG‐TERM PROJECTIONS

DEVELOPING LONG‐TERM PROJECTIONS

PRESENTATION OF LONG‐TERM PROJECTIONS

SUMMARY

Part Four: Planning and Analysis for Critical Business and Value Drivers

15 REVENUE AND GROSS MARGINS

REVENUE GROWTH: KEY DRIVERS

KEY PERFORMANCE MEASURES: REVENUE GROWTH

REVENUE DASHBOARD

GROSS MARGINS AND RELATIVE PRICING STRENGTH

MEASURES OF RELATIVE PRICING STRENGTH

SUMMARY

16 OPERATING EXPENSES AND EFFECTIVENESS

DRIVERS OF OPERATING EFFECTIVENESS

KEY PERFORMANCE INDICATORS: OPERATING EFFECTIVENESS

TOOLS FOR ASSESSING AND IMPROVING OPERATING EFFECTIVENSS

SUMMARY

17 CAPITAL MANAGEMENT AND CASH FLOW

CRITICAL SUCCESS FACTORS

OPERATING CAPITAL MANAGEMENT

UNDERSTANDING THE DYNAMICS OF OPERATING CAPITAL

UNLEASHING THE VALUE TRAPPED IN OPERATING CAPITAL

ACCOUNTS RECEIVABLE

KEY PERFORMANCE INDICATORS FOR THE REVENUE PROCESS AND ACCOUNTS RECEIVABLE

INVENTORIES

SUMMARY

18 CAPITAL MANAGEMENT AND CASH FLOW

CAPITAL INTENSITY

TOOLS FOR IMPROVING THE MANAGEMENT OF LONG‐TERM CAPITAL

PROJECTING CAPITAL INVESTMENTS AND DEPRECIATION

KEY PERFORMANCE INDICATORS FOR CAPITAL INTENSITY

INTANGIBLE ASSETS

KEY PERFORMANCE INDICATORS: GOODWILL AND INTANGIBLE ASSETS

EXCESS CASH BALANCES

LONG‐TERM CAPITAL DASHBOARD

SUMMARY

19 RISK, UNCERTAINTY, AND THE COST OF CAPITAL

THE TIME VALUE OF MONEY

THE COST OF CAPITAL

PERFORMANCE MEASURES

SUMMARY

Part Five: Valuation and Capital Investment Decisions

20 CAPITAL INVESTMENT DECISIONS

THE CAPITAL INVESTMENT PROCESS

EVALUATING THE ECONOMIC MERITS OF CAPITAL INVESTMENTS

ILLUSTRATIONS

SUMMARY

21 CAPITAL INVESTMENT DECISIONS

DEALING WITH RISK AND UNCERTAINTY IN CAPITAL INVESTMENT DECISIONS

PRESENTING CAPITAL INVESTMENT DECISIONS

CAPITAL BUDGETING AND RATIONING

EVALUATING THE EFFECTIVENESS OF THE CAPITAL INVESTMENT DECISION PROCESS

SUMMARY

22 BUSINESS VALUATION AND VALUE DRIVERS

ESTIMATING THE VALUE OF A BUSINESS BY DISCOUNTING FUTURE CASH FLOWS

ESTIMATING THE VALUE OF FIRMS BY USING THE VALUATION OF SIMILAR FIRMS: MULTIPLES OF REVENUES, EARNINGS, AND RELATED MEASURES

BUILDING SHAREHOLDER VALUE IN A MULTIPLES FRAMEWORK

INTEGRATED VALUATION SUMMARY FOR ROBERTS MANUFACTURING COMPANY

VALUE DRIVERS

SUMMARY

NOTE

23 ANALYSIS OF MERGERS AND ACQUISITIONS

THE ACQUISITION CHALLENGE

KEY ELEMENTS IN VALUING AN ACQUISITION

METHODS AND METRICS FOR VALUING AN ACQUISITION

COMMON MISTAKES IN M&A

BEST PRACTICES AND CRITICAL SUCCESS FACTORS

UNDERSTANDING SELLER BEST PRACTICES

KEY PERFORMANCE INDICATORS FOR M&A

DASHBOARDS FOR M&A

SUMMARY

Part Six: Summary

24 SUMMARY AND WHERE TO FROM HERE?

KEY TAKEAWAYS

WHERE TO FROM HERE?

GLOSSARY

ACKNOWLEDGMENTS

ABOUT THE AUTHOR

JACK ALEXANDER

INDEX

END USER LICENSE AGREEMENT

List of Tables

Chapter 2

TABLE 2.1 Comparison of Common P&L Measures

TABLE 2.2 Assets = Liabilities + Shareholders' Equity

TABLE 2.3 Net Operating Assets/Invested Capital Illustration

TABLE 2.4 Cash Flow Statement

TABLE 2.5 Roberts Manufacturing Company Historical and Estimated 2018 Financials

TABLE 2.6 Cash Effectiveness for Roberts Manufacturing Company

TABLE 2.7 Roberts Manufacturing Company Performance Assessment Summary

TABLE 2.8 Key Financial Terms and Measures: Quick Reference Guide

Chapter 3

TABLE 3.1 Finished Goods Inventory – Vance Corp

TABLE 3.2 Finished Goods Inventory – Vance Corp: Descending Order

TABLE 3.3 Analysis of Finished Goods Inventory

TABLE 3.4 Stock Price Sensitivity Analysis

TABLE 3.5 Expected Value of Sales Plan

TABLE 3.6 Return on Equity Analysis

TABLE 3.7 Order Processing Costs Allocated by Sales Dollars

TABLE 3.8 Costs Assigned Based on Activity

TABLE 3.9 Business Model Illustration: Traditional View

TABLE 3.10 Business Model Illustration: Comprehensive View

TABLE 3.11 Business Model Benchmark Summary Based on Company Reports and SEC Filings

TABLE 3.12 Varying Business Models under the Same Roof

TABLE 3.13 Business Models in a Homogeneous Company

TABLE 3.14 Cost and Breakeven Analysis

TABLE 3.15 Operating Leverage Illustration: Current Situation

TABLE 3.16 Operating Leverage Illustration: Revised Cost Structure

Chapter 4

TABLE 4.1 Portfolio of Financial Models

TABLE 4.2 Product Revenue and Margin Documentation

TABLE 4.3 Revenue Plan Model – Existing Products

TABLE 4.4 Revenue Plan Model – New Products

Chapter 5

TABLE 5.1 Experience, Skill, and Competency Inventory

TABLE 5.2 Best Practices Checklist Excerpt

TABLE 5.3 Report and Analysis Inventory and Assessment

TABLE 5.4 FP&A Improvement Plan

Chapter 6

TABLE 6.1 Sensitivity Chart

Chapter 7

TABLE 7.1 Marathon Training Program

TABLE 7.2 Project Timeline

Chapter 10

TABLE 10.1 Key Innovation Measures

TABLE 10.2 Investment in New Hire

TABLE 10.3 Headcount Analysis

Chapter 11

TABLE 11.1 Comprehensive Benchmark Analysis

TABLE 11.2 Benchmarking Summary and Target Worksheet

Chapter 12

TABLE 12.1 Upside and Downside Event Summary

TABLE 12.2 Revenue Probability Analysis

Chapter 13

TABLE 13.1 Traditional Departmental Budget

TABLE 13.2 Rolling Forecast Method

TABLE 13.3 DBO Supporting Schedule: Product Margins

TABLE 13.4 DBO Supporting Schedule: Gross Margins

TABLE 13.5 DBO Supporting Schedule: Marketing

TABLE 13.6 DBO Income Statement

TABLE 13.7 DBO Supporting Schedule: Balance Sheet and Cash Flow

Chapter 14

TABLE 14.1 LTP: Revenue and Margin Projections

TABLE 14.2 LTP: Operating Expense Projections

TABLE 14.3 LTP: Capital Assets and Depreciation

TABLE 14.4 LTP: Capsule Financial Summary

TABLE 14.5 Traditional Retail Model

TABLE 14.6 New Reality for Established Retailers

Chapter 15

TABLE 15.1 Revenue Planning Worksheet: Product Detail

TABLE 15.2 Forecast Evaluation Worksheet

TABLE 15.3 Market Size and Share Analysis

TABLE 15.4 Revenue Forecast Accuracy

TABLE 15.5 Quarterly Sales Trend

TABLE 15.6 Comprehensive Revenue Measures

TABLE 15.7 Gross Margin Analysis

Chapter 16

TABLE 16.1 Sales and Value Added per Employee

TABLE 16.2 Headcount Analysis

TABLE 16.3 Critical New Product Development Status

TABLE 16.4 Natural Expense Code Analysis

Chapter 17

TABLE 17.1 Operating Capital (Working Capital Less Cash and Debt)

TABLE 17.2 Operating Capital Forecast – Thomas Industries

TABLE 17.3 Working Capital Improvement Illustration

TABLE 17.4 DSO Count‐Back Illustration

TABLE 17.5 Best Possible DSO Estimate

TABLE 17.6 Accounts Receivable Aging Schedule for Morehouse Company

TABLE 17.7 Accounts Receivable Past Due Analysis

TABLE 17.8 Accounts Receivable Roll‐Forward Summary

TABLE 17.9 Inventory Trend Schedule by Category

TABLE 17.10 Inventory Roll‐Forward Summary

TABLE 17.11 Inventory Forecast Analysis

Chapter 18

TABLE 18.1 Asset Utilization Review

TABLE 18.2 Projecting Property and Equipment and Accumulated Depreciation

TABLE 18.3 Acquisition Purchase Price Allocation

TABLE 18.4 Estimating the Economic Cost (Penalty) of Retaining Excess Cash

Chapter 19

TABLE 19.1 Uneven Cash Flows Illustration

TABLE 19.2 WACC Illustration Inputs

TABLE 19.3 WACC Computation

Chapter 20

TABLE 20.1 NPV Illustration

TABLE 20.2 IRR Illustration

TABLE 20.3 Payback Illustration

TABLE 20.4 Combined Illustration

TABLE 20.5 Capital Expenditure: Manufacturing Project

TABLE 20.6 Capital Expenditure: Pharmaceutical Product Development

Chapter 21

TABLE 21.1 Project Investment Analysis: Procrastination Pharmaceutical

TABLE 21.2 Sensitivity Analysis

TABLE 21.3 Sensitivity and Breakeven Analysis

TABLE 21.4 Capital Investment Allocation

TABLE 21.5 Capital Plan Ranking

TABLE 21.6 Review of Capital Investments

Chapter 22

TABLE 22.1 DCF Valuation Model

TABLE 22.2 DCF Sensitivity Analysis

TABLE 22.3 Roberts Manufacturing Company Valuation Summary Table

TABLE 22.4 Benchmarking Summary

TABLE 22.5 Summary of Full Potential Value

Chapter 23

TABLE 23.1 Sheridan Acquisition Company Acquires Roberts Manufacturing Company

TABLE 23.2 Accretive‐Dilutive Test Illustration

TABLE 23.3 Control Premium Analysis

TABLE 23.4 DCF Stand‐Alone

TABLE 23.5 DCF Synergy and Stand‐Alone

TABLE 23.6 Synergy Valuation and Control Premium Test

TABLE 23.7 Economic Profit/ROIC Test

List of Illustrations

Chapter 1

FIGURE 1.1 Space Shuttle Cockpit Instrument Panel

FIGURE 1.2 FP&A and PM Must Be Integrated with Other Management Processes

Chapter 2

FIGURE 2.1 Financial Statement Interrelationships

FIGURE 2.2 Key Performance Trends for Roberts Manufacturing Company

Chapter 3

FIGURE 3.1 Decision Tree: Replace Existing Product

FIGURE 3.2 Revenue Process and Accounts Receivable Analysis

Chapter 4

FIGURE 4.1 Financial Model Architecture

FIGURE 4.2 Model Summary

Chapter 5

FIGURE 5.1 Traditional Finance Organization

FIGURE 5.2 Integrated FP&A Structure

FIGURE 5.3 Financial Acumen Scores

Chapter 6

FIGURE 6.1 Revenue Process–Accounts Receivable Dashboard

FIGURE 6.2 Cost Pie Chart

FIGURE 6.3 Histogram of Expenses

FIGURE 6.4 Comparative Histogram Chart

FIGURE 6.5 Doughnut Graph – Percentage Completion

FIGURE 6.6 Line Graph

FIGURE 6.7 Stacked Column Graph

FIGURE 6.8 Stacked Columns with Float

FIGURE 6.9 Bar Chart

FIGURE 6.10 Dual Access Graph

FIGURE 6.11 Reconciliation (Waterfall) Graph

FIGURE 6.12 Speedometer Chart

FIGURE 6.13 Human Capital Management Assessment

FIGURE 6.14 Valuation Summary

Chapter 7

FIGURE 7.1 Overview of Performance Management Process

FIGURE 7.2 Implementing Performance Management Framework

FIGURE 7.3 Creating Context for Performance Management

FIGURE 7.4 The Value Performance Framework

FIGURE 7.5 Performance Framework for Mission‐Oriented Organization

Chapter 8

FIGURE 8.1 Space Shuttle Cockpit Instrument Panel

FIGURE 8.2 Personal Health and Fitness Dashboard

FIGURE 8.3 Performance Measure Worksheet

FIGURE 8.4 Quarterly Corporate Dashboard

FIGURE 8.5 Example of Weekly Dashboard

FIGURE 8.6 New Product Development Dashboard

FIGURE 8.7 Revenue Process/Receivables Improvement Dashboard

FIGURE 8.8 Dashboard for Specialty Retail: Lawn and Garden

FIGURE 8.9 Dashboard for Ski Resort

FIGURE 8.10 Dashboard for Medical Center

Chapter 9

FIGURE 9.1 Establishing a Performance Management Framework

FIGURE 9.2 Integrating PM with Other Management Processes

FIGURE 9.3 Business Unit Accountability Dashboard

Chapter 10

FIGURE 10.1 Historical Performance Recap: Apple

FIGURE 10.2 Comparative Performance: Netflix and Blockbuster

FIGURE 10.3 Drilling Down into Sources of Revenue Growth

FIGURE 10.4 New Product Development Dashboard

FIGURE 10.5 Innovation Dashboard

FIGURE 10.6 Agility as a Three‐Part Process

FIGURE 10.7 Improving Agility

FIGURE 10.8 Economic and Life Cycles

FIGURE 10.9 Agility Dashboard

FIGURE 10.10 Human Capital Impacts All Value Drivers

FIGURE 10.11 HCM Portfolio Analysis

FIGURE 10.12 Human Capital Management and Financial Performance

FIGURE 10.13 HCM Dashboard

Chapter 11

FIGURE 11.1 Quarterly Performance Recap: Under Armour

FIGURE 11.2 Expanded Benchmarking View

FIGURE 11.3 Apple Performance Trends

FIGURE 11.4 Amazon Performance Trends

Chapter 12

FIGURE 12.1 Historical Budget and Control Process

FIGURE 12.2 Historical versus Plan Trends

FIGURE 12.3 Sales Run‐Rate Analysis

FIGURE 12.4 Actual Revenue versus Forecast Range

FIGURE 12.5 Sensitivity Analysis: Key Assumption

FIGURE 12.6 Scenario Recap

FIGURE 12.7 Using Business Model to Develop Projections

Chapter 13

FIGURE 13.1 Traditional Budget and Control Process

FIGURE 13.2 Budget Roll‐Up Illustration

FIGURE 13.3 Dashboard: Evaluation of Operating Plan

FIGURE 13.4 Traditional Forecast Horizon

FIGURE 13.5 Rolling Forecast: Business Outlook Horizon

FIGURE 13.6 Reflect Critical Drivers in Business Outlook

FIGURE 13.7 Business Outlook Architecture Map

FIGURE 13.8 DBO Presentation Summary

Chapter 14

FIGURE 14.1 SLOT Analysis

FIGURE 14.2 LTP: Presentation Summary

FIGURE 14.3 Comparison of Traditional versus New Reality Retail

Chapter 15

FIGURE 15.1 Drill‐Down Illustration: Revenue Growth Drivers

FIGURE 15.2 Revenue Variance

FIGURE 15.3 Revenue Change Analysis

FIGURE 15.4 Forecast Progression Analysis

FIGURE 15.5 Year‐over‐Year Growth

FIGURE 15.6 Revenue in Product Development Pipeline

FIGURE 15.7 Backlog Analysis

FIGURE 15.8 Revenue Growth and Innovation Dashboard

FIGURE 15.9 Gross Margins and Relative Pricing Strength

FIGURE 15.10 Gross Margin Reconciliation

FIGURE 15.11 Dashboard: Gross Margin and Pricing Strength

Chapter 16

FIGURE 16.1 Operating Effectiveness Diagram

FIGURE 16.2 Process View

FIGURE 16.3 Revenue Patterns

FIGURE 16.4 Natural Expense Code Analysis Histogram

FIGURE 16.5 Operating Effectiveness Dashboard

FIGURE 16.6 New Product Development Process Dashboard

Chapter 17

FIGURE 17.1 Drill‐Down Illustration: Capital Efficiency and Asset Management

FIGURE 17.2 Drill‐Down Illustration: Accounts Receivable

FIGURE 17.3 Revenue Process Timeline from Order to Collection

FIGURE 17.4 Revenue Process–Accounts Receivable Dashboard

FIGURE 17.5 DSO Drivers

FIGURE 17.6 Past Due by Root Cause

FIGURE 17.7 Procurement and Conversion Processes

FIGURE 17.8 Excess and Obsolete Inventory Summary

FIGURE 17.9 Supply Chain and Inventory Dashboard

Chapter 18

FIGURE 18.1 Drill‐Down Illustration: Capital Effectiveness and Asset Management

FIGURE 18.2 Capital Investment Process Overview

FIGURE 18.3 Goodwill and Intangible Assets as a Percentage of Total Assets

FIGURE 18.4 Long‐Term Capital Dashboard

Chapter 19

FIGURE 19.1 Compounding Illustration

FIGURE 19.2 Future Value of Annuity Illustration

FIGURE 19.3 Discounting Illustration

FIGURE 19.4 Bond Valuation Illustration

FIGURE 19.5 Discounted Cash Flow (DCF)

FIGURE 19.6 Sensitivity of Value to Cost of Capital

FIGURE 19.7 Risk and Return

FIGURE 19.8 Cost of Capital Drivers

FIGURE 19.9 WACC Visual Summary

FIGURE 19.10 Optimal Cost of Capital and Capital Structure

FIGURE 19.11 Capital Structure and Financial Policy

FIGURE 19.12 Cost of Capital Dashboard

Chapter 20

FIGURE 20.1 Capital Investment Process Overview

Chapter 21

FIGURE 21.1 Risk and Return

FIGURE 21.2 Risk and Expected Return

FIGURE 21.3 Setting Hurdle Rates Based on Risk

FIGURE 21.4 Scenario Recap

FIGURE 21.5 Decision Tree

FIGURE 21.6 Event/Option Tree

FIGURE 21.7 Option Event Summary for Procrastination Pharmaceutical

FIGURE 21.8 Option Value Illustration

FIGURE 21.9 Capital Investment Summary

Chapter 22

FIGURE 22.1 Discounted Cash Flow (DCF)

FIGURE 22.2 Value Decomposition

FIGURE 22.3 Roberts Manufacturing Company Valuation Summary Graph

FIGURE 22.4 Valuation Summary

FIGURE 22.5 The Value Performance Framework

FIGURE 22.6 Estimating Full Potential Valuation

Chapter 23

FIGURE 23.1 Stand‐Alone and Synergies Value

FIGURE 23.2 Control Premium–Synergies Macro Test

FIGURE 23.3 Sources of Acquisition Value

FIGURE 23.4 Comparative Value Summary: Acquisition of Roberts Manufacturing Company

FIGURE 23.5 M&A Dashboard

FIGURE 23.6 Dashboard for a Specific Acquisition

Guide

Cover

Table of Contents

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E1

PRAISE FOR FINANCIAL PLANNING & ANALYSIS AND PERFORMANCE MANAGEMENT

“A comprehensive work on FP&A and Performance Management, covering fundamental topics through best practices and advanced topics. Terrific framework for assessing, improving and expanding the contribution of FP&A. The accompany website, with models and analysis introduced in the book, provides substantial additional value to finance teams.”

Joseph Hartnett, COO and CFO, EventLink, LLC

“Financial Planning & Analysis and Performance Management is a must‐have reference manual for FP&A and Investor Relations teams. I found this text extremely helpful, with its useful tools for setting strategy and its practical guides to implementing process improvements and to innovating.”

Sally J. Curley, CEO, Curley Global IR, LLC and former Senior Vice President, Investor Relations, Cardinal Health, Inc.

“The concepts addressed in this book both challenged and inspired our team to reassess and identify the drivers of value in our enterprise, top to bottom. We are using the examples and suggestions contained throughout the book to develop a single page dashboard that will keep us focused on the key elements of our strategic plan, concentrate on the most relevant metrics, and react quickly to any unexpected deviations and opportunities. This book is a must read and will serve as a great resource for future reference.”

Paul McGowan, Jr., CPA, CVA, Global Managing Partner, MDD International LTD.

“Using decades of experience as CFO and business consultant, Jack Alexander offers a practical guide to bridge the gap between planning and performance. The tools and models in this book will help leverage corporate assets and create shareholder value.”

Jennifer Bethel, Professor, Babson College

Founded in 1807, John Wiley & Sons is the oldest independent publishing company in the United States. With offices in North America, Europe, Australia, and Asia, Wiley is globally committed to developing and marketing print and electronic products and services for our customers' professional and personal knowledge and understanding.

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For a list of available titles, visit our website at www.WileyFinance.com.

FINANCIAL PLANNING & ANALYSIS AND PERFORMANCE MANAGEMENT

Jack Alexander

Copyright © 2018 by Jack Alexander. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.

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Library of Congress Cataloging-in-Publication Data is Available

ISBN 9781119491484 (Hardback)

ISBN 9781119491439 (ePDF)

ISBN 9781119491453 (ePub)

Cover Design: Wiley

Cover Image: © Lava 4 images | Shutterstock

To my wife Suzanne, for four decades of love, support, and friendship

PREFACE

WHY THIS BOOK?

In the late 1970s, as I was starting my career, I came across an article that identified the traits a chief executive officer was looking for in a chief financial officer. Since I had already set my sights on becoming a CFO, I jotted down the key takeaways from the article, something that I developed a habit of doing over my career and continue to this time. Unfortunately, I did not note the article, publication, or CEO to give them credit here or to recognize the soundness of the points articulated in the article. Here is a copy of my notes, that I have retained to this day:

Each of these recommendations has proven to be true in my experience. Of course, this assumes that financial controls and reporting are also well executed. CFOs and finance teams must be able to develop, evaluate, and assist in achieving planned and forecast results. The phrase “dispassionate, hard headed analysis” struck and stuck with me. Financial planning and analysis (FP&A) must be impartial and objective. Finance teams must be prepared to identify and expose both problems and opportunities, often in a hardheaded way. CFOs and their teams must strike a balance between focusing on the cost model and directly and indirectly contributing to growth. “Kinship” refers to a trusted adviser and partner relationship with the CEO. And of course, finance must be viewed as a member of the team, supporting and executing to achieve the organization's objectives.

It is interesting that three of the four characteristics speak directly to FP&A. Throughout my 40‐year career, I have found that FP&A is one of the most important roles the finance team plays. I became a student of financial analysis early in my career and can directly attribute attaining my goal of becoming a CFO in large measure to a strong focus and emphasis on FP&A throughout my career.

I define FP&A very broadly, as evidenced by the scope of this book. FP&A draws on several academic areas, including managerial accounting, financial accounting, finance, and operations and process management, as well as new disciplines in analytics and data visualization. Today the FP&A organization is called upon to lead the development of plans and projections, evaluate trends and variances, evaluate complex investment decisions, and value and increase the value of the enterprise and acquisition candidates, among many others.

Even with the broad scope and increasing importance of FP&A, there are very few resources available to analysts and FP&A departments. The objective of this book is to address that void by providing a comprehensive and practical guide to FP&A.

USING THIS BOOK

The book can be utilized in three ways. First, it can be read from cover to cover by those deeply involved in all facets of FP&A. Second, many readers may peruse the entire book and then focus on a couple of specific areas of interest. Finally, my hope is that the book will be retained for use as a future reference.

This book is organized into five parts:

Part One

: Fundamentals and Key FP&A Capabilities

Part Two

: Performance Management

Part Three

: Business Projections and Plans

Part Four

: Planning and Analysis for Critical Business and Value Drivers

Part Five

: Valuation and Capital Investment Decisions

Part One: Fundamentals and Key FP&A Capabilities

Part One provides a review of fundamentals of finance and key analytical tools. It also covers important FP&A capabilities, including developing models, building analytical capability, and presenting and communicating financial information.

Part Two: Performance Management

Part Two provides an introduction to performance management and best practices in developing key performance indicators and dashboards. It also provides guidance on institutionalizing performance management – that is, integrating it with other management processes. Additional topics include the measurement of innovation, agility, and human capital, as well as applying performance measurement to external forces, including benchmarking and competitive analysis.

Part Three: Business Projections and Plans

Part Three covers best practices in developing projections and plans. Topics include budgets, operating plans, rolling forecasts, business outlooks, and long‐term projections. Special attention is given to techniques to deal with the uncertainty and rapid change that exist in the twenty‐first century.

Part Four: Planning and Analysis for Critical Business and Value Drivers

Part Four covers techniques for planning, analyzing, and improving on key performance drivers: revenue growth and margins, operating effectiveness, capital management, and the cost of capital.

Part Five: Valuation and Capital Investment Decisions

Part Five addresses business valuation, value drivers, and analysis of mergers and acquisitions. In addition, the evaluation of capital investments is covered, from basic concepts through advanced topics such as dealing with risk and uncertainty.

ABOUT THE WEBSITE

WHAT'S ON THE WEBSITE

This book is accompanied by a companion website:

wiley.com/go/fpapm

The following sections provide a summary of the software and other materials you'll find on the website.

Content

A number of illustrative performance dashboards, analytical tools, and Excel models used in the book are included in the accompanying website. These items are identified in the book with a website logo . The dashboards and spreadsheets are intended as working examples and starting points for the reader's use. An important theme of this book is to underscore the importance of selecting the appropriate measures and dashboards. It is very important to carefully select the measures and analytical tools that are most appropriate for each circumstance. Accordingly, most of the dashboards and models will have to be tailored to fit the specific needs of each situation. Please note that in order to facilitate changes to the analyses, none of the formulas in the worksheets are protected. A copy of the original files should be retained in the event that formulas are inadvertently changed or deleted.

The spreadsheets contain the data used in the examples provided in the book. In order to fully understand the worksheets, including the objective, context, and logic of the analysis, the user should refer to the appropriate example in the text. For each worksheet, the data input fields are generally highlighted in color. All other fields contain formulas. The reader should save these files under a different name and use them to begin developing dashboards and analysis for the reader's specific needs. Using the models on the Website‐ROM requires Microsoft Excel software and an intermediate skill level in the use of that software. Many of the worksheets are stand‐alone analyses that are not linked to the other spreadsheets. However, some of the workbook files contain models that require data input on the first worksheet to drive the models on subsequent worksheets in that file.

The website also includes a Quick Reference Guide (Table 2.8) that can be printed, laminated, and retained as a reference for financial terms and ratios and key aspects of valuation and performance measurement.

All contents are Excel spreadsheets unless otherwise noted.

Chapter 2

Fundamentals of Finance

Table 2.5

Roberts Manufacturing Co. Historical and Estimated 2018 Financials

Table 2.7

Roberts Manufacturing Co. Performance Assessment Summary

Figure 2.2

Key Performance Trends for Roberts Manufacturing Co.

Table 2.8

Key Financial Terms and Measures: Quick Reference Guide

Chapter 3

Key Analytical Tools and Concepts

Table 3.1

Finished Goods Inventory – Vance Corp

Table 3.2

Finished Goods Inventory – Vance Corp: Descending Order

Table 3.3

Analysis of Finished Goods Inventory

Table 3.4

Stock Price Sensitivity Analysis

Table 3.5

Expected Value of Sales Plan

Figure 3.1

Decision Tree: Replace Existing Product

Table 3.6

Return on Equity Analysis

Figure 3.2

Revenue Process and Accounts Receivable Analysis

Table 3.7

Order Processing Costs Allocated by Sales Dollars

Table 3.8

Costs Assigned Based on Activity

Table 3.9

Business Model Illustration: Traditional View

Table 3.10

Business Model Illustration: Comprehensive View

Table 3.11

Business Model Benchmark Summary Based on Company Reports and SEC Filings

Table 3.12

Varying Business Models under the Same Roof

Table 3.13

Business Models in a Homogeneous Company

Table 3.14

Cost and Breakeven Analysis

Table 3.15

Operating Leverage Illustration: Current Situation

Table 3.16

Operating Leverage Illustration: Revised Cost Structure

Chapter 4

Developing Predictive and Analytical Models

Figure 4.1

Financial Model Architecture

Table 4.2

Product Revenue and Margin Documentation

Table 4.3

Revenue Plan Model – Existing Products

Table 4.4

Revenue Plan Model – New Products

Figure 4.2

Model Summary

Chapter 5

Building Analytical Capability

Table 5.1

Experience, Skill, and Competency Inventory

Table 5.2

Best Practices Checklist Excerpt

Table 5.3

Report and Analysis Inventory and Assessment

Table 5.4

FP&A Improvement Plan

Chapter 6

Communicating and Presenting Financial Information

Figure 6.1

Revenue Process–Accounts Receivable Dashboard

Figure 6.2

Cost Pie Chart

Figure 6.3

Histogram of Expenses

Figure 6.4

Comparative Histogram Chart

Figure 6.5

Doughnut Graph – Percentage Completion

Figure 6.6

Line Graph

Figure 6.7

Stacked Column Graph

Figure 6.8

Stacked Columns with Float

Figure 6.9

Bar Chart

Figure 6.10

Dual Axis Graph

Figure 6.11

Reconciliation (Waterfall) Graph

Table 6.1

Sensitivity Chart

Figure 6.12

Speedometer Chart

Figure 6.13

Human Capital Management Assessment

Chapter 7

Business Performance Management

Table 7.2

Project Timeline

Chapter 8

Dashboards and Key Performance Indicators

Figure 8.2

Personal Health and Fitness Dashboard

Figure 8.4

Quarterly Corporate Dashboard

Figure 8.5

Example of Weekly Dashboard

Figure 8.6

New Product Development Dashboard

Figure 8.7

Revenue Process/Receivables Improvement Dashboard

Figure 8.8

Dashboard for Specialty Retail: Lawn and Garden

Figure 8.9

Dashboard for Ski Resort

Figure 8.10

Dashboard for Medical Center

Chapter 9

Institutionalizing Performance Management

Figure 9.3

Business Unit Accountability Dashboard

Chapter 10

Measuring and Driving What's Important: Innovation, Agility, and Human Capital

Figure 10.1

Historical Performance Recap: Apple

Figure 10.2

Comparative Performance: Netflix and Blockbuster

Figure 10.4

New Product Development Dashboard

Figure 10.5

Innovation Dashboard

Figure 10.9

Agility Dashboard

Table 10.2

Investment in New Hire

Figure 10.11

HCM Portfolio Analysis

Table 10.3

Headcount Analysis

Figure 10.13

HCM Dashboard

Chapter 11

The External View: Benchmarking Performance and Competitive Analysis

Figure 11.1

Quarterly Performance Recap: Under Armour

Table 11.1

Comprehensive Benchmark Analysis

Figure 11.3

Apple Performance Trends

Figure 11.4

Amazon Performance Trends

Table 11.2

Benchmark Survey and Target Worksheet

Chapter 12

Business Projections and Plans: Introduction and Best Practices

Figure 12.2

Historical versus Plan Trends

Figure 12.3

Sales Run‐Rate Analysis

Figure 12.4

Actual Revenue versus Forecast Range

Table 12.1

Upside and Downside Event Summary

Figure 12.5

Sensitivity Analysis: Key Assumptions

Figure 12.6

Scenario Recap

Table 12.2

Revenue Probability Analysis

Figure 12.7

Using Business Model to Develop Projections

Chapter 13

Budgets, Operating Plans, and Forecasts

Table 13.1

Traditional Departmental Budget

Figure 13.2

Budget Roll‐Up Illustration

Figure 13.3

Dashboard: Evaluation of Operating Plan

Table 13.2

Rolling Forecast Method

Table 13.3

DBO Supporting Schedule: Product Margins

Table 13.4

DBO Supporting Schedule: Gross Margins

Table 13.5

DBO Supporting Schedule: Marketing

Table 13.6

DBO Income Statement

Table 13.7

DBO Supporting Schedule: Balance Sheet and Cash Flow

Figure 13.8

DBO Presentation Summary

Chapter 14

Long‐Term Projections

Table 14.1

LTP: Revenue and Margin Projections

Table 14.2

LTP: Operating Expense Projections

Table 14.3

LTP: Capital Assets and Depreciation

Table 14.4

LTP: Capsule Financial Summary

Figure 14.2

LTP: Presentation Summary

Table 14.5

Traditional Retail Model

Table 14.6

New Reality for Established Retailers

Figure 14.3

Comparison of Traditional versus New Reality Retail

Chapter 15

Revenue and Gross Margins

Table 15.1

Revenue Planning Worksheet: Product Detail

Table 15.2

Forecast Evaluation Worksheet

Figure 15.2

Revenue Variance

Figure 15.3

Revenue Change Analysis

Table 15.3

Market Size and Share Analysis

Table 15.4

Revenue Forecast Accuracy

Figure 15.4

Forecast Progression Analysis

Table 15.5

Quarterly Sales Trend

Figure 15.5

Year‐over‐Year Growth

Figure 15.6

Revenue in Product Development Pipeline

Figure 15.7

Backlog Analysis

Table 15.6

Comprehensive Revenue Measures

Figure 15.8

Revenue Growth and Innovation Dashboard

Table 15.7

Gross Margin Analysis

Figure 15.10

Gross Margin Reconciliation

Figure 15.11

Dashboard: Gross Margin and Pricing Strength

Chapter 16

Operating Expenses and Effectiveness

Table 16.1

Sales and Value Added per Employee

Table 16.2

Head Count Analysis

Figure 16.3

Revenue Patterns

Table 16.3

Critical New Product Development Status

Table 16.4

Natural Expense Code Analysis

Figure 16.4

Natural Expense Code Analysis Histogram

Figure 16.5

Operational Effectiveness Dashboard

Figure 16.6

New Product Development Dashboard

Chapter 17

Capital Management and Cash Flow: Working Capital

Table 17.1

Operating Capital (Working Capital Less Cash and Debt)

Table 17.2

Operating Capital Forecast – Thomas Industries

Table 17.3

Working Capital Improvement Illustration

Table 17.4

DSO Count‐Back Illustration

Table 17.5

Best Possible DSO Estimate

Figure 17.4

Revenue Process–Accounts Receivable Dashboard

Figure 17.5

DSO Drivers

Table 17.6

Accounts Receivable Aging Schedule for Morehouse Company

Table 17.7

Accounts Receivable Past Due Analysis

Figure 17.6

Past Due by Root Cause

Table 17.8

Accounts Receivable Roll‐Forward Summary

Figure 17.8

Excess and Obsolete Inventory Summary

Figure 17.9

Supply Chain and Inventory Dashboard

Table 17.9

Inventory Trend Schedule by Category

Table 17.10

Inventory Roll‐Forward Summary

Table 17.11

Inventory Forecast Analysis

Chapter 18

Capital Management and Cash Flow: Long‐Term Assets

Table 18.1

Asset Utilization Review

Table 18.2

Projecting Property and Equipment and Accumulated Depreciation

Table 18.3

Acquisition Purchase Price Allocation

Figure 18.3

Goodwill and Intangible Assets as a Percentage of Total Assets

Table 18.4

Estimating the Economic Cost (Penalty) of Retaining Excess Cash

Figure 18.4

Long‐Term Capital Dashboard

Chapter 19

Risk, Uncertainty, and the Cost of Capital

Figure 19.6

Sensitivity of Value to Cost of Capital

Table 19.3

WACC Computation

Figure 19.9

WACC Visual Summary

Figure 19.12

Cost of Capital Dashboard

Chapter 20

Capital Investment Decisions: Introduction and Key Concepts

Table 20.1

NPV Illustration

Table 20.2

IRR Illustration

Table 20.3

Payback Illustration

Table 20.4

Combined Illustration

Table 20.5

Capital Expenditure: Manufacturing Project

Table 20.6

Capital Expenditure: Pharmaceutical Product Development

Chapter 21

Capital Investment Decisions: Advanced Topics

Table 21.1

Project Investment Analysis: Procrastination Pharmaceutical

Table 21.2

Sensitivity Analysis

Table 21.3

Sensitivity and Break‐Even Analysis

Figure 21.4

Scenario Recap

Figure 21.6

Event/Option Tree

Figure 21.7

Option Event Summary for Procrastination Pharmaceutical

Figure 21.8

Option Value Illustration

Figure 21.9

Capital Investment Summary

Table 21.4

Capital Investment Allocation

Table 21.5

Capital Plan Ranking

Table 21.6

Review of Capital Investments

Chapter 22

Business Valuation and Value Drivers

Table 22.1

DCF Valuation Model

Table 22.2

DCF Sensitivity Analysis

Figure 22.2

Value Decomposition

Table 22.3

Roberts Manufacturing Co. Valuation Summary Table

Figure 22.3

Roberts Manufacturing Co. Valuation Summary Graph

Figure 22.4

Valuation Summary

Table 22.4

Benchmarking Summary

Table 22.5

Summary of Full Potential Value

Figure 22.6

Estimating Full Potential Valuation

Chapter 23

Analysis of Mergers and Acquisitions

Figure 23.1

Stand‐Alone and Synergy Value

Table 23.1

Sheridan Acquisition Co. Acquires Roberts Manufacturing Co.

Table 23.2

Accretive‐Dilutive Test Illustration

Table 23.3

Control Premium Analysis

Table 23.4

DCF Stand‐Alone

Table 23.5

DCF Synergy and Stand‐Alone

Table 23.6

Synergy Valuation and Control Premium Test

Figure 23.3

Sources of Acquisition Value

Table 23.7

Economic Profit/ROIC Test

Figure 23.4

Comparative Value Summary: Acquisition of Roberts Manufacturing Co.

Figure 23.5

M&A Dashboard

Figure 23.6

Dashboard for a Specific Acquisition

Modifying the Charts and Graphs

The user may need to modify some of the charts and graphs on the website in order to substitute specific performance measures for those contained in the sample dashboard. In order to modify chart titles, alter axis labels, and make other changes to charts, click on the chart, then select Chart in the menu commands and then select Options. A menu of available chart options will be presented, including titles, labels, and scale selections.

The user may also want to change the scale of the charts to better present the data for each situation. This can be accomplished by double clicking on the “Value Axis” label on the graph and selecting Scale to change axis minimum and maximum values.

GLOSSARY

A glossary of commonly used financial, value, and performance management terms is included in the back of the book.

Jack Alexander

1FINANCIAL PLANNING & ANALYSIS AND BUSINESS PERFORMANCE MANAGEMENT

CHAPTER INTRODUCTION

Financial Planning & Analysis (FP&A) and Performance Management (PM) are critical functions to the success of any enterprise. In this chapter, we will define what we believe productive FP&A and PM functions should include, and we will preview the contents of the remainder of the book. We will use the terms FP&A and PM interchangeably to encompass these two related and overlapping disciplines.

THE PROBLEM WITH TRADITIONAL MEASUREMENT SYSTEMS

Traditional financial reports have several limitations. First, they typically are prepared after the close of the accounting period, on a monthly, quarterly, or annual basis. Once these reports are prepared and distributed, managers attempting to use them for performance monitoring are looking in the rearview mirror. The report may tell them where they have been, but it will not be helpful in keeping the car on the road! A financial report for March, for example, may indicate that inventories increased above expected levels. While management can review causes of the increase and take corrective actions in April, they were unable to avoid the problem and are left with the unfavorable impact on working capital and cash flows.

A related limitation with traditional accounting reports is that their content is typically focused on “lagging” financial measures, such as gross margins, days sales outstanding (DSO), and so forth. Effective managers identify “leading” indicators of critical processes and activities that can be monitored on a current basis. This affords them the opportunity to identify exceptions and unfavorable trends and take immediate corrective action. In creating a system of effective performance improvement reports, managers need to identify the leading or predictive indicators of performance. For example, a key but lagging indicator of accounts receivable performance, DSO, requires knowing the ending receivables balance and sales for the period. However, a well‐constructed performance report will track key leading indicators such as revenue patterns and collections on a weekly basis throughout the quarter. Management can estimate the ending receivables level based on the interim measures and take corrective action immediately within the quarter if exceptions or unfavorable trends emerge.

The third limitation with most accounting reports is that they are prepared by accountants in a way that is useful and intuitive to them, but is difficult for most nonfinancial managers and employees to understand and digest. These include traditional financial statements, supporting schedules, and spreadsheets that are easily understood by accountants, but can be confusing to the rest of the organization. Key trends or exceptions may be buried in the statements, but are extremely difficult for anyone to identify, let alone take action upon.

Another challenge is the endless bombardment of new financial measures and new management disciplines over recent decades, including economic profit, scorecards, key performance indicators (KPIs), dashboards, data visualization, analytics, and artificial intelligence (AI). In addition, performance measures have been developed for specific industries and special situations such as early‐stage enterprises. Managers should look across these various initiatives and extract and combine the best features of each to develop an effective system of performance management for their enterprise.

OBJECTIVES OF FINANCIAL ANALYSIS AND PERFORMANCE MANAGEMENT

Figure 1.1 presents the instrument panel in the cockpit of the space shuttle. At a glance, the pilot can get a highly visual report on the shuttle's altitude, on its attitude, and on every major system in the aircraft. The radar in an airplane allows the pilot to spot and identify potential external threats long before visual contact. At first the panel appears very complex, but you can bet the pilots know where every needle and dial should be and the importance of any changes! They compare this information with the feel of the plane, visual observation, experience, and intuition to make adjustments in real time, as indicated, to operate the craft in safely executing the flight plan or mission.

FIGURE 1.1Space Shuttle Cockpit Instrument Panel

Photo courtesy of NASA.

In a nutshell, the objectives of FP&A and PM are to develop and provide information to run the business and achieve the organization's goals, just as the instrument panel assists the pilots of an aircraft to execute their mission.

Our definition and application of FP&A is very broad and inclusive. It includes all activities that assess, plan, improve, and monitor critical business activities and initiatives. PM is a critical aspect of the management processes of the enterprise. Performance management is closely aligned with and overlaps FP&A in many respects. Important characteristics of effective PM include:

Achieving an organization's goals and objectives, including strategic and operational initiatives, forecasts, and planned results.

Projecting and modeling future financial performance.

Monitoring performance on key value and business drivers.

Increasing visibility into critical areas of business performance, allowing managers to assign and enforce accountability for performance.

Providing an effective framework, allowing managers and employees to understand how their activities relate to operating and financial performance, and ultimately to the value of the company.

Providing early detection of unfavorable events and trends, such as manufacturing problems, competitive threats, and product performance issues.

Delivering critical information to managers and executives in effective displays or presentation formats that aid in identifying trends, problems, opportunities, and so on.

Integrating into other management practices in the overall system of management processes that we will call the performance management framework (PMF).

Identifying, monitoring, and mitigating risks.

Providing information to managers to run the business.

FP&A and PM must be integrated into other management processes as shown in Figure 1.2. Analysts and others involved in PM must play an active role in the management of the organization. They are not reporters or historians; they should help shape the outcome of the enterprise's efforts.

FIGURE 1.2FP&A and PM Must Be Integrated with Other Management Processes

Understanding How Decisions Are Made

Since a substantial part of FP&A involves developing and providing information and analysis to managers, the analyst should develop an understanding of how the human mind receives and processes information as part of evaluating options and making decisions. The analyst bears a responsibility to develop and present findings in an objective manner that reduces bias and the tendency to reach less than optimum decisions.

A primary theme throughout this book is the important need to present and communicate business information effectively. This subject is the focus of Chapter 6, Communicating and Presenting Financial Information.

PREVIEW OF THE BOOK

The book has been written to address key areas of Financial Planning & Analysis and Performance Management from a practical point of view. While theory and technical aspects are included throughout the book, I have tried to incorporate real business applications from my 40‐year career in business accounting and finance. The book contains five parts:

Part One

:

Fundamentals and Key FP&A Capabilities

Part Two

:

Business Performance Management

Part Three

:

Business Projections and Plans

Part Four

:

Planning and Analysis for Critical Business and Value Drivers

Part Five

:

Valuation and Capital Investment Decisions

Part One: Fundamentals and Key FP&A Capabilities

Part One builds a foundation for effective planning, analysis, and performance management. It includes a comprehensive review of financial statement analysis and presents analytical tools that can enhance the effectiveness of FP&A. For most finance professionals, Chapter 2 is primarily a review, so a quick perusal of this material may suffice.

In order to complement technical subject areas in the book, we cover best practices in developing financial models and in developing analytical capability. Finally, we address a significant weakness in many finance organizations: presenting and communicating business information.

Part One contains these chapters:

Fundamentals of Finance

Key Analytical Tools and Concepts

Developing Predictive and Analytical Models

Building Analytical Capability

Communicating and Presenting Financial Information

Part Two: Business Performance Management

In Part Two, we focus on subject matters traditionally associated with PM. After introducing keys to effective business performance management (BPM), we present the best practices in selecting key performance indicators (KPIs) and creating dashboards. In order to fully achieve the benefits of PM, it needs to be integrated with other key management processes. We introduce a challenge to PM leaders to focus on what's important, not just what is easy to measure. Since PM should also look outside the enterprise, benchmarking and competitive analysis are also presented.

Part Two consists of these chapters:

Business Performance Management

Dashboards and Key Performance Indicators

Institutionalizing Performance Management

Measuring and Driving What's Important: Innovation, Agility, and Human Capital

External View: Benchmarking Performance and Competitive Analysis

Part Three: Business Projections and Plans

In Part Three, we will cover best practices and techniques for planning, projecting, and forecasting future performance. In addition to traditional budgeting and operational planning, the implementation of rolling forecasts or business outlooks is also presented. Finally, we cover the unique challenges in projecting performance over an extended time horizon.

Part Three includes these chapters:

Business Projections and Plans: Introduction and Best Practices

Budgets, Operating Plans, and Forecasts

Long‐Term Projections

Part Four: Planning and Analysis for Critical Business and Value Drivers

Part Four presents best practices and illustrations for planning, measurement, analysis, and improvement of key business and value drivers, in the following chapters:

Revenue and Gross Margins

Operating Expenses and Effectiveness

Capital Management and Cash Flow: Working Capital

Capital Management and Cash Flow: Long‐Term Assets

Risk, Uncertainty, and the Cost of Capital

Part Five: Valuation and Capital Investment Decisions

Part Five presents planning and analysis of critical business decisions, including capital investment decisions, techniques for valuing a business, and analyzing value drivers. The section concludes with techniques to value a business, and the planning, analysis, and evaluation of mergers and acquisitions (M&A).

Part Five includes these chapters:

Capital Investment Decisions: Introduction and Key Concepts

Capital Investment Decisions: Advanced Topics

Business Valuation and Value Drivers

Analysis of Mergers and Acquisitions

Supplemental Information

Supplemental information includes a glossary, an index, and information on the CD or website available to purchasers of this book.

SUMMARY

Most senior financial and operating executives single out FP&A as one of the most important and, unfortunately, underperforming functions of the finance organization. Combining elements of classic FP&A with PM can unleash significant analytical horsepower that can assist the organization in executing its mission and achieving its objectives.

Before embarking on an initiative to improve FP&A and performance management, practitioners should develop a context based on the company's strategy and objectives, performance, and critical initiatives. This will ensure that the focus of efforts is directed to critical areas in the organization. Material found in Chapter 5, Building Analytical Capability, and Chapter 7, Business Performance Management, will be helpful to this cause.

Part OneFundamentals and Key FP&A Capabilities

2FUNDAMENTALS OF FINANCE

CHAPTER INTRODUCTION

The traditional and most fundamental aspect of financial planning and analysis is the ability to understand and evaluate financial statements and financial performance. This chapter presents a brief introduction (or refresher) to financial statements and financial ratios. Many finance professionals will use these financial ratios as overall measures of a company's performance or as overall measures of performance on a particular driver of value.

BASICS OF ACCOUNTING AND FINANCIAL STATEMENTS

The three primary financial statements are the Income Statement, the Balance Sheet, and the Statement of Cash Flows. We need all three statements to properly understand and evaluate financial performance. However, the financial statements provide only limited insight into a company's performance and must be combined with key financial ratios and ultimately an understanding of the company's market, competitive position, and strategy, before evaluating a company's current performance and value. A significant limitation of financial statements is that they present historical results – that is, the past. Other measures and mechanisms must be utilized to see what is happening in the present and to predict and manage future outcomes.

Financial statements are based on generally accepted accounting principles (GAAP). A key objective of financial statements prepared under GAAP is to match revenues and expenses. Two significant conventions arise from this objective: the accrual method of accounting and depreciation. These two conventions are significant in our intended use of financial statements for economic evaluation and business valuation purposes, since they result in differences between accounting income and cash flow.

Accrual Accounting

Financial statements record income when earned and expenses when incurred. For example, the accrual basis of accounting will record sales when the terms of the contract are fulfilled, usually prior to collection of cash. Similarly, expenses are recorded when service is performed rather than when paid.

Depreciation

GAAP requires that expenditures for such things as property, plant, and equipment with long useful lives be recorded as assets and depreciated over the expected useful life of the asset. As a result, when a firm spends cash to purchase equipment, it records it as an asset on the balance sheet and depreciates the cost of that asset each year on the income statement.

Income Statement (aka Profit and Loss)

The income statement, or what is frequently referred to as the profit and loss (P&L) statement, is a summary of all income and expense transactions completed during the period (year, quarter, etc.). Typical captions and math logic for a basic income statement include these examples:

Sales

+ $1,000

Cost of Goods Sold

– 500

Gross Margin

= 500

Operating Expenses

– 200

Operating Income

= 300

Income Tax Expense

– 100

Net Income

= 200

Many different measures, terms, and acronyms are used in practice to describe various elements of the P&L. Table 2.1 illustrates how some of these common measures are determined as well as how they relate to one another.

TABLE 2.1Comparison of Common P&L Measures

Abbreviation

P& L

EBIT

EBIAT

EBITDA

EP

Sales

$100,000

$100,000

$100,000

$100,000

$100,000

Cost of Sales

COGS

50,000

50,000

50,000

50,000

50,000

Gross Margin

GM

50,000

50,000

50,000

50,000

50,000

% of Sales

50.0%

50.0%

50.0%

50.0%

50.0%

R&D

5,000

5,000

5,000

5,000

5,000

SG&A

SG&A

15,000

15,000

15,000

15,000

15,000

Depreciation & Amortization (D&A)

10,000

10,000

10,000

–

10,000

Operating Profit

OP

20,000

20,000

20,000

30,000

20,000

% of Sales

20.0%

20.0%

20.0%

30.0%

20.0%

Interest Expense

3,000

Profit before Tax

PBT

17,000

Income Tax

35.0%

5,950

7,000

7,000

Net Income

PAT

11,050

%

11.1%

Earnings before

EBIT

20,000

Interest and Taxes

Earnings before

EBIAT

13,000

13,000

Interest

after

Taxes

Earnings before

EBITDA

30,000

Interest, Taxes, D&A

Capital Charge

10,000

Economic Profit

EP

3,000

Following are definitions of key terms used in Table 2.1:

Net Income: