Why Steve Ricketts Consulting

What is needed for a dynamic planning environment is a viable, reliable and achievable way to map the activities that activate the dollars that drive your company’s day-to-day operations and cash flows. What we are talking about, in general, is Financial Planning & Analysis (FP&A) – including budgeting, forecasting, rolling forecasts, project and capital expenditure projections, equity and debt planning, as well as scenario and sensitivity analysis. More specifically, we are talking about “agile, driver-based planning”, the latest technology in real-time financial modeling and continuous strategic planning.

Most companies, and especially entrepreneurial entities, do not have the time and/or resources to put together a comprehensive financial plan that is continuous and dynamic for strategic planning purposes. Most models are thrown together for equity or debt financing purposes or board action and represent a “top-down” (percentage) approach to numbers that, generally, are meaningless and unachievable. The “plans” usually end up in the trash can once the financing objectives are achieved or board meeting is adjourned.

To achieve financing objectives, to build a credible, viable business plan and to create a dynamic, continuous strategic planning, monitoring and valuation model, you need to have a financial software that is comprehensive, robust and adaptable and, at the same time, user friendly and flexible. Until a few years ago, the only widely used software available was Microsoft’s Excel®.

The latest agile planning software allows companies to develop financial plans, rolling forecasts, project analyses and robust analytics in a timely, user-friendly, structured but flexible and dynamic environment. Models are built from the “bottom-up” and are “driver-based” allowing for linking and mapping of key activities that drive the dollar allocations of the business. The end result is a financial model that is strategic in nature, allowing not only current investor, bank or operational decision-making, but also continuous planning and rolling forecasts, as well as comprehensive, robust analytics.

Agile, driver-based planning allows your company to escape the “Excel Hell” that has frustrated most financial analysts and kept FP&A and Continuous Strategic Planning in the domain of expensive Enterprise software.

Driver-Based Planning

Driver-based planning (financial plus operational activity) is a best practice methodology where financial plans, namely budgets and rolling forecasts, are structured using models of underlying business activities that drive financial data. It incorporates assumptions about business activities that are modeled using units, rates and amounts to drive financial data such as revenue projections, headcount, spending and capital requirements. Managers are empowered to do better budgeting and, in particular, improve the accuracy and decision-making usefulness of rolling forecasts. Linking automatically operates across all time periods.

With agile, driver-based planning, operational or financial data at the line item level can be computed using multiple computation methods that facilitate driver-based modeling. Such methods, using the unit/rate/amount architecture, simplify cross time period, accumulation, indexing and other operations that are difficult to implement and maintain with cell-based formulas in spreadsheets.

Driver-based planning reduces data volume by modeling the most material items in a financial plan and linking to operational drivers or quantifiable activities of the business (e.g., volume measures such as units, transactions, subscribers, customers, call levels, hours, installations, etc.).

Driver-based modeling – 3 focuses:

  1. Revenue forecasting based on the volume measures and driver relationships between products.
  2. Variable and semi-variable headcount and expenses driven by the volume measures or identified underlying activity levels.
  3. For cash planning, balance sheet items such as inventories, accounts receivable and accounts payable, each based on their respective P&L drivers at a relevant level of detail.

With driver-based planning, everyone can see changes immediately and talk about the assumptions – the playing field is leveled and discussions are more objective.