London FP&A Club: Seven Models to Manage Performance

Michael Coveney, a thought leader in corporate performance management, former consultant and veteran technology and finance professional, shared tips on operational activity, cash funding, forecasting, risk and strategy models. He is convinced that established planning procedures have had their day.

“Annual budgeting and quarterly reporting doesn’t make sense anymore. It’s redundant in the modern 24×7 business world,” he claims. The experienced finance and technology professional previously worked at ComShare and Infor and has undertaken project installations at more than 150 global companies, such as BP, since starting his career in the 1970s.

“The speed of modern business has increased, as has the product and reporting cycle, since I started out in business,” said Coveney, addressing London FP&A Club members. “Look at the mobile phone sector, for instance, where a new handset is out of date nine months later.

“That must impact the budget. Annual planning doesn’t make sense anymore and predicting business performance has only got harder as business has speeded up. That’s why I want to share seven interconnected modelling tips to help you cope with modern corporate demands.”

Before this, the 28 senior FP&A professionals gathered – including sponsors Tidemark, Lorraine Wreford, head of FP&A at the East of England Co-operative Society and James Smith, FP&A manager at Glencore – introduced themselves and shared with their peers what they hoped to get from the evening.

Oonagh Mason, finance director, Americas, at the British Council commented: “FP&A is an emerging discipline I want to understand better as it develops.” She told gtnews: “My organisation is also looking at the Association for Financial Professionals (AFP) FP&A Certification. We need to decide if it’s something we wish to pursue in terms of training our staff to improve their planning and predictive capabilities. I’m especially interested in the corporate programme on offer.”

Speaker Chris Winter had possibly the most modish job title, as Europe-zone lead of zero-based budgeting (ZBB) at Heinz. The ZBB approach demands good predictive planning and budgetary accuracy, continuously starting afresh as it does. Winter shared tips and debated different approaches with colleagues later in the evening during the networking drinks reception, following Coveney’s presentation.

Seven FP&A Models for Managing Performance

Coveney began by examining common planning problems, such as the perception that it’s a periodic exercise insufficiently integrated into everyday reality. Dissatisfaction was evident in that nearly two in three of the 28 attendees concurred, when asked if they spent too much time on unproductive budgeting.

This led to an overview of planning basics, the causes of inaccuracies and a discussion on planning’s place in the modern business world.

Coveney then presented interlinked seven FP&A models, which he believes are required to better manage corporate performance and speed up finance reporting.

1. Operational Activity Model: “This is typically used for setting budgets,” explained Coveney. “For instance, you can use it for set revenue targets and measure them, or work out the whole business cycle from sales, through to marketing, lead generation, contract negotiations, to production, workloads and back again. The key question is to ask: ‘Have we got enough resource to hit the target?’ That is what this model should be used to answer.”
2. Cash Funding Model: This model should fund the activity model and answer the question: ‘how much money do we need and from what sources should it be funded?’. “It should look at cash inflows and outflows; the payment terms for suppliers and customers; and be able to cover any shortfalls via a bank loan or other instrument,” said Coveney.
3. Detailed History Model: This model will tell you what actually happened. It should be used to review past performance, analyse sales data by customer, region, product and so forth, while also examining customer sentiment via social media. The purpose is to learn how to budget better in the future, learning from previous data and evidence-based historical numbers.
4. Target Setting Model: The key question here is ‘where is the marketplace heading?’ and ‘is our target realistic’? According to Coveney this model is typically driver-based and assesses the drivers for revenue, cost, units sold, etc. The aim is to align high-level goals with realistic ‘on the ground’ facts. Some supporting driver-based reporting technology would be helpful here.
5. Detailed Forecast Model: This model should provide the relevant detail behind the headline budget numbers, compare forecasts with plans, and be constructed from the bottom-up using realistic numbers and accurate predictions. “For instance, if you can align a potential sales forecast with revenue predictions, historical data and a salesperson’s guess of a 20, 50 or 80% chance of a sale closure, then you’ll have a much better forecast,” explained Coveney. Linking it all together is what matters.
6. Strategy Improvement Model: “This for me is the key model, as strategy is linked to improving specific business processes in accordance with the goals,” said Coveney. FP&A professionals must also be able to understand the impact of launching a new product or marketing campaign on the bottom line, on resource allocation and so forth. Known impacts can guide strategy and make sure it is the right strategy to follow. The key questions here are ‘what could we do differently?’ and ‘what would be the impact on the business?’, plus ‘how much would it cost if we implemented our strategy?’. “As a financial professional you’ll also need to be able to ‘time shift’ the data using appropriate technology to work out the budget impact in say one, three or six months’ time.”
7. Scenario Model: What happens if interest rates go up, or a currency depreciates? You need to be able to answer such traditional treasury questions, using scenario modelling as essentially a risk management and opportunity spotting tool.

“All seven models are connected and interlinked,” concluded Coveney. “You cannot leave one out and get the full benefit of following this approach.” He ended with a technology overview illustrating how modern systems can automatically ensure budgeting information is moved into forecasts and vice versa. Modern technology can also ensure data is more easily and quickly shared with colleagues via scorecards, reporting and scenario planning tools. Speed is of the essence in the modern world.

“Planning shouldn’t be driven by a date on a calendar. It should be triggered by events and exceptions and be undertaken on a continual basis, responding to the marketplace as it changes,” said Coveney. “The best companies have ‘de-coupled’, meaning that they’re not stuck in the annual budget/quarterly reporting cycle for the sake of it, but do rolling forecasting and budgeting to spot trends, threats and opportunities early on.

“Even if you are stuck in an annual budgeting model due to the wishes of your boardroom you can still change it continuously within that parameter. After all, an annual budget plan is only based upon what we think is the future, so if reality changes you must too.”

Reaction Quotes

Speaking to gtnews after the modelling presentation, Gary Moran, managing director at Daniel Benson Resourcing, said he’d found the evening “useful” and had “actually known more than I thought, with a certain crossover evident between financial controller job titles and FP&A duties”.

Chris Whiddon, senior finance manager at Vodafone, said: “The most interesting aspect for me was the debate about how best to bring the complexities of the seven different performance models together, so that one influences the other, giving you a more dynamic and complete whole. The seven models are all interlinked, but making that evident and ensuring they all feed into each other is the challenge.”

• For more on future FP&A Club events in London and elsewhere, plus details about the free membership available to finance professionals, please click on the highlighted link. Alternatively, email founder Larysa Melnychuk. To join the LinkedIn FP&A Group click on the highlighted text. Details about the recent FP&A Leadership Summit in Amsterdam, the Netherlands, can also be viewed online.
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