THE BUDGET and the MULTI-YEAR PLAN: Business Tactics

The budget. Not much more needs to be said. For most people there is no glamour in budgeting or financial planning. There are no warmly lit dinners with interesting clients that just got back from Safaris in Kenya. No box seats behind third base with the Founder musing about his days playing college ball. No company sponsored weekend of skiing at Bachelor’s Gulch with interesting gifts greeting you on your return to the hotel room.

While never does the CFO get presented fancy hardware for building the financial plan that maps how the company will meet its goals, the budget and its sibling – the multi-year plan, when built correctly are key tools in a company achieving greatness.

Greatness does not just mean reaching sales or profit goals, or getting the best valuation based upon impressive financial forecasts. It also means providing the entire management team with specific goals around which to rally. These plans are the roadmap of how to get from where you are now to where you want to be. They lay the framework of weekly meetings for the staff to measure progress, they create interim opportunities to “ring the success bell”, and they help build a winning corporate culture - one where all members of the team buy-in to the corporate goal and understand how their performance contributes to everyone’s success. That is the difference between a financial plan for bankers (revenue and profit) and a financial plan that you use to run a business (driving a team to a common goal).

I am not going to get into the raw detail of building a budget, because the formal process – while similar for all companies, can vary based upon the business, its sector, its customers, the accounting systems, etc. That said every budget has some basic requirements in common. Forecast revenues, expense, headcount, capital investments, how long it will take your customers to pay you and how long you have to pay your vendors, etc. Some of the work is done in excel, much of it in the financial accounting systems – customer by customer, cost center by cost center, line item by line item.

The most effective budgeting though isn’t just done by having each business unit leader fill in next year’s Jan-Dec revenue and expense estimates alongside the actual Jan-Dec of the prior year and then having Finance come back with “cut 15%”. It should be part of a strategic review of the company’s industry, customers, product set, peer group, and staff. Where is the industry going? Which sectors, customers, products, and geographies have experienced the greatest growth and have the greatest growth potential? Which sectors, customers, products, and geographies are the most profitable and why? What parts of the company are the most productive – not just in terms of sales or profit, but in terms of just getting things done? Realistically what can the company do this year and how does that set it up for bigger success in the years to come?

This strategic view outlines the long term plan and addresses long term opportunities and challenges for the business. That “big goal” should then be translated into a multi-year plan which sets forth the major achievements necessary to hit that goal. The budget then is not an isolated annual project – it is the detailed roadmap for the next 12 months as part of the longer 5+ yr journey toward a company’s long term strategic goal and vision.

With that in mind, here is a suggestion for the optimal financial planning hierarchy:

A) Set the strategic vision for the company: Where are we going? What is our vision? What are the core products and services we provide and why are we better than the rest? Where is our industry going and why is it a great place to be? Why would high energy people want to be part of this industry and company?....

B) Build a multi-year business and financial plan that supports that strategic vision: In order for us to achieve our vision, what is the year by year plan that we must meet to achieve our goal? What customers should we strive for and how do we meet their needs? How should our products evolve? What are the resources we need and when must we have them? What should we build and what should we buy? What are our year by year revenue goals and what financial and staff resources are required each year to hit those goals? What capital will be required?.... This is the multi-year roadmap.

C) The budget then becomes the 12 month tactical plan: With the multi-year plan as the long term roadmap, what are the specific goals we need to meet every month and quarter this year? What customer accounts must we close? What product investments must we make? What partnerships / acquisitions must we enter into? What staff changes must we put into effect? How should we compensate our employees to hit this year’s goal? Do we have sufficient capital to meet this year’s goals? How will we track our performance on a weekly, monthly, quarterly basis?....

Most effective companies understand these, with particular attention to A (vision) and do C (budget) on an annual basis with varying levels of success and effort. B (multi-year planning) tends only to get attention in the formation stages of the company and when necessary for financing or other corporate change events (M&A, major industry or customer changes). I contend that B is a critical component that should be more of a “living” plan rather than something that gets completed on a periodic basis when an investment banker needs a multi-year forecast. It is unrealistic for most companies to maintain a fully detailed multi-year plan that is updated every month, etc. (I have done that and it is a ton of work.) That said, if a company builds and maintains a 6 quarter rolling forecast (by effectively extending its current 4 quarter budget 2 quarters and updating the forecast quarterly), it is not terribly difficult to maintain a high level multi-year forecast with some basic assumptions.

So what are the take-aways?

• Make sure you have a clear strategic vision for the company relative to the “end game” and the markets and customers you want to serve. Communicate that vision with abandon.
• Layout a multi-year plan (even if it is high level) that breaks the company’s big goal into the key milestones you believe you need to hit to achieve that goal.
• Be specific in that multi-year plan and build it from the ground up as much as possible – “These are markets we need to activate each year”, “These are the products we will need”, “These are the key customers we need to land”, “This is what the organization needs to look like”, etc.
• Be flexible - while the strategic vision for the company will likely not change, the specific path the company takes rarely follows the path originally laid out.
• Build a current year budget that details the things that need to happen on a month by month basis by business unit as part of the multi-year plan.
• The month by month plan needs to be detailed such that the reports and dashboards that each business unit use to measure performance on a daily / weekly basis track the performance implied in the budget.
• Make sure each business unit is having weekly meetings to track progress and allocate resources to critical projects.
• Extend the 4 quarter budget an additional 2 months and build a regular quarterly forecasting process such that the company always has a living rolling 6 quarter forecast.
• Tie that 6 quarter forecast into the multi-year plan creating a direct link from the monthly performance to the company’s 5+ year plan.
• Build individual compensation plans and performance review processes such that each person understands how they get paid to meet the monthly, quarterly, yearly goals.
• Make people accountable for their performance – even top management - and create many opportunities to ring the success bell.

Budgeting and building financial plans, when part of mapping the journey toward an ultimate goal, should energize the troops rather than put them to sleep. Any goal oriented employee wants to know how they can make a difference and strongly desires specific targets to meet and exceed. If communicated effectively, the strategic vision, the multi-year plan, and the budget will provide those targets and motivate the team to climb the mountain. Without that roadmap and those goals, the team may work hard for a while, but a high performance goal oriented team which craves direction and records to break, will soon look elsewhere to stretch their talents. 

-Bob

BUSINESS INTELLIGENCE vs. FINANCIAL REPORTING – Business Tactics

Situation (continued from prior post): Ok, you finally closed that institutional round of funding, have begun the process of productizing the core functionality that will become the new software business, you have a strong Board of Directors in place, and you are building out the development, sales and marketing teams. One of the first big hires you make is Jim West, a top software sales guy who got tired of the selling large ERP systems and wanted get back to the high energy, high impact, high reward environment of a nimble emerging software company.

During his first week on the job, Jim comes into your office and says “Given the potential customers you have circled, my existing relationships, and the company contacts my new sales team will have, I think we could have a pipeline of over 100 potential clients for the new platform. I am sure we can nail a high percentage of these prospects but we have to be really careful that we don’t over promise and under deliver with respect to certain key things: (1) delivering on the functionality that we sell and the capabilities of the software, (2) the time to implement and expected “go-live” with the full functionality, (3) the stability and up-time of the new system particularly given that we are delivering it on a SaaS basis, and (4) the cost with respect to the core system, implementation, on-going maintenance, and any upgrades. If we don’t stay “on-it” with respect to these things from the start, we will have some very disappointed customers – a bad thing for a new software business.” You respond, “Jim, thanks for the heads up. I definitely agree we have to track and hold the team accountable in those areas. In addition, we have other critical things to measure: (1) Pricing and profitability of the new system and the additional modules we are building, (2) Utilization and efficiency of our services and implementation teams particularly given that every implementation will be different, (3) Detailed sales pipeline tracking, (4) The true cost of development and the product roadmap as well as the cost of maintenance, and (5) Making sure everything syncs up with the annual budget and multi-year plan. All that and we have to track some of those things on a weekly even daily basis.”

As Jim walks out of your office, seemingly satisfied that you understand the importance of his concerns, you contemplate how your CFO is going to handle the new demands. Historically, your management reporting consisted of reviewing the existing key customer projects, progress with the handful of new client prospects, and the P&L and Balance Sheet from the accounting system. The CFO’s world is about to change dramatically.

Business Intelligence level management reporting systems drive forward looking vision, educated decisioning, and accountability. Business Intelligence looks forward through the learnings of the past.

Too many companies view management reporting as printed financial statements and spreadsheets with sleep provoking commentary about how one line item went up or down compared to prior history or budget. In those unfortunate scenarios, 80% of content describes the past leaving the executive team and Board to navigate the ocean ahead through a hazy fog (whether they know it or not). Big opportunities and challenges appear quickly in the company’s field of vision and the organization has to react before the full impact on the business is completely understood. A company that strives for business intelligence level reporting will maximize the clarity of how future events – new strategies, big customers, new products, acquisitions, etc. impact the company, its business model and its prospects.

OK, what does Business Intelligence (“BI”) level reporting mean? We could debate the specifics, but at a high level BI reporting takes the myriad of data about an organization and its sector (financial, operational, industry, etc.) and distills that information into communications that clearly present the most critical components of business performance and makes recommendations for actions in a way that drives effective management decisioning. I know, that sounds like a bunch of management speak – Here is one simple visual example:

With BI level reporting, the 2010 financial forecast evolves from a sea of numbers that only finance types can wade through into a usable document that raises fundamental questions about the business and drives management decisions. The above should also include commentary that provides insight on the implications of the data and makes recommendations for action. This example was pulled from an actual 2010 budget for a mid-sized company.

How do you build BI level reporting?

• Work with each business unit (sales, marketing, development, production, CEO, Board etc.) and agree on the key business information and frequency necessary to track day-to-day, quarter-to-quarter performance and progress on key business unit milestones.
• Determine how best to produce this information given the existing IT and accounting / finance infrastructure – strive for maximum automation. Scope out any necessary changes to current IT systems required.
• Work back from the key milestones and prepare reports, dashboards and KPIs that will measure performance and allow you the lead time to make corrections if things aren’t going as planned. Strive for conciseness, clarity of message, and a dashboard mentality.
• Build the company’s budget based upon running out the key milestones, metrics and dashboards (new vs. existing customers, price / volume, development roadmap, utilization, staff efficiency, etc.) so that the business units understand the budget in terms of their day to day performance and tracking.
• Determine other critical information that the team needs to understand the levers of the business – profitability by product, customer, business unit, geography; key trend lines; major potential initiatives that might not be budgeted, etc.
• Leave capacity for the ad-hoc analysis and reporting that will certainly come up – “Customer X wants this additional unplanned functionality”, “There is this huge deal in Germany - how should we price it and how long will it take to implement?”, “If we moved 20% of our development to India, what would be the impact?”, “If we raised an additional $10mm, how much faster could we grow and what would the business look like in 5 yrs?”.
• Take the time to get behind the numbers and communicate clearly – do not just prepare spreadsheets and dashboards and distribute them. It is the role of finance to understand what the numbers tell the organization about the business and communicate that clearly to the team – many of whom look at a spreadsheet and get lost in the detail. Insightful commentary that accompanies the dashboards and reports will keep the team engaged and focused.

As you can imagine, the above bullet points, which are not all-inclusive by any means, represent a ton of effort. Effort required not only of the F&A staff, but of the business units and the executive team. That said, if automated properly, once built any changes should update the entire management reporting package and dashboards with minimal effort. When combined with insightful analysis and recommendations by the finance organization, the entire management team becomes “students of the business” and has clear visibility how best to achieve its goals and how to react when unanticipated opportunities and challenges present themselves. Additionally, the F&A function becomes a critical strategic function, not just where they “count the beans”.

BI should be transformational. Properly executed, the entire management team should have the tools to understand the most important levers to pull to maximize business impact, have information when it is actionable, be able to communicate complicated information clearly to non-finance types, and be able to openly debate the best course of action. Without that, not only will the company’s view of the future be foggy, it could be blind to the implications of very important opportunities or obstacles. (The link below shows that nicely.)

-Bob

Click here to see a video of what can happen if your visibility isn’t quite clear; http://www.youtube.com/watch?v=-9vrD5dmPms