“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
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Copyright © 2018 by Jack Alexander. All rights reserved.
Published by John Wiley & Sons, Inc., Hoboken, New Jersey.
Published simultaneously in Canada.
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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
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.
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 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 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 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 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 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.
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.
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 |
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.
A glossary of commonly used financial, value, and performance management terms is included in the back of the book.
Jack Alexander