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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.

The Wiley Finance series contains books written specifically for finance and investment professionals as well as sophisticated individual investors and their financial advisors. Book topics range from portfolio management to e‐commerce, risk management, financial engineering, valuation, and financial instrument analysis, as well as much more.

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

FINANCIAL PLANNING & ANALYSIS AND PERFORMANCE MANAGEMENT




Jack Alexander











Wiley Logo

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:

fprefuf001

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 image. 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

Part One
Fundamentals and Key FP&A Capabilities