Financial Planning & Analysis and Performance Management
Description
Financial Planning & Analysis and Performance Management is the essential desk reference for CFOs, FP&A professionals, investment banking professionals, and equity research analysts. With thought-provoking discussion and refreshing perspective, this book provides insightful reference for critical areas that directly impact an organization's effectiveness. From budgeting and forecasting, analysis, and performance management, to financial communication, metrics, and benchmarking, these insights delve into the cornerstones of business and value drivers. Dashboards, graphs, and other visual aids illustrate complex concepts and provide reference at a glance, while the author's experience as a CFO, educator, and general manager leads to comprehensive and practical analytical techniques for real world application.
Financial analysts are under constant pressure to perform at higher and higher levels within the realm of this consistently challenging function. Though areas ripe for improvement abound, true resources are scarce--until now. This book provides real-world guidance for analysts ready to:
* Assess performance of FP&A function and develop improvement program
* Improve planning and forecasting with new and provocative thinking
* Step up your game with leading edge analytical tools and practical solutions
* Plan, analyze and improve critical business and value drivers
* Build analytical capability and effective presentation of financial information
* Effectively evaluate capital investments in uncertain times
The most effective analysts are those who are constantly striving for improvement, always seeking new solutions, and forever in pursuit of enlightening resources with real, useful information. Packed with examples, practical solutions, models, and novel approaches, Financial Planning & Analysis and Performance Management is an invaluable addition to the analyst's professional library. Access to a website with many of the tools introduced are included with the purchase of the book. Please see About the Website page for access instructions.
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JACK ALEXANDER is an experienced CFO and operating executive turned consultant, author, and educator. As the founder of Jack Alexander & Associates, LLC, he provides advice to businesses across a wide range of financial and operating areas, with a focus and passion on Financial Planning & Analysis (FP&A) and Performance Management (PM). The firm also offers customized training and workshops on FP&A. He is a frequent speaker on FP&A and PM. He is the author of Performance Dashboards and Analysis for Value Creation and Financial Planning and Analysis and Performance Management, both from Wiley.
Content
Preface xv
About the Website xix
1 Financial Planning & Analysis and Business Performance Management 1
The Problem with Traditional Measurement Systems 1
Objectives of Financial Analysis and Performance
Management 3
Preview of the Book 6
Summary 9
Part One Fundamentals and Key FP&A Capabilities
2 Fundamentals of Finance 13
Basics of Accounting and Financial Statements 13
Financial Ratios and Indicators 19
Summary 42
3 Key Analytical Tools and Concepts 43
Basic Statistical Tools 43
The Business Model 59
Summary 69
4 Developing Predictive and Analytical Models 71
What Is a Financial Model? 71
Summary 81
Appendix: Illustrative Model 81
5 Building Analytical Capability 89
For the Individual 90
For the Organization 94
Summary 108
6 Communicating and Presenting Financial Information 109
Laying the Foundation for Success 110
Developing Effective Presentations and Reports 117
Delivering the Presentation 120
Data Visualization and Presentation: A Picture Is Worth a Thousand Words 121
Summary 134
Part Two Performance Management
7 Business Performance Management 137
What Is Business Performance Management? 138
Developing or Enhancing BPM in an Organization 144
Summary 155
8 Dashboards and Key Performance Indicators 157
Objectives of Dashboards and Key Performance Indicators 157
Selecting Appropriate Performance Measures and Key
Performance Indicators 160
Creating Performance Dashboards 166
Sample Dashboards for Selected Industries 175
Summary 175
9 Institutionalizing Performance Management 179
Gaining Traction 179
Integrating Business Performance Management with Other
Management Processes 183
Avoiding Common Mistakes 189
Summary 191
10 Measuring and DrivingWhat's Important:Innovation, Agility, and Human Capital 193
Innovation 194
Measuring and Driving Business Agility 204
Human Capital Management 214
HCM Dashboard 226
Summary 226
11 The External View: Benchmarking Performance and Competitive Analysis 227
Analysis of Markets, Customers, and Competitors 228
Benchmarking to Evaluate Performance 232
Using Benchmarks to Set Enterprise Goals for Performance and Value Creation 242
Summary 243
Part Three Business Projections and Plans
12 Business Projections and Plans: Introduction and Best Practices 247
Overview of Business Planning and Projections 248
Best Practices in Projecting Future Financial Results 252
Summary 266
13 Budgets, Operating Plans, and Forecasts 267
The Budgeting Process 267
The Operating Plan 272
Business Forecasts and Outlooks 277
Summary 301
14 Long-Term Projections 303
Unique Challenges in Estimating Long-Term Performance 304
Applications of Long-Term Projections 305
Developing Long-Term Projections 307
Presentation of Long-Term Projections 319
Summary 325
Part Four Planning and Analysis for Critical Business and Value Drivers
15 Revenue and Gross Margins 329
Revenue Growth: Key Drivers 330
Key Performance Measures: Revenue Growth 343
Revenue Dashboard 351
Gross Margins and Relative Pricing Strength 351
Measures of Relative Pricing Strength 356
Summary 359
16 Operating Expenses and Effectiveness 361
Drivers of Operating Effectiveness 362
Key Performance Indicators: Operating Effectiveness 365
Tools for Assessing and Improving Operating Effectivenss 382
Summary 387
17 Capital Management and Cash Flow:Working Capital 389
Critical Success Factors 391
Operating Capital Management 393
Understanding the Dynamics of Operating Capital 394
Unleashing the Value Trapped in Operating Capital 396
Accounts Receivable 398
Key Performance Indicators for the Revenue Process and
Accounts Receivable 401
Inventories 410
Summary 420
18 Capital Management and Cash Flow:Long-Term Assets 421
Capital Intensity 421
Tools for Improving the Management of Long-Term Capital 424
Projecting Capital Investments and Depreciation 428
Key Performance Indicators for Capital Intensity 431
Intangible Assets 433
Key Performance Indicators: Goodwill and Intangible Assets 434
Excess Cash Balances 436
Long-Term Capital Dashboard 437
Summary 439
19 Risk, Uncertainty, and the Cost of Capital 441
The Time Value of Money 441
The Cost of Capital 449
Performance Measures 458
Summary 461
Part Five Valuation and Capital Investment Decisions
20 Capital Investment Decisions: Introduction and Key Concepts 465
The Capital Investment Process 466
Evaluating the Economic Merits of Capital Investments 469
Illustrations 478
Summary 484
21 Capital Investment Decisions: Advanced Topics 485
Dealing with Risk and Uncertainty in Capital Investment
Decisions 485
Presenting Capital Investment Decisions 499
Capital Budgeting and Rationing 500
Evaluating the Effectiveness of the Capital Investment
Decision Process 502
Summary 505
22 Business Valuation and Value Drivers 507
Estimating the Value of a Business by Discounting Future
Cash Flows 508
Estimating the Value of Firms by Using the Valuation
of Similar Firms: Multiples of Revenues, Earnings,
and Related Measures 517
Building Shareholder Value in a Multiples Framework 521
Integrated Valuation Summary for Roberts Manufacturing
Company 525
Value Drivers 528
Summary 533
23 Analysis of Mergers and Acquisitions 535
The Acquisition Challenge 535
Key Elements in Valuing an Acquisition 537
Methods and Metrics for Valuing an Acquisition 539
Common Mistakes in M&A 554
Best Practices and Critical Success Factors 557
Understanding Seller Best Practices 560
Key Performance Indicators for M&A 562
Dashboards for M&A 564
Summary 564
Part Six Summary
24 Summary and Where to from Here? 569
Key Takeaways 569
Where to from Here? 572
Glossary 575
Acknowledgments 585
About the Author 587
Index 589
ABOUT THE WEBSITE
WHAT'S ON THE WEBSITE
This book is accompanied by a companion website:
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 . 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...