It was 15 minutes into the executive leadership team meeting where George, the director of FP&A, had been summoned to present the latest outlook on the business. The CEO, Sarah, pointed out that there were a few key scenarios that were not covered in the presentation. She would like to see what the impact would be if they turned reality.
George was already starting to sweat. He knew that to model this he would either have to ask for an extension or open the big monster of a financial Excel model that had produced the numbers in the first place. The model was basically one big number-horror-show with no visually appealing look. Not wanting to miss his slot in front of the leadership team George went for opening the model. This turned out to be a big mistake…
When was the last time you saw a financial model that was visually appealing and could be presented as-is to non-finance people? I do not recall seeing one myself at least. You might think it is not a problem that the model cannot be presented because you are anyway doing that in PowerPoint. The challenge? You lose the ability to do this in real-time during the discussion with business leaders. In this article, we will address what you could maybe do instead (and we will reveal the ending to George’s story at the end).
Let us redefine the purpose of your financial model
Most financial models aim to achieve too many things in one go. They want to be a P&L, a balance sheet and even show cash flows and ROI calculations on investments. This results in them becoming too large both in terms of sheet and cell area but also file size. That means no simple user can find their way around in them and that they crash often or take ages to recalculate.
It is time to try something different. It starts by de-scoping your model to only model the essentials. No one can predict how their cash flow will look like six months from now anyway. No, give this a try instead.
- Identify the most important drivers for your business (no more than ten)
- Create three scenarios (a base, low and high case)
- Establish values for each of the assumptions and a confidence interval for the high and low case
- Link your assumptions to a simple P&L (no more than ten lines)
Now you can at all times produce a simple P&L forecast based on expected development in key drivers. Moreover, you can set up a monitoring system for your key drivers and get alerts when they move outside your confidence interval. Whenever you get an alert it should trigger an action planning session where you discuss what to do differently in this new scenario.
So, what happened to George and his financial model?
Back to George in the leadership team meeting. He responds to Sarah’s request “those are indeed some key scenarios to cover Sarah and thank you for highlighting them. Let me just open my model and we can look at them on the spot”. George then double clicks on the file on the screen to open the model. 30 seconds of awkward silence passes before the file finally opens. George feels the impatience of Sarah and her team with a few of them already checking their phones.
With the file open, George is ready to start doing the simulation. However, he quickly notices the confusion in most of the senior leaders’ eyes. They have no clue what they are looking at. So George needs to take a few minutes of their precious time to explain what they are looking at. At last, he can commence the first simulation. He changes the key assumptions that Sarah asked for and after some ten seconds calculation time they can see the result. George breathes a sigh of relief as he moves on to the next simulation. However, after having changed the second of three assumptions the file freezes and eventually crashes after yet another minute of waiting time.
At this point Sarah breaks up the session by saying “George thank you for coming today and showing us the forecast. It is clear you need some more time to work this out. We will call you back at a later time”. George leaves the meeting disheartened and demotivated. He just blew it in front of the CEO and her senior leadership team. Will he ever get the chance again?
Do not end up like George! Try a different approach and build a model that can show the essentials and do near real-time simulations. This will undoubtedly elevate your impact on the organization and free up time for the important discussions of how to make the future happen! What does your financial model look like and would you present it to your CEO?
This blog is presented by ValQ in collaboration with Anders Liu-Lindberg, Business Partnering Institute.
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