Financial Planning & Analysis and Performance Management

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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

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FINANCIAL

PLANNING & ANALYSIS

AND PERFORMANCE

MANAGEMENT

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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

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knowledge and understanding.

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

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FINANCIAL

PLANNING & ANALYSIS

AND PERFORMANCE

MANAGEMENT

Jack Alexander

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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.

No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any

means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section

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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

Printed in the United States of America.

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To my wife Suzanne, for four decades of love, support, and friendship

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CONTENTS

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

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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

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Contents

10 Measuring and Driving What’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

xi

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Contents

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

xii

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Contents

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

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Contents

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

xiv

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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 finan￾cial 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:

xv

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Preface

Each of these recommendations has proven to be true in my experi￾ence. 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 “dispas￾sionate, hard headed analysis” struck and stuck with me. Financial plan￾ning 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 contribut￾ing to growth. “Kinship” refers to a trusted adviser and partner relation￾ship with the CEO. And of course, finance must be viewed as a mem￾ber 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.

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