CUSTOMatrix™ Insights Newsletter

Financial Modeling and the Art of Collaboration

Eric Chriss Founder, CEO, CUSTOMatrix, Inc.

If you’re the CFO in charge of the yearly forecast, it’s easy to fall into the trap of discounting the financial knowledge of your colleagues in marketing, operations, IT, or HR.  After all, you’re the one who has to do all the work of gathering, rationalizing, and finally…defending the data.  But it doesn’t have to be such a grind and won’t be if you establish two priorities.  First, GET ORGANIZED and then quickly get the active and continuous support of the CEO.

Although most CEOs understand the value of a budget, there are varying degrees of support for the effort.  The CFO’s job is to persistently (and appropriately) seek the partnership of the CEO and it is a lot easier if the approach is well organized and documented. 

All forecasting models can be broken down into four general areas of interest, which can then be delegated to the management team for a truly collaborative discussion.  It’s always good to begin with the business structure or model and how the business is serving its clientele.  This analysis inevitably calls into play the extent of market penetration.  Next, the executive team needs to be evaluated to determine if it is managing the business model in a way that maximizes response to the market.  Finally, there are the financial factors, most notably the cash position, which are ultimately driven by the dynamic mix of the first three areas of interest.  So in summation, the CFO and CEO begin their plan by planning and discussing the:

• Business structure or model.
• Market penetration.
• Management capacity.
• Financial constraints on growth.

The CFO’s role in leading the forecasting effort is much like that of the quarterback in a football game, while the CEO is reinforcing the process as the coach.  With this analogy in mind, it is important to bring the core management team together for the initial kick-off meeting, where the CEO and CFO establish the playbook strategy:

• Deadlines and delegation of responsibilities by functional area.
• Explanation of the “Best Practices” approach to compiling the forecast.
• Evaluation and feedback.
• Refinement/precision of the scenarios and agreement on metrics.
• Signing off on the plan.
• Integrating the plan into the management accounting information system.

Obviously, large enterprises will have a greater degree of specialization in the areas of marketing and sales, operations, and finance and accounting, which means…more people dedicated to do the forecasting work.  However, if yours is a small to medium sized company; intelligent delegation is just as important.  It just may require a little more psychology to get it done.  This is where the CEO plays a big role in reinforcing the value of the collaborative effort.  In the small to medium sized company, more active participation by the marketing and sales and operations is encouraged by emphasizing:

• Ownership of the specific plan component, (e.g. sales by territory, capital acquisition budgets of assets for specific departments, and compensation levels based on attainment of targeted goals).
• Increasing confidence and trust by disclosure of relevant and sometimes sensitive financial metrics (e.g. profit sharing methodologies, equity participation strategies, and enterprise cash position).
• More intelligent participation means a more rapid end to the forecasting process.

The popularity of spreadsheet technology has resulted in its adoption across functional areas.  Because of the relatively wide spread working knowledge of spreadsheet construction, the CFO can compartmentalize the forecast model so that each component (e.g. revenue forecast, fixed assets schedule, and headcount and salary summary) can be independently developed and maintained.  Utilizing an enterprise “Best Practices” approach, each manager will develop and update the forecast data according to a framework which has been recognized by the entire team.  This approach helps to minimize:

• Individual training efforts.
• Error detection and correction.
• Compilation time.
• Time required for enterprise ratification.

This article is meant to explain the groundwork for a collaboration effort by the CFO and team of forecasting managers and as such is general in its theme.  Company size will inevitably mean greater complexity and the resources needed to develop and publish a working financial model.  At the same time, small and medium sized companies can approach the budget process with sophistication through comprehensive planning and documentation, adoption of “Best Practices”, and wise management of the team.

Written by Eric Chriss, CEO and founder of CUSTOMatrix™. He has been recognized as a national leader in the training of “Best Practices” financial modeling and continues to help companies of all sizes develop and implement their budgetary plans.

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