The term financial planning model (FPM) doesn’t likely conjure up much emotion and, by definition, it may even sound a little boring: “A financial planning model is simply a tool that’s built in Excel to forecast a business’ financial performance into the future. The forecast is typically based on the company’s historical performance and assumptions about the future”. It includes an income statement and typically a balance sheet, cash flow statement, and supporting schedules.
For me a FPM has never been boring! It’s actually been, hands down, one of the most valuable strategic tools I’ve used in planning and operating a fast paced business in a dynamic changing industry. To be clear a FPM does not replace establishing a company’s vision and key objectives, but having a living evolving FPM will be instrumental in accomplishing both.
Before I explain more about the scope and benefits of a FPM I’d like to mention three key emotions (yup emotions) the FPM consistently created for me:
Excitement. Our FPM ‘revved’ me up about the future. Applying various ‘what ifs’ to the assumptions and seeing the potential results that could be accomplished in the next 1-3 years was always exhilarating for me. I found the more aggressive ‘what ifs’ also more often than not became the realities of the eventual Plan.
Calmness. Our FPM definitely helped me sleep better at night. Because we had such a detailed Plan it made making most big decisions and the necessary pivots a lot easier and less stressful.
Satisfaction. To have a Plan and then help our team work the Plan to consistently achieve the projected results every year was tremendously satisfying.
To provide some background the FPM in our last operating company was comprised of:
16 revenue assumptions,
17 expense assumptions,
12 cash flow and other assumptions, plus
A comprehensive employee worksheet.
Over a period of time we chose to present a rolling 8 year financial summary of the business (4 years of historical actuals and a 4 year forecast including the current fiscal year and three years forward). We chose to forecast on a monthly basis for the current fiscal and project future years by quarterly anticipated results. We also established and tracked 10 key performance indicators (KPIs) that were super helpful for internal decision-making and allowed us to compare our results to industry standard metrics.
Some FPM benefits:
Revenue and Growth – Our assumptions included pricing by category, unit booking velocity by category, upsells, discounts, attrition/retention, planned price changes, and foreign exchange fluctuations. Accurately forecasting revenue was core to everything we did and to almost every big decision we made so the ability to do a variety of ‘what ifs’ and ‘reality checks’ via our FPM dramatically improved the probability of achieving both our short term and long-term goals. Accurately forecasting our revenue allowed us to become a predictable company and, culturally, to be a company that delivered on the things we said we would do.
Expenses – Expense assumptions are quite self-explanatory so I won’t detail each here. In the expense area we really zeroed in on gross margin trends and wanted to ensure a high degree of accuracy in forecasting the 4-5 key expense categories that significantly impacted EBITDA.
Employee and resource planning – Our personnel was the company’s most important asset and, by far, our largest expense. The quality, motivation, and retention of our people were critical to all facets of our success (revenue growth, product development, customer implementation, support, and retention). So we paid a lot of attention to compensation planning for existing employees and contractors including commission/bonus plans, salary increases, and benefits. We also used the FPM in conjunction with planning the number and timing of all new hires – this was really helpful for the various departmental leaders and their recruiting process.
Cash flows – The FPM is extremely helpful for forecasting cash flows and projecting ending cash at a period in time. Whether we planned for potential new products, to notch up our growth rate, change pricing models, or add incremental personnel beyond the plan we could easily forecast the benefits and implications to cash for every scenario. As an example, when we originally launched the business our fees were based on about 50% one-time and 50% monthly SaaS recurring fees. A few years in we felt it would be better for our customers, and our long term results, to change our fee model to about 90% SaaS recurring revenue. We were able to project and more easily manage the short-term drain on cash while realizing the longer-term benefits from the change to the pricing model.
KPIs – Some of the most important indicators and trends for us were bookings, annual recurring revenue (ARR), revenue per customer, cost of customer acquisition (CAC), customer retention, and revenue per employee. Closely tracking these allowed us to analyze monthly trends and pivot faster whenever we needed to. We also used our KPIs to compare and aspire to achieve results similar to recognized leaders and standards in our industry.
Internal collaboration and buy in – We brought our leadership team members into the annual planning process and whenever significant adjustments were needed in the current year. This process organically improved teamwork and communication in decision making -- especially at times that involved changes to the timeframe of adding personnel or taking on other additional costs. We also held quarterly all team meet ups that included comparing our actual growth, retention, and profit to our FPM -- I believe that sharing our Plan and presenting both our operational goals and the financial roadmap for the future instilled confidence across the team and minimized employee attrition.
Bankers and investors – Having a detailed financial plan and roadmap, the insights to pinpoint and illustrate our KPIs, and being able to articulate various trends, strengths, challenges, and opportunities all made for more enjoyable meetings with bankers, financiers, and investors. Being armed with this type of information does not necessarily mean we’d agree to do business together, but it always felt good to leave meetings with those folks knowing that they knew we operated a well-planned professional company. Thanks in large part to our FPM!
I hope this article helps you in your pursuit of operational excellence. Feel free to reach out and connect with me on LinkedIn or contact me directly at 604-312-4050 / dave@performaxgroup.com
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