Increasing User Buy-in of Financial Forecasts

Business HandshakeLet me begin with two assumptions: first, your primary modeling tool is Microsoft Excel; second, you share model projections with others. If both these assumptions are correct, I have two secrets of success for those new to financial forecasting.

The first is that everyone who sees your forecast assumes they know more about what the modeled results should be and better understand the impact of changes than you do. That you spent countless hours constructing the model, studying company and industry trends, back-testing formulas and validating every assumption will be quickly lost in their rush to point out what to them appears to be “obvious errors”.

I frequently develop complex models generating quarterly projections of full financial statements for a three to five year horizon. Models usually involve the consolidation of multiple entities and detailed ratio analysis. A typical model has 35 to 60 variables. Every variable is contained in named cells on an assumptions tab (immediately behind the title tab). All formulas utilize the appropriate variable name rather than a cell reference or hard coding.

For those not familiar with the use of named cells in Excel, go to the File Manager icon on the Formulas tab. Additional guidance is available online. One source is http://bit.ly/18tl7OP.

Typically, a client will zero in on one or two variables, insisting (as an example) that sales growth projected in year 3 is clearly wrong! He or she is so confident of their belief that the model has likely lost significant credibility with them.

Invariably, the impact of the user’s change is not as significant as they suppose. Sticking with the sales example, changing the growth rate has no impact on earlier years. Furthermore, the effect on future income is reduced by resultant increases in the cost of goods sold, inventory carrying costs, variable expenses such as commissions and shipping, borrowing costs and so on. Finally, income taxes further reduce the bottom line impact by another 35% to 40%.

Rational discussion and logic serve no purpose in this situation. You cannot change human nature! Your goal is merely to channel it in a productive direction.

I do this by simply asking what they think the number should be. I then take them to the assumptions tab and change the offending variable to their number. The model then recalculates, eliminating any guesswork on the impact of the proposed “correction”.

Seeing is believing.

The second “secret” complements the first. Without exception, even the most complex models come down to a mere handful of key variables. Since your goal is to redirect rather than change behavior, help users focus on those that drive projected results, rather than getting bogged down in immaterial detail.

You can accomplish this by highlighting which variables have an individually material impact on the cumulative results of your forecast. Begin by deciding what the appropriate base or dependant result is. I find it is most often one of three things depending on the primary use of the model: net income, stockholders equity or the internal rate of return.

I then test every variable in isolation with a 10% unfavorable change. For example, a 20% sales increase is reduced to 18%. I note the impact of each variable on the cumulative base result. I then typically use a materiality threshold of 2% for disclosure. The less attention drawn to non-critical variables the better!

Rarely will a variable have a high correlation to the measured result. A typical scenario might be that a 10% change in each of my 35 to 60 variables produces four to six with an impact greater than 2%, with none exceeding 8%.

This sensitivity analysis is the third tab, immediately behind the variables. By quantifying and clearly presenting the impact of changes in this manner, you are inviting needed input (and therefore user buy-in), without having to debate or justify the majority of variables that will have minimal or no impact on your forecast. Users can then concentrate on achieving a comfort level with a relative handful of model inputs, saving everyone time.

As a closing note, while the focus is on the cumulative impact of variable changes, there are times and circumstances when individual period results are also important, regardless of the dollar impact. For example, loan covenant compliance is a constant requirement. If a change in an otherwise insignificant variable creates an incidence of non-compliance, the change cannot be ignored.

How I handle that situation is the subject of a future article. Here is a hint: conditional formatting!

The Fractional CFO Concept (Part 2)

Earlier this week I introduced what may have been a new concept for some small business owners and managers; the idea of fractional or part time CFO. A vacation timeshare is a useful analogy to understand how and why a part-time financial expert may be the perfect solution for your needs.

I conclude this topic with a few frequently asked questions.

  • What exactly does a CFO do, and how does that change if I use a fractional CFO?

The chief financial officer or CFO is the person primarily responsible for managing the overall financial operations of an organization. This position is responsible for planning, cash flow management, record keeping, financial reporting, etc. The only difference between a traditional CFO and a fractional CFO is the nature of their relationship to the business. While a CFO is full time officer and employee, a fractional CFO is a part-time, independent contractor. However, their duties and responsibilities are virtually identical.

  • Will I retain a fractional CFO for a one-time assignment, or will they continue to provide on-going services?

Occasionally, a client will request that that their fractional CFO provides services for a one-time, special project. The CFO will likely endeavor to accommodate all client needs. However, their primary focus will be on providing on-going fractional CFO services, including the development, implementation and monitoring of a long-term business plan. While the time allotted to this process can be adjusted and even reduced as initial objectives are met over time, it is a continuous process that typically requires some effort at least monthly and probably weekly.

  • How much should I expect to pay for my fractional CFO?

The cost of fractional CFO services are primarily determined by only two things, the number of hours spent on an account, and the billing rate of individual providing client services. Barring temporary or emergency situations, a reputable fractional CFO firm will endeavor to staff assignments using associates with skill sets and experience levels appropriate to your needs. Ultimately, they will provide the level of service you determine based on your needs and within a budget determined by you. Your schedule can vary from just a few hours per month to several days per week, and can be adjusted as future needs require. Typical clients should expect to spend from $500 to $10,000 per month, depending on the two factors.

  © 2012 by Dale R. Schmeltzle

 

The Fractional CFO Concept

The idea of fractional or part time use of a valuable resource has been around for many years. A perfect example of this concept was pioneered by the vacation real estate industry. In the 1960s, a French ski resort owner recognized few people could afford, let alone needed a resort condominium for all 52 weeks of the year.

He addressed this challenge by dividing every room into 52 separate units of time. Using the slogan “stop renting a room, buy the hotel” he launched a worldwide marketing phenomenon we now know as the time-share industry. Units were sold to different owners, each of whom purchased the full use and enjoyment of the week that best suited their schedule, and at an affordable price. If a buyer needed more than one week a year, they bought as many units as they wanted.

Other “bells and whistles” have been added through the years. Today, over 4 million American families own at least one vacation timeshare.

The concept of a fractional CFO is no different.

Most business leaders recognize the need for trained, experienced financial expertise on their management team. Many simply do not need a full time CFO. Therefore, they cannot cost justify the investment of a full time salary. Even if an owner or manager has the required skill sets, a professional CFO can likely generate a superior work product in less time.

This in turn frees up the most valuable and scarcest resource of all, TIME!

No successful entrepreneur ever launched a business with the intent of spending all day analyzing balance sheets, determining marginal profit contribution, dealing with bankers and tax accountants or addressing regulatory inquires. They launch businesses to exploit competitive advantages in their chosen field by servicing customer needs. Any time spent “working on the books” is time away from their real mission and a costly distraction from their value proposition.

Retaining a fractional or part-time CFO presents a cost effective solution customized to a business’ exact needs, budget and life cycle. The key to a successful fractional CFO relationship is to design and staff that engagement with a professional who will understand your business and address your financial needs. They must also become an integral (if part-time) member of your management team. Your fractional CFO should meet with you to tailor an affordable program to address your specific business needs. Together, you will establish a regular schedule of dedicated time to service those needs. That schedule can vary from just a few hours per month to several days per week, and can be adjusted as future needs require. The client can typically terminate a fractional CFO at any time and for any reason without incurring additional costs, just as you would if you had hired a full time employee.

On Friday, I will conclude this subject with a few frequently asked questions. Until then, please enjoy a safe and joyous 4th of July, and let us all remember the true meaning of the holiday, and the sacrifices of those who made it possible.

© 2012 by Dale R. Schmeltzle

Curiosity was Framed, Ignorance Killed the Cat

My first job after public accounting was as Director of Internal Audit for a large regional insurance company. Given free range to determine my own assignments, I immediately launched a review of the claims processing operation. As Willie Sutton would say, “That’s where the money is.”

Back then, mainframe computers housed in cold rooms that took up an entire floor were the order of the day. Reports printed on large “green-bar” paper with perforated edges, bound together between heavy cardboard covers using bendable wires.

On my second day on the job, I was flipping through a report of claim payments. It listed basic information like policy and claim number, payee, amount, dates and so forth. The report probably had 50 to 60 claims per page, and was several hundred pages long.

I spotted something strange. About every 15 or 20 pages, a claim would show a negative payment. Based on my understanding of the system, there was no logical explanation for negative numbers. I started asking questions, lots of questions!

To make a long story short, I had stumbled across an internal control weakness that allowed certain claims to be paid twice. As best I can recall, I found about $125,000 of duplicates. That was not a lot of money to a billion dollar company, even in 1978 dollars. Still, with an annual salary of $22,000, I cost-justified my first five years’ compensation the second day on the job.

My point in recalling this story is not to take you with me on a boring stroll down memory lane. OK, that is part of it, but a very small part.

My point is that other people who had worked with the claim report every day had undoubtedly noticed negative amounts before, yet had failed to follow through with a few simple questions. If they had, they might have closed the control weakness years earlier. Why?

I offer two words: human nature.

People seem to have a natural tendency to accept most things as they are. Asking questions and challenging the status quo is actually considered rude in many cultures. Sadly, it is career limiting in many corporate environments. Relax and remember what happen to the mythical cat! I heard it was a mid-level manager in a Fortune 500 company somewhere on the east coast.

That is not to suggest people are by nature lazy, apathetic or any other negative adjective. It’s just how things are.

Contrast that to Thomas Edison, who said he rarely picked up an object without wondering how he could make it better. I call that the curiosity factor. Either you have the curiosity factor, or you don’t. It cannot be taught or learned, and is seldom spoken of. Yet in many professions (including internal auditing), it is probably the single best predictor of ultimate success.

Every business desperately needs someone who will leap headfirst into operations or finances with a dedication approaching a Pit bull on a pork chop. If that is not you, go hire someone with the curiosity factor.

You will be amazed at what valuable business opportunities are waiting to be discovered just below the surface.

 

© 2011 by Dale R. Schmeltzle

Resolve To Make a Decision

Abraham Lincoln once described a general who was unwilling to make decisions under pressure as “acting like a duck that had been hit on the head.” I have never actually observed the behavior of waterfowl suffering from cranial trauma, although I once accidentally hit a duck with a stone skimmed across a frozen pond. But that was long ago and involved an entirely different part of the duck’s anatomy.

I have observed the behavior of managers making (or not making) decisions enough to conclude that the majority of problems in business are not because someone made the wrong decision, but because no one made any decision. Will Rogers summarized the risk of indecision with this, “Even if you are on the right track, you will get run over if you just sit there.”

To be sure, there are “mission critical” decisions that have the long-term potential to make or break any organization. Nevertheless, unless you are a heart surgeon or an airline pilot, most mistakes are to some extent correctable, at least within limited timeframes.

Decision making is a cognitive process involving logic, reasoning and problem solving skills. Unfortunately, each of us enters the process with preconceived biases and exhibits some degree of “decision inertia” or a reluctance to move off those biases when faced with new facts or circumstances. Business decisions can be reduced to a four-step process as illustrated in the following diagram.

The first step is to analyze the problem and identify solutions. This is largely a fact gathering exercise involving input from multiple sources and considering alternative courses of action.

It is important to differentiate between problem analysis and decision making. Although it may sound redundant, success requires the decision maker to do just that, make a decision. Theodore Roosevelt said, “In any moment of decision the best thing you can do is the right thing, the next best thing is the wrong thing, and the worst thing you can do is nothing.”

While the dreaded “paralysis of analysis” may be seen as the cause, the reality is many people, perhaps including Mr. Lincoln’s general, simply find it safer not to make decisions, even in obvious situations.

As an example, I was once responsible for opening three new offices and hiring several hundred employees, including managers with company cars. The fleet manager came to me in a panic one day. Company policy allowed employees to select their own cars. This meant they would be without cars for several weeks. I calmly asked what the choices were, and immediately ordered 15 identical cars. She asked how I knew they would like the cars. The truth was I neither knew nor cared! Since a decision was needed, I made it. The managers arrived on their first day to find a fleet of new cars waiting on the front row. As expected, no one died.

Investment professionals report there is a tendency to “sell winners too quickly and hold on to losers too long.” The reason we hold on to losers is primarily a subconscious reluctance to admit mistakes. Your focus should be on early detection of challenges and the identification and implementation of appropriate corrective action. American author Arnold H. Glasow put it this way, “One of the tests of leadership is the ability to recognize a problem before it becomes an emergency.” Be willing to make changes if indicated by the monitoring process, even at the risk of exposing your mistakes. Tony Robbins put it this way, “Stay committed to your decisions; but stay flexible in your approach.”

Accountability is paramount to a successful decision making process. If you want credit for your accomplishments, be willing to take responsibility for mistakes. Have enough confidence to say, “I was wrong, now let’s fix it.” Remember, your goal is not to avoid all mistakes. Simply doing nothing would accomplish that. Your goal is to minimize the impact of missteps and learn from them.

I end with this comment by Peter Drucker, management consultant and author of 39 books. He said, “Whenever you see a successful business, someone once made a courageous decision.”

P.S. My apologies to PETA for the whole duck by the frozen pond rock skimming long time ago hit in the anatomy thing.

© 2011 by Dale R. Schmeltzle

Internet Marketing for Small Business-Part 1

Businesses have long used the Internet as a one-way communication channel to inform and educate customers about their products, prices, locations and hours. One-way communication is no longer sufficient, even for small businesses.

Here are some ideas to expand the traditional and limited marketing role of the Internet for your business without exceeding your budget limitations.

To increase sales and improve service, businesses should offer interactive capabilities for customers to place orders, make inquiries, request bids, and download product catalogs and service manuals. Many businesses now use the Internet to allow patients and clients to book or change their own appointments. It can be a very useful tool to help reduce lost revenue by sending an email or text message to confirm scheduled appointments. Online customer access need not be a cost prohibitive luxury viable only for “big box” retailers and national catalog companies. Multiple studies confirm it is a necessity for many types of small businesses. For example:

  • In an October 18, 2010 article titled A Cheery Holiday Forecast, Thad Rueter of the Internet Retailer reported on the results of a survey by The National Retail Federation. The survey found 44% of consumers ages 18 and above planned to shop online during the 2010 Christmas season. Of consumers who earned at least $50,000, 55% would shop online. Perhaps more telling of emerging trends, 27% of U.S. consumers who own a smartphone were expected to use it to research and buy products.
  • An article titled 8 Ways Fullservice Operators Can Build Sales was published by the National Restaurant Association in their 2010 Restaurant Industry Outlook Forecast. It reported that 41% of consumers sur­veyed said they choose new restaurants because of e-mail promotions. Close to 30% said they would likely opt to receive e-mail notification of daily specials. Another 56% visit restaurant websites, 54% view restaurant menus, 54% use the Internet to learn about restaurants they have not patronized while 25% have made reservations online.

If your business uses or is considering using gift cards, look at Panera Bread and McAlister’s Deli websites. Both offer the ability to sell, recharge and check card balances online, a real customer convenience. Providing printable coupons online is an even easier customer benefit you can offer.

On Friday, I will discuss email marketing and surveys as a marketing tool for your business.

Word-of-Mouth Has Gone Global-Part 6

Even if you use outside assistance to design and develop your social media platforms, generating fresh content remains your responsibility. Quite simply, no one knows more about your business than you do. Demonstrate that fact by sharing the body of material you accumulated in becoming a recognized expert. However, resist the temptation to share it all at once. Building a following in cyberspace is a marathon, not a sprint. As with blogging, develop a consistent conversational style and reporting pattern.

Here are a few pointers to get the most social media mileage out of your content and maximize its effectiveness:

  • If you have a document with multiple bullet points, break each into a separate post.
  • End each post by briefly telling readers what to expect in your next entry, and when it will be published.
  • Most content can be reformatted and repurposed as appropriate. For example, press releases and articles can be posted on Facebook and other sites as well as your blog. A 1,200-word article can provide a lot of content at 140 characters per tweet. Facebook status update fields have a 420-character limit. LinkedIn has a 700-character limit. Other social networks each have similar limits. With a little practice, you will probably find, as I did, that communicating your message within those limits is usually quite easy to accomplish.
  • You can supplement your original content with relevant quotes and articles written by others, or simply pass along helpful advice and suggestions you come across in your daily business. Numerous websites provide extensive quotes on every business subject. One example is www.brainyquote.com.
  • Timely material can be re-circulated or retweeted periodically.
  • Unless supporting a particular point of view is a deliberate part of your branding and marketing strategy, avoid expressing religious and political opinions or supporting controversial agendas that might alienate potential customers.
  • Have several people proofread and review your content. Check your pride of authorship at the door. Do not be afraid to use someone who will look you in the eye and tell you if you have “an ugly baby.” My son’s unbridled desire to correct his father makes him an extremely effective proofreader. Another friend’s frank comments often bruise my ego. I typically stew about them for a day, and then incorporate most of his suggestions.
  • No one cares about trivial matters like what you ate for dinner unless of course you are a food critic or Kim Kardashian. Maintain an air of business decorum and professionalism in your social media platforms.
  • There are numerous social networking tools available free online to help you monitor and simultaneously update multiple sites such as Twitter, Facebook and LinkedIn. Those tools currently include Tweetdeck, Hootsuite and Ping.fm. Most also provide upgraded versions for a fee. It is a truism of any free-market system that whenever a product or service becomes an undifferentiated commodity, those offering it can only compete on price. It is inevitable in the fast-paced world of social media that as soon as someone develops a new Internet-based service, someone else will figure out how to make money by offering it free. Therefore, periodically ask your social media active friends and network contacts whether they are aware of any new tools.
  • Finally, the ultimate purpose of social media marketing is to build business relationships. All relationships require two-way communication. Do not get so consumed in posting content that you neglect to respond to direct messages or DMs. Try to establish a dedicated time every day to answer your DMs.

I will conclude this series about social media marketing on Monday with some final thoughts. Enjoy your weekend.

Word of Mouth Has Gone Global

Through your efforts to become a recognized expert in your field, you will accumulate an ever-growing body of material (articles, papers, program notes, PowerPoint presentations, research material, etc.) that can serve as content for the next group of ideas.

Social media marketing is all the rage. Embattled TV star Charlie Sheen set a Guinness world record on March 2, 2011. He reached 1 million Twitter followers in just 25 hours and 17 minutes. It took Mr. Sheen four days to reach 2 million followers. It remains to be seen whether he will catch Lady Gaga, who leads the pack with approximately 10 million Twitter followers.

Social media has influenced national elections and at least one guest host selection for Saturday Night Live. Viewers of Super Bowl XLV learned the Chevrolet Cruze can now read Facebook newsfeed content in real-time, affording drivers “the ability to send status updates and stay connected to social platforms.” Exactly what those other platforms are is unclear as of this writing. However, speculation is that it will likely include Twitter.

Moreover, as events of recent years have proved, totalitarian governments in many parts of the world think it is easier to control civil unrest online than in their streets. The first casualties of politically embarrassing protests are often these same social networking sites. Egyptian activist and Google executive Wael Ghonim was a leader of the early 2011 uprising that toppled President Hosni Mubarak. He told CNN, “I want to meet Mark Zuckerberg one day and thank him. I’m talking on behalf of Egypt. This revolution started online. This revolution started on Facebook.” I was fascinated to learn that the U.S. State Department starting tweeting in Arabic during the crisis.

The socio-economic and political impact of social media is a source of inspiration for some and fear for others. The statistics are impressive for all.

Let me provide a working definition of the term. Social media marketing relies on Internet platforms to provide content that attracts attention and encourages readers to share your message with their social network. Some of the more popular platforms are:

  1. Facebook
  2. Foursquare
  3. LinkedIn
  4. MySpace
  5. Twitter
  6. YouTube

Each has a somewhat distinctive set of demographics such as average age, gender, education level, membership size, U.S. and global traffic volume, length of average visit and so on. Visit www.alexa.com to find the best matches for your target market.

For the rest of this week, I will be offering suggestions to use social media marketing as a low-cost, effective marketing aid for your business.

More Thoughts on Business Cards

Business management columnist Dale Dauten once sarcastically remarked, “It’s called a pen. It’s like a printer hooked straight to my brain.” In a world where it may now be theoretically possible to live your entire life without ever uttering a word or holding a pen, it is easy to forget that communication also includes non-electronic channels. I will say again that effective business communication means conveying your message confidently, concisely and consistently; it is not restricted to any specific medium.

So today, I will revisit a decidedly low tech and often overlooked subject. A few weeks ago, I gave suggestions on how to use business cards more effectively. I will offer a few more tips to increase their effectiveness while saving you money, two very desirable characteristics.

The picture at the beginning of this blog post is actually my QR or Quick Response Code. A QR Code is a two-dimensional barcode consisting of black modules arranged on a square pattern on a white background. Adding it to your business card makes it readable by QR barcode readers and camera phones. This may be a desirable feature to consider, especially if you are in a technical field. You can create a free QR Code at numerous websites including http://snapmyinfo.com/blog/how-to-create-a-business-card-qr-code/

Next, decide exactly how you want your card to look, the information to be included, the color, fonts, logo, etc. However, do not be too anxious to hit the “Place Order” button. Save the design and put it aside for a few days. Solicit input from others. Double check your spelling and revisit your design before making a final decision. Everyone wants the perfect card. Nevertheless, reordering new cards because you suddenly realize the red font does not show well on the black background or that your logo is too large can get expensive. I know. I have made both those mistakes and several others. I am on the fifth or sixth version of my card and plan at least one more “final” change. Learn from my mistake. As a further precaution, place your initial order for the minimum quantity. You can always reorder if you are satisfied with the finished product.

Finally, remember business cards are only one of many pieces of paper your business uses every day. You also distribute checks, invoices, envelopes, statements, proposals, receipts, letterhead, note pads, thank-you notes and so on. Make sure you are getting the full promotional value from every document. Tastefully display your company name, logo and marketing tag line on each document.

Just Ask!

Today’s small business marketing advice is very simple. It can be summed up in just two words: Just Ask!

As simple as it may sound, and whatever your reward policy is, you will get far more referrals if you ask for them than if you just wait for them to come to you. The same thing goes for customer referrals. The key of course is to be tactful and polite, and not to appear overly assertive.

Adding a brief description of your ideal referral to the end of your “10-second speech” will help others provide the type of referrals you are looking for. For example, a benefits consultant might add, “The ideal referral for me is a small business with 10 or more employees.”

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