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Financial Acid Test for Long Range Plans and Projects |
Question
Will we reach our 3-year volume and financial goal? How reasonable and valid are our plan’s assumptions?
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Challenge
A client needed to assess how attainable their three-year projected volume and financial performance was. The challenge was to identify the weak and strong assumptions of the plan. They had identified a series of internal and external factors that they strongly believed affected their results. Furthermore, the client had clear thoughts and expectations of the factors’ interaction as well as their impact on the company’s P&L. The goal was to provide information identifying which assumptions needed to be managed more tightly to improve the credibility of their plan’s projections.
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Solution
The core of our solution approach entailed the use of a simulation model that we built using the client’s framework as well as independent forecasts for each of the factors involved. The simulation model allowed the team to run what-if scenarios, plugging in different values for their assumptions. The simulator’s foremost purpose was to assess the importance and risk that each factor had on the success of the plan. We also calculated the cost of a factor’s failure and/or poor performance. The level of attention a factor received became driven by the degree it was able to change the overall result due to a deviation from its expected level.
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Outcome
The client was able to transition from ‘’managing the P&L’’ to ‘’managing the drivers of the P&L’’ because each factor’s variance and impact on the P&L was better understood. In addition, the time to rerun a scenario was cut from one week to a few hours. The team was able to put forth very clear execution strategies for each of the different circumstances. The plan’s validation process was perceived to be very thorough and credible, and was therefore well received by the executive committee.
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