Flawless Financials the Financial Forecasting Online Newsletter from Minotaur Financial and David Brode March, 2005 Sent monthly to over 400 subscribers. Please pass on Flawless Financials to those in your network. To leave Flawless Financials, follow instructions at bottom. * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * This month: Operationalizing A Model: Part 1 * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * Overview In last month’s newsletter I discussed the uses of strategic modeling in an operating company. In this edition, I focus on the difficulties I’ve faced when trying to “operationalize” a strategic model. Problems 1. Tying to actuals. Once the company is operating, the controller is publishing financial statements every month and the model needs to reflect these updated numbers lest it lose credibility. I often say about modeling that it’s much easier when I can just make up numbers. Documenting an assumption and the rationale behind it is far easier than matching another data source. In fact, this is an exceedingly difficult problem in a large model, because there can be hundreds of inputs for each time period. It’s not too hard to enter the income statement and balance sheet (though there are always challenges there), but it’s harder to tie out to all the operational data. Just knowing how many customers you have or how many of a particular asset you have can be maddeningly difficult to ascertain. Often the way the operational data is captured doesn’t fit for how it’s needed in a financial modeling context. Also I have found multiple and conflicting sources for certain data, e.g. where the controller publishes one number but the engineering department publishes another. 2. Syncing to other forecasts. As a company matures, the financial model isn’t the only forecast in town: suddenly, each group has their own forecast. The network people have plans for the cell sites they are building and the capex associated with the build. The sales group has customer forecasts. The controller has budgets. These forecasts may be for the next three months or the next three years, and they are not necessarily using the same assumptions. For example, the sales forecast could assume more covered pops than the network people are planning to build. So the problem is not just how to sync to a data source that is itself constantly changing (both in results and in its technical format), but deciding which data source rules. 3. Adding detail for definitional nuances. Typically when I first build a model, I’ll use a term like “customers.” But a funny thing happens once the business begins to operate: we start to find it useful to distinguish between different types of customers, and pretty soon we wind up talking about customers who pay vs. those who were comped their initial service, waitlisted customers, customers except those on temporary leave, etc. Or maybe for cell sites it could be those sites that are physically owned or leased vs. those which have been built vs. those that are actually in service today. These measures develop because a different definition of customers can drive revenue than the one which drives capital investments, for example. One difficulty here is in finding a consistent data feed for the new definition. A second difficulty is in determining which nuances are important enough to justify a modification. Finally, there’s added complexity in defining how to forecast these different measures over time. I want the model to have good detail for credibility, but it needs to remain a model where variables can adjust as assumptions change; with too much detail you lose the value of modeling. 4. Feeding In Assumption Changes Since the strategic plan is a quantification of the company’s strategy, there needs to be a mechanism for updating the assumptions in the model. All too often I’ve found out days or weeks later about decisions that were made at the board meeting which have a material impact on model assumptions. To keep the model up to date, there needs to be a mechanism for regularly validating the assumption set. Well it’s not exactly a cliffhanger, but I’m going to save the solutions to these operationalization problems for next month’s newsletter! In the meantime, please write in if you can think of other problems that I left out of this analysis. Until next month, all the best, David Brode -- Minotaur Financial Removing Financial Issues as a Deal Roadblock * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * NEWSLETTER ARCHIVE AVAILABLE Make sure to visit the Minotaur Financial website for the Newsletter Archive at http://www.brode.net/resources/ * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * http://www.brode.net mailto:David@Brode.net 1919 14th Street, Suite 510 Boulder, CO 80302 (303) 444-3300 * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * ABOUT DAVID BRODE I’m a financial modeling specialist. Over the last fifteen years I’ve completed dozens of models and certainly thousands of versions to support corporate development, M&A, strategic planning, and debt and equity transactions. These models have raised over $1B in debt and $100M in venture capital and private equity. Over time I’ve consistently revised software tools and work processes to get the job done quickly and well. If you have a financial forecasting issue, I’d love to help. * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * (c) 2004 Minotaur Financial, All rights reserved. You are free to use material from the Flawless Financials newsletter in whole or in part, as long as you include complete attribution, including a live web site link. Please also notify me where the material will appear. The attribution should read: "By David Brode of Minotaur Financial. More articles on financial forecasting can be found at http://www.brode.net " * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * Are you struggling to convince others to do a deal which you think is a no-brainer? To discuss how you can take numbers off the table as a deal roadblock, call (303) 444-3300. I'm very accessible and glad to help. * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * DO YOU LIKE THIS NEWSLETTER? You are welcome to share this email with colleagues who would benefit from better numbers. Your feedback is always welcome and appreciated. Write in to mailto:feedback@brode.net. * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * PRIVACY POLICY: I never rent, trade, or sell my email list to anyone for any reason whatsoever. You'll never get an unsolicited email from a stranger as a result of joining this list. To SUBSCRIBE FREE to this newsletter, send an email to mailto:subscribe@brode.net. And you'll get Minotaur's Financial Forecasting White Paper in the deal. To be REMOVED from this list, send an email to mailto:remove@brode.net. (Please note that this message needs to come from the email address that originally subscribed. If you need help determining this, please email mailto:David@Brode.net.)