Richard Reinderhoff

Richard Reinderhoff is a CFO/FP&A expert, turned advisor. He has worked for corporations from different continents, at local BU and holding level. His experience in an emerging market has developed him into a strategic finance business partner.

Richard uses his strengths to develop learning management teams, improve capital allocation decision-making, and eliminate misperceptions on strategy. He is a specialist in Zero-Based Budgeting and promotor of FP&A, as the next frontier in finance business partnering.

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Rolling Forecast – Case Study: A Review Of Management

By Richard Reinderhoff, CFO/FP&A Expert and Independent Adviser

A rolling forecast is not only about seeing the future unravel, but a constant evaluation of the management team to see if they are able to adjust their operations on time. Without it, any form of strategic planning becomes useless.

Below you find a real-life case. Step-by-step each question will be briefly discussed. It is about a foreign business unit, which was part of a large European corporation, on the brink of a crisis.

1. What is expected for the year to come?

You want the rolling forecast to have the basics. This means there should be an overview of the budget: Budget (n), where “(n)” is the actual year, next to the actuals of previous years, Year (n-1) and (n-2). 

In this overview, you see that the “year-to-date” numbers by management are optimistic. The plan was approved (sales target 43,0 million), meaning that the executive team knows how the management team will realise this growth scenario, in the last 2 quarters of the year. 

 

2. Will they hit the target?

Next, you have the “year-to-date actuals” forecast. The local management team might want to see month-by-month numbers, to manage the sales force/sales division. As an executive team, you don’t want to start micro-managing a local business (you hired a country manager, remember). That’s why the budget consists of YTD numbers.

The first month was better than budget, pushing the YE (December) up to 43,4 million. Yet, the following months the business turned sour. What has been happening?

3. What is management expecting, short term?

You want to know if the management team is focussed and if the quality of the forecast is adequate, to achieve the quarterly results.

You see repeatedly the first month being overly optimistic forecasted by the management team: YTD 6,2 expected in February, YTD 5,3 realised; YTD 8,9 expected in March, YTD 7,1 realised; YTD 11,1 expected in April, YTD 10,1 realised. Is this just a bad quarter and what are their plans to recover lost sales? Or are they ‘wishing’ things will turn out for the best?

4. What is management expecting, long term?

A strategist looks just a little bit further. With a 13 months(!) rolling forecast you can get the next month projected twice! Near the monthly close, the management team has to forecast coming month revenues, based on their order book or some kind of sales projection. In addition, the same people should forecast the same coming month, but 1 year ahead. “Business-as-usual” or is there a something on the horizon?

YTD Februari, March and April of the actual year are the same as the YTD months of the forecasted year, 6,2, 8,9 and 11,1 million. The management team is thinking “business-as-usual”. 

(Note: The YTD Actual of January (3,4), changed in the forecasted year to 2,5 million. This was an unwitting mistake, yet explained because actual YTD sales had dropped 0,9 million in February (from 6,2 to 5,3 million). This kind of planning should actually always occur, but some executives don’t want to see reality, that quickly.)

5. How will the business evolve?

Any trend should appear here, the forecasted 12 months (FC12). It shows the expectations the management team has about the evolution of the industry and/or the commercial impact of operational problems, eg. out-of-stock, recall, strikes. It presents the foundation for the next business plan, hence no surprises anymore.

Each month the business is loosing a million or more in sales and the local management team isn’t seeing any improvement, thus not acting. This confirms that  the management team is ‘wishing’ for a better future. Is the business loosing market share? Or is there another crisis? 

6. If action is required, can management do it?

The rolling forecast gives the executive team the opportunity to discuss with the management team what is happening and to decide on the best way forward. They can coach the management team through strategic choices and financial decision making.

In this case, there was another crisis and the executive team intervened. The country manager was effectively ousted and the thirty-something finance director and sales manager were put in charge. The executive team (approving their monthly purchase orders, of course) accepted the turnaround plan writing overnight by the finance director, and their re-forecast of May to YTD (Decembre) 21,2, down from 39,7 million.

7. Is the problem being solved?

The decisions of the executive team and the actions of the management team will appear in the rolling forecast. Again, short term predictions, YE (December) stability, and solid long term outlook (FC12). 

The YTD monthly sales now are higher than forecasted, several months in a row. The YE improved too. Also the FC12 in August seemed more realistic (22,7, from 16,9 million), supported with 1 year ahead forecasts justifiably being lower. This gave the executive team the option to sell the business.

 
Lessons learned: Look outside the reporting deck!

The local finance director foresaw the downturn. He had been looking at the local accounting numbers, without all the reporting contingencies and reserves. In addition, he saw that inventory of their (worldwide) suppliers was growing fast, according to Bloomberg. This indicated a general slowdown in the segment. Fueled with ‘bad’ management, it was a crisis in the making. The turnaround plan focussed on expanding into another segment: fewer volume sales, yet solid profits.

Above were the key-questions related to Sales. You should also have a rolling forecast of the Operational Profit (OP). This allows the executive team to monitor what management is doing to improve operations (from COGS to overhead). Depending on the industry, add an Order book rolling forecast. To complete the monthly forecast executive deck, add a quarterly overview. In this way, you can have OP/Sales (%), which is relevant to all publicly held companies.

Even with the best forecast at hand, always look outside the reporting deck. Each step generates different questions. Talk to the management team. Remember, a rolling forecast means continually reviewing the (non-)actions of the management team and adjust operations in accordance with the business focus. A rolling forecast is one of the best first steps towards having an agile business culture.

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Strategic Planning is about ‘Talks & Figures’

By Richard Reinderhoff, CFO/FP&A Expert and Independent Adviser

A ‘financial’ strategist is a strategist first, and a financial second. For decades financials have been applying solutions to become a strategic business partner for the C-suite, from financial engineering and tax planning, to centralising (global) operations and deep analytics today. To avoid drilling deeper and still find nothing, reverse engineering the strategic role of the financial will show another route to be of value and increase the yield on IRR or profits with double digits… 

Reality check

If the aim of CFO’s and FD’s is to improve the decision-making process by the C-suite, meaning add value to the business, accounting and compliance aren't helping this quest. In fact, if you read the report by American Institute of CPAs (AICPA) and the Chartered Institute of Management Accountants (CIMA), Joining the Dots: Decision Making for a New Era, you’ll be in shock:

  • 80% of respondents admit that their organisation used the flawed information to make a strategic decision at least once in the last three years. One-third (32%) of respondents say big data has made things worse, not better…”
  • “72% of companies have had at least one strategic initiative fail in the last three years because of delays in decision-making, while 42% say they have lost competitive advantage because they have been slower to make decisions than more agile competitors.”

It is all about information, yet more details or more of the same data will give you the same answers, only in more detail or at a higher spend (Capex). The trick is to reverse the direction the financial is looking: from ‘stargazing into a black hole’ to ‘storytelling based on facts’. For this to happen, the strategy of the business needs to be placed into the ‘accounting’ systems. 

A simplified example will be used to show, how this ‘street smart’ solution was encountered (step 1) and how it is set-up (step 2).

Step 1. Talk to Sales & Operations

A strategy is often a group of plans, where the numbers disappear in PowerPoint presentations, Excel sheets or BI software. Many financials are hooked by their screens, yet the story in the plans is ‘lost in translation’. 

For example, what does the following overview tell you?

Not much, it just shows you the composition of spending, not the strategic intent. As a board member, you might even be tempted to reduce Consultancy fees and Temps, as part of a company-wide ‘savings initiative’ as a response to market pressures.

The first step to increasing your understanding is to talk to Sales & Operations and ask what drives and blocks their business. For the same example, the “Accounts” have been decomposed and reshuffled into the “Business Drivers”, it shows how each business is planning to be developed. 

When the result is lagging, which question will you ask now?

Of course, as a board member, you will ask where and why performance is lagging. This is how the quality of the decision is increased, avoiding ‘one size fits all’ solutions. And normally, it’s the financials that should have provided the CEO, CFO or GM with the right answer.

  • In a real case, 14 companies worldwide were managed based on these kinds of expense reports, which built up into Return On Capital Employed (ROCE) and Value Added ratios. This was also enough for a local Finance Director to manage the expenses until the business focus changed from selling ‘bulk’ to ‘custom build’. Now, with a highly segmented market approach, a cost management system had to be devised to meet this differentiation and his reporting needs, meaning he had to get involved with Sales & Operations and monitor each segment.

Step 2. Implement Project Accounting

As a financial, you have talked to Sales & Operation (managers, directors, and global VP’s) and they have given you a jointly agreed list of key “business drivers” for each market. This list should match their business plans or strategy. One problem, there are no such descriptions in the Chart of Accounts or as Cost Centres. Here enters project accounting. 

What is a project? Basically, it is a sequential flow of various tasks. Each project task can contain any kind of spending, following the Chart of Accounts, and different ‘Cost Centres’ can book on a project activity, when working (or purchasing) together.

Standard project: 

Within project management, each project task or activity is called a Work-Breakdown-Structure (WBS), with a WBS-description and WBS-number. To transform project accounting into a strategy storyboard, you give each project task a WBS-description of a “business driver”, and have a term which lasts e.g. 20 years or more. Now the strategy is in the accounting system!

Strategy storyboard: 

The only instruction you have to give to the budget owners is that their assistant books each transaction and allocation with one additional code: the WBS-number, which is given by the budget owner and related to one of the business drivers. 

Now that you have the strategy translated into a storyboard in your accounting system and amount are being booked, this is what you get:

  1. The local manager will get a report enabling him/her to tell the strategic story to the regional director.
  2. The regional director can follow the role-out and effectiveness of different strategies across the region, and explain and advise the global VP where and how best to allocate or reduce spend, going forward.
  3. Global VP’s can present a ‘Use-of-Funds’ overview to their CEO, telling the real strategic story on how the money was used by their business (versus strategic intent) and which additional initiatives were taken to improve performance.
  4. The CEO will be able to match the initial detailed ‘Use-of-Funds’ overview (= the strategic plan or Pitchbook) presented to boards and investors, with the quarterly updated ‘Use-of-Funds’ overviews, to defend any change (or not) in business focus and actions are taken on major events impacting the company.
  5. Now boards can constructively participate in discussing and making the strategy work, without the need to just trust the PowerPoint of the CEO or worry about the report of their Audit Committee.

Project accounting has more reporting advantages, e.g. it ‘overwrites’ / no cross-border limits, bookings can be split between different WBS-numbers, and various consolidation hierarchies possible.

  • In another real case, around 8 different Marketing Managers each had their marketing plan translated and linked to business drivers defined by their own regional Marketing Director. The local FP&A specialist applied project accounting to all these plans and reporting needs. As a consequence, finance stopped receiving inquiries from Marketing Directors controlling the spending of their Marketing Manager, and the Marketing Managers could deviate from global ‘reduction initiatives’, securing their prioritised spend and meet or exceed their targets.

How does this increase the yield with double digits? Re-allocation of Capital!

A company using a traditional business planning method will learn quickly. After management sees where the money really went into and noticing they spent less time understanding the numbers, they will start to permanently reduce spend on non-value added activities and fund only the best new opportunities. 

Those companies familiar with Beyond Budgeting, Driver-Based Planning, or (strategic) Zero-Based Budgeting, will immediately see the real advantages:

  • No strategic initiative will be wasted (= effectiveness of capital).
  • The allocation of capital can easily be prioritised and changed in accordance with the business environment (= market leadership).
  • Strategic changes will not be hindered by the planning cycle (= transparency and agility).
  • Changing KPI’s will result in faster solution finding and best-practices (= cost savings).
  • Re-assigning people to value-added activities increases motivation (= retention of talent).
  • Business focus, growth and development will be watched closely by boards (= continuity).
  • M&A must show where the synergy will be (or is) happening (= accountability, goodwill, impairment). 

The increase in returns comes from the effective execution of the strategy and adapting it in accordance with the business environment. By linking the strategy with accounting, and not the other way around(!), project accounting is writing the real success story, every month!

Epilogue: Strategic Planning is about ‘talks & figures’

Independent of the accounting, ERP or BI system installed, using project accounting can turbocharge any financial into a strategic business partner without the need for any significant investment. When FP&A is placed within this bigger picture, the link to strategic planning becomes evident. By translating the strategic intent of the company into business drivers made visible through the ‘use-of-funds’, the execution of the strategy becomes fact-based, transparent and verifiable: ‘talks & figures’. Just think about it, and add real value to your role and your company. 

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Breakpoints in Forecasting

By Richard Reinderhoff, CFO/FP&A Expert and Independent Adviser

Sometimes, what you forecast needs to change dramatically, due to e.g. market disruption or internal changes. You also might not monitor every business the same way, because each might be in different development stage or ´situation´. By looking at the company itself, but also possible (management) crises, you can determine what the focus of the forecast should be. 

A breakpoint is a point of discontinuity, change, or where things simply stop working. Below are three situations which can ‘make or break’ the forecast. 

1. Full Forecasting

Investing in only forecasting the top-line of the P&L is flawed from the beginning.  It will always be a partial view of reality.

  • At the start of a company, funding is used to initiate the business and to get sales of the ground. If sales are lagging, more funding is needed. This means a longer period of spending. Sales take place later and a higher expense, hence the ROI is suddenly significantly lowered. Someone once wrote, that as an investor you look for very high returns, because it takes twice as long, and it is half as what was expected.
  • Imagine distribution within a region of countries. An out-of-stock situation might have consequences for some countries, but not all. Those countries which do suffer, might increase their marketing spend to regain market share. Overtime at the factory increases costs. Think transfer pricing.

What are you forecasting? There is always a priority when forecasting: Competition (Sales or Assets), Costs (Opex or Capex), or Cash (OP or FCF). Continuously forecasting both P&L and Balance sheet seems valid, and it provides basic input for risk management.

2. No Management Risk

The financial results depend on the decisions and actions taken by management. They are in ‘control’. Many symptoms are part of daily business, which could identify (future) problems with management. 

  • Is the business a one-man show? Does the board participate? How balanced is the top team? Any Non-Executive Directors, as ‘criticasters’ and trouble shooter?
  • Is the CFO visible and present? Does all financial information arrive ‘well’ at the top? 
  • How is the company dealing with change? Any strong outside pressure from peers or ´markets´?
  • How about ethics, social responsibility, or legal issues?
  • Cheap credit, used to sustain the business or to grow exponentially? Management talking about a major project to ‘save’ the company?
  • Are financial indicators becoming weak? Is any accounting ‘work-around’ solutions being promoted?
  • Or, flashy offices, growing customer complaints, staff (and talent) leaving…

What are you forecasting? Here forecasting is about the going concern, without ‘looking’ at the numbers. As a risk it might be called “PR risk” or “succession problem”; that is when someone stops assuming things are in working order. 

3. Portfolio complexity

For lack of a better definition, ‘portfolio complexity’ refers to independent ‘systems’ influencing each other, e.g.: 

  • Carve-out and restructuring: the problem of splitting-up the shared services;
  • M&A: either to access new markets, or to use one’s overcapacity in people and assets;
  • Industry decline and profit margin: pessimism due to consolidations and foreclosures.
  • Regulation and disruption: usage, relevance and the value of intangible assets.

Add, circular economy, PPP investments, or today’s corporations, and forecasting works only if it is a joint activity. 

What are you forecasting? Nothing. In hindsight, this is about planning the future. Here it is about timing, or provisions, contingencies, and restructuring reserves, and how to plan for it. 

These three situations can ‘make or break’ any forecast. It is normal for risk management to be involved and partner with FP&A. Risk management as an overview (the short version) shows: (a) risks & opportunities, (b) level of importance (high, medium, low), and (c) the financial impact. Having one for the running year, and one for the long-range forecast (LRF), is or should be normal business practice bringing balance in any presented forecast.

The article was first published in Unit 4 Prevero Blog

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How Much Bias Is in Your Forecast?

By Richard Reinderhoff, CFO/FP&A Expert and Independent Adviser

Being critical of one’s own work, is even more important for the financial doing the forecast. A forecaster will undoubtedly have his or her bias and blind spots. However, some can be avoided by looking at the forecast itself, and some by looking at person doing the forecast. The aim here is to create deeper awareness of ‘forecasting’ by presenting some structural elements.

The Forecast

Forecasting is about understanding the past, to project the future. This process of ‘time’ can be reconstructed as follows:

This picture raises at least the following of questions:

  1. What is the causality between each stage? 
  2. How significant is this relation?
  3. Which actions are planned or should be taken ‘today’?
  4. How far in time will these actions reach?
  5. What else will influence each future stage? 

By layering this model of ‘time’, a comprehensive ‘universe of the forecaster’ is created.

It has three levels:

  • A system level. E.g. events like economic trends, social changes, geopolitical forces or disruption generating a similar impact on competitor and related companies. 
  • A process level. E.g. changes in the supply chain, marketing or organisational directly changing the (financial) numbers. 
  • A ‘factual’ level. E.g. events occur, changing the future, and management makes decisions trying to manage this ‘future’. 

Now the previous questions become more meaningful. The forecaster can bring add content from these of these levels. However, the forecaster must now acknowledge, that what management decides, impacts the forecast directly. Understanding management and interpreting the decisions they make become a significant influence on the forecast… and the forecaster.

Management

Management holds a pivotal point, between ‘yesterday’ and ‘tomorrow’. Management is there to make sure profit is made. However, when over time a business is not making a profit, it is either in the wrong business, or it is suffering from poor management. In both cases, management didn’t change its business focus on time. Keeping this extreme case in mind helps to at least classify the decision management makes ‘today’, e.g.:

  1. ‘Head in the sand’ and hope ‘it’ will disappear.
  2. Evasive action: e.g. delay reporting to higher management, delegate to other department, organise ‘around’ the problem, putting out fires.
  3. Short term solution: e.g. discounts, returns, spending cuts, management change.
  4. Initiate business change: e.g. market research, product development, change business focus, M&A, divest.

There are libraries full on failed and successful business decisions and strategic choices. It is up to the forecaster to judge the impact of these decisions and choices. Too much ‘imagination’, and the forecast becomes speculative. Too much copying management expectation, and ‘an unknown’ risk is created.

The Forecaster

Last, but surely not least, the forecaster. The three levels of the ‘universe of the forecaster’ also relate directly to the person doing the forecast:

  1. Is there the ability to tell the story: from processing data (factual level) and generating information (process level), to providing knowledge and insights (system level)?
  2. Is there enough business acumen into the understanding of the organisational impact, including the impact from unrelated industries and markets, both being potential sources of competition and disruption?
  3. Is one self-aware of limits and blind spots, e.g. from the personal background and professional experience?

Forecasting is an iterative process, and the forecaster is continuously learning from ‘mistakes’. Experience from working in various industries, companies, or cultures accelerates this learning curve. The following overview might inspire to improve the forecasting.

Bias can have many sources, e.g. education, upbringing, professional drive, peer pressure. These elements also create (mis)perceptions. Where bias often cannot be solved, misperception can. Using the ‘universe of the forecaster’ can help identify possible misperceptions. Open communication, like (cross-functional) teamwork and discussions, and fact-finding, like root-cause analysis, BI or statistical models, can take away many misperceptions and improve the quality of the story behind the numbers.

The article was first published in Unit 4 Prevero Blog

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Talking to Marketing… about spend!

By Richard Reinderhoff, CFO/FP&A Expert and Independent Adviser

For most marketing managers doing the annual budget is a bore or waste of time. With most transactional services outsourced and financial management centralised in the home country of the company, local financials spend more and more time with planning, budgeting and forecasting. It’s the opportunity for financials to start business partnering with marketing managers and senior management. The following two tricks have been tested and proven valuable for both the financials, marketeers and executive management, when business partnering got introduced.

Trick 1: Understanding strategic choice 

As a financial you can always ask the ‘difficult’ questions. Sitting down with the marketing manager is often seen as a welcomed gesture. Using the follow graph will give the financial great input on the market and what the budget is expected to do.

This graph helps explore the strategic choice of the marketing manager.

  • How many of the users are buying your product to solve their problem, a product they know exists? E.g. presently around 40% ‘market penetration’. 
  • How many people know your product exists for their problem? E.g. presently around 80% ‘market development’. 

Now the financial can start to discuss and understand the chosen strategic direction, the desired budget and the expected sales. With knowledge on what drives sales and where the marketing manager plans to invest, the next step can be made.

Trick 2: Understanding spending levels

The financial must also dig deeper into this budget, to understand what the company is getting for each dollar spend, the ROI. Depending on the industry, financial projections (sales and budget) for the coming 3 years, for each product, would provide enough information. In addition, within the corporate environment everybody knows there will be spending cuts, somewhere during the year. It is good sportsmanship when the financial can also prepare the marketing manager (well) in advance. 

  • To understand the full budget, start by asking the sales outcome at 50%, 80% and 100% of the requested budget, for the coming 3 years. The marketing manager will start to prioritise the spending plan accordingly and think about the effectiveness of each planned action and investment for the coming years. 

As a finance business partner, you learned about the effectiveness of the planned marketing efforts and at the same time prepared the marketing manager for ‘possible’ spending cuts. 

  • Next, discuss with the marketing manager what would happen to the sales, if there is no budget at all: zero spend. Perhaps sales will stop immediately, perhaps it might take years for sales to drop (think e.g. patents related products or subscription-based business models). 

The financials will be able to understand what the first 50% of the budget really is worth in sales, and how much is based on different forms of ‘loyalty’. 

Do this for each product in the portfolio and the financial can identify where the company will achieve its highest ROI. With disruption happening in every segment of the economy, the financial just also helped prepare the CEO, in case e.g. a product needs to be dropped, to increase business performance.

These two tricks make budget talks a little more fun for the marketing managers, while obtaining the needed information for today’s finance business partner to support business planning and decision making. It also generates a lively debate, when senior management gets involved. Often additional questioning around ‘ruling’ marketing assumptions is triggered, giving the financial even further insights into the (business) drivers behind the sales forecast. Investment in business intelligence is the normal path in developing the finance business partnership.

The article was first published in Unit 4 Prevero Blog

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Author's Articles

August 20, 2019

Sometimes, what you forecast needs to change dramatically, due to e.g. market disruption or internal changes. You also might not monitor every business the same way, because each might be in different development stage or ´situation´. By looking at the company itself, but also possible (management) crises, you can determine what the focus of the forecast should be. 

August 5, 2019

Being critical of one’s own work, is even more important for the financial doing the forecast. A forecaster will undoubtedly have his or her bias and blind spots. However, some can be avoided by looking at the forecast itself, and some by looking at person doing the forecast. The aim here is to create deeper awareness of ‘forecasting’ by presenting some structural elements.

July 23, 2019

For most marketing managers doing the annual budget is a bore or waste of time. With most transactional services outsourced and financial management centralised in the home country of the company, local financials spend more and more time with planning, budgeting and forecasting.

May 24, 2019

FP&A has an impact on the organisational structure, enhanced by the possibilities of new technologies. Where previously companies are classified as having a centralised, decentralised or matrix structure, the future promises to be less clear, more diverse yet potentially very agile!

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