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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Risks: How to Make Risk Appetite Visible?

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

FP&A Tags: 

At a corporate level, risks can be very well mapped and controlled using e.g. the COSO framework. Defining the risks is often source driven. This means: the source of the risk is identified leading to the impact being measured by the possibility of occurrence (chance) and the size of its impact on the P&L (money). How much appetite for risk does the company have to achieve its goals? 

This complex area of Enterprise Risk Management (ERM) is today’s responsibility of the CFO and, if available, the Chief Risk Officer (CRO). They are the ones who influence the risk culture. Three key questions will be considered: How is risk mapped? Where is this risk appetite? And, how to manage it? 

How is risk mapped?

The COSO risk framework focuses on 4 objectives: strategic, operational, financial reporting, and compliance. The financial reporting and compliance risks can be collected using some form of internal control framework: 

  • For each business and financial process, management and/or external experts can identify the risks and (needed) control mechanisms. 
  • A walkthrough audit can identify, which control activities, registrations and checks are not in place, and how to solve these issues (e.g. automate, training, new tasks, process adjustment, reporting, etc.). 
  • Since some of the risks will not be full-proof yet, a short list of key-risks (or rolled-up risks) can be established for the executive team to evaluate. 

These two areas, financial reporting and compliance, are also a source for identifying the first operational risks (e.g. missing review of KPI’s) and some strategic risks (e.g. culture related or integrity issues). Management can elaborate on the other operational and strategic risks, making the key-risk overview complete. These are the risks that appear on risk dashboards for the executive team and boards to discuss.

Where is this risk appetite?

Risk appetite reflects how much risk the company is willing to take. It is at the core of managing risks. Through voting, expert opinion, or discussion, the list of key-risks is reviewed establishing the chance they might occur/lead to a problem, and the financial impact they probably have on the P&L.

While auditing and reviewing the (key-)risks, solutions (and opportunities!) will be suggested. Investing in these solutions shows up in the risk map, moving more risks into the green area, or making the green area larger until the remediations are in place. The area between uncontrollable risks and events and risks with remediation can be defined as the risk appetite. 

How to manage risk appetite?

Defining the risk appetite of the company should not only be defined by the financial impact, available money to remediate, or chance ‘guesstimates’. Nor, should it be shaped by ‘culture’. E.g. how often can a risk occur/be allowed? Where is zero-tolerance required? When should we remediate? These questions call for the need to classify risks differently.

The list of (key-)risks could be classified as follows:

  1. Normal business hazard
  2. Competitive or operational/systems impact
  3. Reputational or 3rd party impact
  4. Loss of ‘license to operate’ or default

These 4 indications show who will be responsible for managing that specific risk, and who is responsible for establishing limits or approve actions. Classification makes the levels of risk and risk appetite transparent. It makes the risk ‘culture’ visible. 

From the risk areas, strategy, operations, financial reporting and compliance, the financial impact is just one classification. The consequence for each business might be different and it is up to Risk Managers and FP&A professionals to deal with these risks. Both are business partners bringing risk awareness to staff and management. By classifying the impact of risks differently, a shortcut is obtained to effectively communicate and manage the risk appetite and influence the risk culture.

The article was first published in Unit 4 Prevero Blog

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Capital Allocation & Internal Funding

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

The most important decision for top management is where the money goes. Capital allocation not only defines the money flow but also who will be spending it. Since many companies are threatened by disruption, intrapreneurship is now more important than ever. FP&A specialists can hold a key-position when it comes to facilitating the process of capital allocation. 

FP&A thrives on measuring performance and is constantly forecasting the ‘future’ in accordance with strategic and operational change. Acting as a partner for management, they can transform Business Performance Management into a platform for internal funding. 

Business Performance Management

There are various definitions of Business Performance Management. In general, it means setting goals and a range of targets, measuring progress and intervene when there are deviations from the planned targets. What often is missing from the definition, is the delegation of authority or collaboration. When targets are jointly agreed upon, management gets an active voice and is willing to suggest improvements. This is where intrapreneurship starts.

Finance Business Partnering

Performance is never stable and regularly top management must decide on business improvement proposals. Although this can be time-consuming, reading through all the proposals, zooming in on the performance measurements could simplify the capital allocation process. The first condition is that management has a Business Performance Management system in place, hence knowing its ‘language’. Second, there is a standard for presenting the proposals and a standard for comparing each proposal.

Presentation

The following 5 slides should be enough for a proposal to be in line with any Business Performance Management systems management is using.

Slide 1. Introduction (What)

  • Scope of the problem (description)
  • Reason for the project (e.g. strategy, incident, technology)
  • Objective (fully quantified, being: intention/aim, target results, time, material)

Slide 2. Facts & Analysis (Why)

  • Relevant data and factors (e.g. root cause, trends, facts)
  • Key indicators and key objectives (reflecting the urgency)
  • Norms and standards (what would be ‘normal’ or ‘compliant)

Slide 3. Objective & Action plan (How)

  • Goal (intention/aim)
  • Plan (general steps)
  • Lead time (duration)

Slide 4. Financials (Funding)

  • Team responsible (individual commitment)
  • Estimate time usage (resource planning)
  • Funding needs

Slide 5. Summary (Decision)

  • Upsides & downsides (where, the impact, remediation)
  • Benefits, costs, risks management (value creation)
  • Advice and the request for funding

Decision making

Business improvement comes in two categories: changing a (part of the business) process yet maintain the target or change (part of the business) process to improve the target. Normally, most proposals relate to improvements to achieve the target. However, opportunities tend to improve the target, yet also impact the strategy of the business. It is important to judge each proposal on its own merits before any capital is assigned. 

The following 4 variables have been used to review proposalsequalising the selection process and improving the discussion at the top:

  • Strategic need: Is there a need to strengthen the business strategy?
  • Economically effective: Is there an efficiency improvement?
  • Technically viable: Can it be done?
  • Cultural fit: Will it be acceptable?

For sure, each proposal will have a different result for each variable and, yes, there are bound to be discussions. These discussions will be at least based on metrics known and used by (top)management. It avoids micro-management, e.g. looking only at a proposal detail, and it minimises favouritism, due to transparency. If finance is also to facilitate this process, development in soft-skills and group dynamics might be recommended. 

Future Roles

The FP&A specialist is already at the centre stage, due to the financial reporting and its connections throughout the business. Business Performance Management can be used to present viable plans in 5 slides and, as such, facilitate top management in the process of prioritising these opportunities. After all, it is about information and finance business partnering.

To move from planning & analysis towards preparing investment proposals is a natural step, where the financial will quickly gain more insight into the operations of the company. Being often the right hand of the CFO, working in FP&A is a career opportunity. Therefore, possible future roles include local Finance Director, Corporate Business Development, Investor Relations, or even the next CFO. 

 

The article was first published in Unit 4 Prevero Blog

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Understanding Value Is a Calculated Business!

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

There are different financial indicators to monitor the financial results of a company. Focussing on ‘value creation’ is sometimes considered ‘rocket science’ for the local management team. However, by explaining the steps of calculating ‘value’, management will quickly see what is meant by it and how they create it. 

The following ‘value’ model was used to manage business units across several continents; a practical case of Value-Based Management. Based on a manufacturing company, it provides basic insights into how value creation can be reported, moving away from the more traditional P&L. 

A. Cash Value

Today, it is all about generating cash. Free Cash Flow (FCF) is often seen as the ‘holy grail’. It shows the cash available to the owners (or shareholders), free from any other obligation. It excludes counting for depreciation because it isn’t a cash payment, only an allocation of costs over the lifetime of fixed assets. 

The way the business operates, pays its bills and charges its clients, also influences how much cash is stuck daily operations or available for the owners. These ‘cash flows’ from operations move through the balance sheet (B/S).  The Operating Cash Flow (OCF) shows how much ‘cash’ is added to or lost from the Operating Profit (OP). 

The Free Cash Flow is commonly used in valuation models. Management reports sometimes show the FCF of a business but call it OCF. The more FCF is generated, the higher the value of the company. 

B. Operational Value

Operating Profit (OP) is the standard to evaluate the financial performance of a business. Every executive understands this concept. From a value point of view, you can distinguish between what ‘machines’ produce in value and what ‘people’ add to the business.

People need compensation, which either goes through the payroll, or as temps supporting the organisation. In addition, outsourcing support processes shows how much a business is being facilitated by (centralised) activities. This is the core of what is minimally needed to be in business. 

Of course, employees also receive (social) benefits, which differ in each country, and there are the expenses to get the products sold, different for each product/market. The cost of the fixed assets is also accounted for, since without it there wouldn’t even be a business.

C. Production Value

If people are one part of the value equation, ‘machines’ are on the other. Machines ‘consume’ all types of resources. An international manufacturer commonly will have e.g. products being resold through ‘his’ BU, commissions, licencing products or parts, outsourced activities. 

From the production process itself, there is also the P&L effect of the inventory. One part relates to what is being consumed in the production to create a product of value, and one part is about ‘goods’ which already have their value produced but weren’t sold/delivered. This makes how much was ‘sold’ according to the books, and how much of production was really ‘delivered’, very tricky.

Any business has to adapt to disruptions or a 4th industrial revolution (4IR). It will be common to have multiple income streams and produce for various business models. This makes “Production” and cost management vital in creating value.

D. Value by Design…

Creating value requires working with other financial KPI´s, and not the standard gross and net profit margin analyses. To compare a production plant, market segment, or BU’s, with its peers becomes transparent for financials and non-financials, when using a ‘value model’. Getting to the roots of the cash flow, will end short-term thinking and initiate a planned design. Management can add their story to the numbers, especially when explaining Rolling Forecast deviations or presenting (Beyond Budgeting) investment opportunities. This is using ‘value’ to design and drive the business!

The article was first published in Unit 4 Prevero Blog

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Author's Articles

October 15, 2019
FP&A Tags:

At a corporate level, risks can be very well mapped and controlled using e.g. the COSO framework. Defining the risks is often source driven. This means: the source of the risk is identified leading to the impact being measured by the possibility of occurrence (chance) and the size of its impact on the P&L (money). How much appetite for risk does the company have to achieve its goals? 

October 1, 2019

The most important decision for top management is where the money goes. Capital allocation not only defines the money flow but also who will be spending it. Since many companies are threatened by disruption, intrapreneurship is now more important than ever. FP&A specialists can hold a key-position when it comes to facilitating the process of capital allocation.

September 17, 2019

There are different financial indicators to monitor the financial results of a company. Focussing on ‘value creation’ is sometimes considered ‘rocket science’ for the local management team. However, by explaining the steps of calculating ‘value’, management will quickly see what is meant by it and how they create it. 

September 3, 2019

The strength of those working in FP&A often comes when they worked in different industries or with BU’s from different countries. They learned a little bit more about the impact management can have on the numbers under different circumstances. To develop a long-range forecast, financials need to look beyond current events and steer away from business plans based on extrapolation.

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