The following is an edited abstract from CFO Thought Leader’s “Ask Ethan” podcast featuring Ethan Carlson, CEO, Carlson Management Consulting, and Jack Sweeney, co-host of CFO Thought Leader.
CFOTL What’s your advice to executives who may believe driver-based models are too complex or sophisticated for their teams to manage or execute?
Ethan First, in trying to create a model, focus on the key elements that influence your numbers. You don’t have to create a model so dynamic that every single line item updates perfectly. Think about the standard 80/20 rule in all things — 80% of all expenses are probably focused in a handful of key accounts.
Models don’t have to be complex. Your business will dictate the level of complexity and what you can identify. It’s great if, say, every ten visits to your website translates into a sale and you can categorize how many marketing dollars drive people to your website and that cascades down through sales, or if you can look at salesperson productivity and see how that will translate into sales. If you can’t, that’s okay too. You should focus on what you can quantify.
Models can vary in complexity. They don’t need to be overly complex to be useful. If I were taking an organization that had never done any sort of sophisticated modeling or budgeting but wanted to implement a model, I would take small steps and make sure we focused on a couple of key things and then expand.
All of the topics we talk about here are on budgeting and forecasting, and they are all iterative processes. It’s not like you’re going to come in and overnight transform a model and a business’s way of thinking. It takes time: you start with simple models and drivers and continue to add the sophistication over time.
CFOTL When people want to adopt driver-based methodologies as part of their entire approach what do you recommend?
Ethan A lot of factors that will influence the timing. One question is do you have good information on your business and on your drivers? One problem that often presents itself to a CFO or a director of financial planning and analysis who wants to change how the company budgets is they don’t have historical data and enough of a trend to really make informed decisions to determine whether these factors are in fact good drivers or not.
Often you have to start with what you can get your hands on, and then over time – be it three months, six months, a year – with the focus on those topics, you start to gather better information for the basis of your analysis, which then can be improved.
A lot depends on what’s available and how long it will take to get it. Again, a focused approach is always best. In almost every business we’ve worked with, we spend a lot of time putting together these models and budgets and forecasts and reports. But at the end of the day, it’s always a half dozen line items, or maybe a dozen, which are the big ticket items that really move the needle in their projections.
It’s a shift in the thought process. If you’ve been using historical trends or a budget manager’s input, asking for a kind of “guestimate” as to the projections for next year, shifting to something that’s more grounded in these drivers will take time. But again, if you focus in on just those key accounts first and then expand that, you can be very successful.