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Financial Modeling for Mixed-Use Retail and Residential Development

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In this article, we will explore mixed-use development and discuss the differences between retail and residential components and how to reflect these differences in the financial model. While this article will focus on these two types of real estate since they are my area of expertise, it’s worth noting that mixed-use developments can also include office, hospitality, and entertainment spaces, among others. 

Benefits The Mixed-Use Development 

Mixed-use development is an appealing option for developers and investors because it maximizes the potential of a property by utilizing it for multiple purposes. For example, a mixed-use building could have a retail store on the ground floor, offices on the middle floors, and residential units on the top floors. 

One of the most significant benefits of mixed-use development is that it creates a vibrant and dynamic community. With a blend of residential and commercial properties, residents have easy access to services and amenities, while local businesses have a built-in customer base. 

In addition, mixed-use developments can help reduce traffic congestion and carbon emissions. By living, working, and shopping in the same area, people are less likely to need to drive long distances, thereby reducing long car trips. 

From an investment perspective, mixed-use properties offer a more diverse, stable, and reliable source of income. With a varied range of tenants or essential services for residents, the risk of vacancy is reduced, and if one type of tenant leaves, there are still other sources of income to rely on. 

Challenges of the Mixed-Use Development 

While mixed-use developments offer many benefits, they also present challenges. One of the biggest obstacles is navigating zoning regulations, which can make it challenging to combine different types of properties in a single development. In addition, developers must ensure that each use is compatible with the others and that there are no conflicts for tenants and residents. 

Another challenge is designing a building that is flexible enough to accommodate different uses. Commercial properties may have different requirements than residential ones, particularly when it comes to heating, ventilation, and air conditioning. This can lead to additional design and material costs, which should be taken into account in the financial model. 

Despite these challenges, the popularity of the mixed-use model is on the rise as it benefits developers, investors, and communities. 

The Feasibility Model or Pro Forma   

The feasibility models for residential and retail development have many differences. The primary overall difference is that residential development focuses on creating units for people to reside, while retail development focuses on creating spaces for businesses to operate. This primary difference impacts the  

feasibility models for both types of development. Below, I will discuss the differences between the two types of models and how they may be reflected in the feasibility. However, I cover the differences in a more theoretical manner rather than covering the technical mechanics that you would see in an Excel file.     

Revenue  

Revenue streams differ for residential and retail developments. In a residential development, the primary revenue stream is rental income from the units. The feasibility analysis typically uses monthly rental amounts and considers factors such as unit mix and market rates to determine annual income. 

For retail developments, revenue comes from lease payments by businesses occupying the space. The revenue is typically calculated as annual rent per square foot and can be used to derive useful metrics such as rent by tenant type. Retail revenue is more volatile than residential revenue, as it depends on the success of businesses. Percentage rent deals can align the interests of landlords and tenants, with both benefiting from higher sales and foot traffic. 

Costs  

The costs associated with residential and retail development differ outside of land acquisition. Residential development costs primarily involve construction and marketing, whereas retail development costs include construction, marketing, and tenant improvement costs. Tenant improvement costs cover modifications to the space to meet the business’s requirements occupying it. Complexity in mixed-use developments usually leads to higher construction costs, costs from consultants for permitting, and design expenses. In retail, the more popular dining-related tenants tend to have higher tenant improvement costs.  

Financing 

Financing for residential and retail development differs as well. Residential development financing is easier to obtain and typically cheaper due to being perceived as less risky than retail development. Retail development financing is often more complex as lenders need to assess the creditworthiness of the businesses occupying the space and their ability to pay rent, leading to higher interest rates. The cost or interest rates for mixed-use developments usually sit between the cost of focused retail or multifamily residential developments.  

Demand Factors 

Population growth and demographic changes drive the demand for residential development. In contrast, consumer behavior, such as shopping habits and spending patterns, drives the demand for retail development. Competition from other retail spaces in the area and market/demographic factors like average household income in the area can also impact retail space demand. Successful mixed-use development and the tenant mix in a project can harness the demand for the area. Market research is crucial for mixed-use development projects in a given market.  (Article Continued Below)

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Risk Factors 

Residential development is generally less risky than retail development because there is a higher demand for housing than for retail space. The success of retail development is closely tied to the success of the businesses occupying the space, which can be impacted by economic conditions and competition. Attracting retail tenants that emphasize essential services can mitigate this risk. For example, many mixed-use developments attract retail tenants that provide services like food, salons/barbershops, dry cleaning, and healthcare.  

Example  

The company I was at owned an aging shopping center with a lot of foot traffic due to its favorable location. We decided to pivot to a mixed-use redevelopment with a residential component due to increasing rental rates, a lack of residential spaces in the market, and a growing population in the area. 

We saw potential tailwinds for permitting costs because the local government’s interests aligned with ours and our organization had a good relationship with them. Demand factors looked favorable, and risk factors were mitigated when looking at the local market outlook and our regulatory body relationship. 

To keep transparency on the revenue side, I built separate tabs for each revenue model portion to explain different revenue streams. The costs were difficult to separate, but we noted that the per sq ft cost was higher than our usual benchmark. Overall, the yield for the project settled at around 7.5%, which made sense given the benchmarked returns we saw for each product type. 

Finally, we looked at potential outside financing and found that the quoted rates were noticeably less than quotes for a project that only built additional retail space. 

Conclusion

The feasibility models for residential and retail development differ in several ways, such as revenue streams, costs, financing, demand, and risk. While this article is not an exhaustive list, it aims to highlight the main differences to provide the reader with an overview. Developers and investors must carefully analyze these factors when assessing a project’s feasibility and determining its potential return on investment. Understanding these differences is crucial to developing a successful project and maximizing the chances of success for a mixed-use development. 

Sales Capacity Models: A Deep Dive into Mastering Growth

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All businesses set revenue targets as a common practice. However, the real challenge lies in understanding what it takes to meet those targets. This is where the concept of Sales Capacity Modeling comes into play. In this blog, we’ll provide a breakdown on Sales Capacity Models, from key components and calculations to considerations that are essential for charting a course towards your revenue goals.

What is a Sales Capacity Model?

A sales capacity model is a type of financial model that assists leaders in evaluating necessary headcount to achieve a revenue target. While you may have a clear revenue target, you may be uncertain about its implications for headcount planning. This is where a robust sales capacity model becomes invaluable.

How to Calculate Sales Capacity?

When constructing your sales capacity model, you can choose to delve deeply into your assumptions, but this may introduce additional complexity and effort. This is not a significant issue if your data is clean and easily accessible, but it’s something to keep in mind.

To begin, you will need some or all of the following data points to create your model:

  • CRM Data – Historical sales representative data, including the number of opportunities, contract values, close rates, average deal sizes, sales cycle durations, industry, and more.
  • Headcount Data – Information on representatives’ start dates, career progression within the company, team changes, and so on.

Once you have these two datasets, you must combine them to gain a comprehensive understanding of each sales representative’s performance. A basic starting point to assess the productivity of each sales rep is to perform the following calculations for a given period (e.g., monthly, quarterly, yearly):

Average Number of Opportunities x Close Rate = Number of Won Opportunities

For instance, if there are 100 opportunities in a year with a 60% close rate, you would have 60 won opportunities generating revenue.

Number of Won Opportunities x Average Deal Size = Revenue Generated

Taking the 60 won opportunities and multiplying them by an average deal size of $100k results in $6M in revenue generated.

Revenue Generated / Average Number of Reps in the Period = Revenue per Rep

If it took 10 reps to generate that $6M in revenue, each rep produced an average of $600k per year.

Target Revenue / Revenue per Rep = Number of Reps to be Hired

Assuming sustained productivity at that rate and a target of $12M in new revenue, this means you need to hire 20 new reps to achieve it.

Given the simplicity of the above calculation, there are numerous factors to consider when building your model. For example, you may want to refine your capacity calculation based on:

  • Experience – Reps in their 1st, 2nd, 3rd year, and beyond may generate different revenue amounts.
  • Cohorts (e.g., year hired) – Performance may vary based on when reps were hired. For instance, the average performance of a rep hired in 2019 may differ significantly from someone hired in 2022.
  • Region – Regional disparities may exist, with some teams having more opportunities and established presence than others.
  • Industry – Certain industries may contribute more revenue, but breaking into others may require additional resources. Additionally, some industries may have higher spending on your product.

This suggests the need to calculate revenue per rep by experience levels, cohorts, regions, and industries, depending on your company’s unique circumstances. You may even choose to further segment your analysis for precise modeling and performance tracking.

In addition to segmenting the calculations above, you should consider including factors that could affect your capacity negatively:

  • Ramp Time – Onboarding processes may take 1-2 months, and reps may not start generating revenue until month 4.
  • Attrition – You won’t retain all your headcount, and losing an experienced rep may lead to a longer recovery period.
  • Seasonality – If your business generates most revenue in Q4, hiring well in advance can facilitate ramping up in time.
  • Ability to Hire Talent – Aggressive revenue targets may necessitate rapid hiring, which could pose a risk if your talent team is not equipped for it.
  • Unintended Drag – Other factors, such as hiring many reps quickly, may impact existing sales reps’ time and performance, e.g., coaching.

These factors may require an additional 15-20% or more headcount to achieve your revenue targets. Building assumptions into your model is essential, and you must evaluate your specific situation to determine the most suitable approach.

Moreover, beyond granularity, consider the broader context of your company and industry:

  • Understanding Your Market – Assess how much each region has been penetrated; achieving your model’s expectations may not be feasible if you’ve already reached a high penetration level in a region.
  • Current Sales Processes – While your model may suggest hiring more reps, evaluate your existing sales processes, onboarding training, KPI tracking, and more to improve efficiency.

Conclusion

Once you’ve determined the appropriate level of detail and considerations, regularly update your sales capacity model with actual data to assess the accuracy of your assumptions. This will enable you to provide leadership with early insights into sales team performance, whether it’s meeting or falling short of expectations.

By creating a sales capacity model, you and your leadership will gain valuable insight into the timing and number of reps to hire in order to meet your revenue targets.

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3-Statement Modeling: A Comprehensive Financial Approach 

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So, your company has been plodding along with fairly predictable growth in revenue and a stable customer base. Capital expenditures, DSO and DPO have been consistent, as well as inventory turns. Cash flow has been stable, and 13-week cash projections have relied on historical information. However, the board of directors and executive leadership have announced a major expansion plan for the business, which involves new territories, lines of business, customers, vendors, profitability profiles and changes in inventory policies. To meet these new requirements, the finance department needs to expand its processes to include balance sheet and cash flow projections.

In this blog, we will explore the importance of expanding financial projections to include balance sheet and cash flow forecasting, evaluating new lines of business, creating an integrated financial model, automating relationships between financial statements, and discussing the benefits of 3-statement modeling in providing a comprehensive view of company performance. 

Expanding Financial Projections 

“Garbage in, garbage out” underscores the significance of accurate and clean financial records as the bedrock of reliable forecasts. Ensuring all revenue, cost, capital expenditure and related transactions are promptly recorded in accordance with GAAP standards is crucial.

Special attention is needed, particularly for revenue transactions, which are often the most substantial figures on the income statement. Situations involving non-intuitive revenue recognition rules—common in software, SaaS, contract-based, real estate and certain manufacturing industries—call for scrutiny to ensure accurate recording. Robust internal controls and monthly reconciliations are essential for maintaining precise financial reporting and accounting for all system transactions.

Evaluating New Lines of Business 

The expansion into new lines of business will introduce different profitability profiles, new vendors, customers and payment terms. This deviates from the existing business practices, and inventory levels and values are also likely to diverge. Before providing consolidated projections to the leadership, a thorough evaluation of each new line of business is essential. 

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Integrated Financial Modeling 

To fulfill the executive leadership’s requirement for a 5-year outlook, the finance department needs to develop an integrated model for each entity, considering the unique assumptions of the new lines of business. This integration involves establishing relationships between the income statement and balance sheet. For example, projected revenue will impact accounts receivable based on projected DSO assumptions. Automating these relationships ensures that as the income statement is updated, the balance sheet automatically adjusts accordingly. 

Similarly, the statement of cash flows is influenced by items on both the income statement and balance sheet. Net income, depreciation and amortization from the income statement affect the cash flow statement, while changes in balance sheet accounts reflect in the statement of cash flows. The financial model for the statement of cash flows should automate these relationships as much as possible, allowing changes in the income statement to ripple through the balance sheet and statement of cash flows with minimal manual intervention.

The 3-Statement Model: Integrating Income Statement, Balance Sheet and Cash Flow 

A 3-statement model is a comprehensive financial model that integrates the income statement, balance sheet and statement of cash flows. It provides a holistic view of a company’s financial performance and future projections. By automating the relationships between these statements, changes in one statement automatically impact the others, providing a more accurate and dynamic representation of the company’s financial position. 

Assessing Financial Needs 

The output of the cash flow model, specifically the ending cash balance, provides insights into the need for additional funding. If the projected ending cash balance for any period falls below a predetermined threshold, adjusting the level of debt on the balance sheet can increase the ending cash balance in the statement of cash flows and the balance sheet. Changes to debt also impact interest expense, net income and the ending cash balance on the statement of cash flows. 

Consolidation and Benefits 

Once the 3-statement modeling is completed for all business entities, the finance department consolidates the results into an overall financial model. This model provides the information requested by the executive leadership team and yields several benefits. 

Benefits of 3-Statement Modeling 

The benefits associated with 3-statement modeling outweigh the costs of development and periodic updates for most companies. In a rapidly changing economic and competitive environment, executive leadership requires a holistic financial model to assess investment needs, funding requirements and solvency. The comprehensive model allows for periodic updates and ad hoc modifications, providing the complete picture needed by leadership.

Conclusion 

Expanding financial projections to include balance sheet and cash flow forecasting is crucial for businesses undergoing significant expansion. By creating an integrated model and automating relationships between the income statement, balance sheet and cash flow, companies gain better insights into funding requirements, cash management and forecasting. The benefits of 3-statement modeling far outweigh the associated costs, enabling executive leadership to make informed decisions in dynamic business environments.

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How to Improve Forecast Accuracy

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Forecasting stands as a pivotal function that allows businesses to maintain competitiveness, expand their market share and execute long-term strategies. Regardless of a company’s size, one of management’s central responsibilities involves evaluating the overall health of the business and addressing crucial inquiries: Is the company profitable or incurring losses? Can we manage our debts as they become due? Is our growth aligned with industry and market conditions?

Answering these questions relies on well-crafted forecasts developed by the internal management team, requiring a process that analyzes both internal and external data, converts it into meaningful projections and makes decisions that steer the company’s trajectory. However, the value of forecasts diminishes without accuracy. Precise short-term forecasts are essential for informed decisions, while inaccuracies can lead to severe consequences like misallocated resources, missed opportunities, financial instability and compromised strategic planning.

Drawing from more than two decades of experience in corporate finance, much of which was devoted to refining processes for generating precise forecasts, I’ve distilled key insights that have not only elevated forecasting accuracy, but also saved substantial time and effort along the way.

1. Start with Evaluating Data Quality

“Garbage in, garbage out” underscores the significance of accurate and clean financial records as the bedrock of reliable forecasts. Ensuring all revenue, cost, capital expenditure and related transactions are promptly recorded in accordance with GAAP standards is crucial. Special attention is needed, particularly for revenue transactions, often the most substantial figures on the income statement. Situations involving non-intuitive revenue recognition rules—common in software, SaaS, contract-based, real estate and certain manufacturing industries—call for scrutiny to ensure accurate recording. Robust internal controls and monthly reconciliations are essential for maintaining precise financial reporting and accounting for all system transactions.

2. Understand Key Business Drivers

Much like accurate financial records rely on competent accounting following clear processes, insightful forecasting demands Finance to grasp financial reporting and the underlying metrics. This entails understanding revenue generation, primary sales components and seasonal trends. For major expenses like labor and production, sensitivity to input prices, shifts, hours and automation is crucial. Coupled with a strong grasp of company drivers, industry insights provide context for a comprehensive understanding.

These insights, combined with the core principles of accurate data, effective data management and a robust forecasting model, form the foundation of precise forecasting practices, empowering businesses to navigate the market effectively.

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3. Effectively Manage and Utilize Data

Maintaining clean and accurate business data is at the core of this step. The accuracy of forecasts directly depends on the quality of the data that drives them. This requires a meticulous commitment to ensuring data integrity. Leveraging key data sources like ERP systems, operational data, industry benchmarks and competitor analyses will form a robust foundation. These sources not only inform forecasts, but also provide vital insights for navigating the competitive landscape. By prioritizing data integrity and effectively utilizing available information, businesses can enhance their forecasting capabilities and make well-informed decisions.

4. Construct a Robust Forecasting Model

With a foundation established through accurate historical reporting and an understanding of key business drivers, the next step involves constructing a forecasting model. While an Excel-based model is a conventional choice, alternative approaches that offer greater efficiency could also be considered. Regardless of the chosen software or method, the model should hinge on essential assumptions (or drivers) that underpin financial projections. For instance, sales revenue could be contingent on units sold, subscriptions, contracts, customers or other relevant metrics that shape revenue generation. Additional pertinent assumptions might involve average order values, product/service mix, and incorporating price and cost adjustments based on the latest consensus (pertaining to cost-of-living adjustments and merit-based increases for internal labor costs).

Integrating assumptions into your forecast actually results in more accurate projections, as comparisons between what transpired versus what was expected to occur can be reviewed and any deviations between the two can be reduced through refining the assumptions. This flexibility to rapidly reflect changes in assumptions and quantify the impact will help to significantly increase the accuracy of the modeling over time.

Conclusion

In summary, honing accurate forecasts isn’t just about getting around in the market; it’s about setting a clear path forward. Our dive into these details underscores the importance of having precise data, understanding what really drives the business, managing data effectively and building a strong forecasting model. By embracing these principles, businesses give their management sharper tools to make smart decisions, strengthen their base, fuel growth and significantly improve the accuracy of their forecasts.

Learn More

The process of selecting and implementing any system can be difficult at best and a complete failure at worst. We know from experience that many companies make avoidable mistakes in regards to new systems, such as delegating the implementation process to internal employees, avoiding formality or not planning for post go-live support. If you’d like to explore the support we offer, then visit our financial systems consulting page and start a conversation. Our free guide below also offers insight into the process of system implementations:

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Aerospace and Defense: Financial Transformation and Project-Closing Process

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The Situation

8020 Consulting was engaged by a publicly traded Aerospace & Defense client whose business relied heavily on U.S. government programs and comprised multiple related projects. The client faced challenges in accurately closing projects within its ERP system, leading to discrepancies in financial reporting and unaccrued costs. The underlying problems included misclassified purchase orders, materials and incomplete team awareness and training.

Our Solution and Results

To learn more, download the full case study, using the form below.

Download the Case Study

Our full case study is offered as a PDF, and it covers the situation, our solution and results. To download your copy, complete the form using a business email address. Then you’ll receive a link to the resource via email.

Aerospace and Defense Finance KPIs: Driving Excellence in a Complex Industry 

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The aerospace and defense industry stands as a testament to human ingenuity, innovation and determination to push the boundaries of what is possible. As one of the most technologically advanced and challenging sectors, it plays a crucial role in shaping the modern world and ensuring global security. From cutting-edge aircraft and spacecraft to advanced defense systems, the industry’s endeavors require precision, efficiency and unwavering commitment to excellence. In this dynamic and high-stakes landscape, aerospace and defense finance professionals leverage Key Performance Indicators (KPIs) as their guiding compass. These metrics provide valuable insights into operational performance, financial health, and strategic decision-making, making them indispensable tools for success. Unlike in many other industries, aerospace and defense companies operate under unique conditions that demand rigorous monitoring and optimization of various aspects to thrive in the competitive and constantly evolving environment. 

1. Sales, EBIT and Bookings 

KPI Definition: Sales, EBIT (Earnings Before Interest and Taxes) and Bookings are financial metrics that measure revenue generation, profitability, and the inflow of new contracts. 

Why it Matters in Aerospace and Defense Finance: The aerospace and defense industry involves massive investments and long project timelines. Tracking these KPIs allows companies to assess their financial health, identify growth opportunities and secure contracts, which are vital to sustaining operations and remaining competitive. 

2. Variable Cost / Router Standard Hours – Effectiveness 

KPI Definition: This metric measures variable costs per router standard hour, providing insights into the effectiveness of resource allocation. 

Why it Matters in Aerospace and Defense Finance: Aerospace and defense projects are complex and require meticulous resource management. By optimizing variable costs, companies can enhance production efficiency, ensure cost-effective operations and maintain a competitive edge in the market. 

3. Router Standard Hours / Actual Hours – Efficiency 

KPI Definition: This KPI compares router standard hours with actual hours spent on production, highlighting production efficiency. 

Why it Matters in Aerospace and Defense Finance: In the aerospace and defense industry, where precision and adherence to timelines are critical, monitoring production efficiency enables organizations to identify inefficiencies, streamline processes and deliver projects on time while maintaining the highest quality standards. 

4. Fixed Cost 

KPI Definition: Fixed costs represent expenses that remain relatively stable regardless of project volume. 

Why it Matters in Aerospace and Defense Finance: The long-term nature of aerospace and defense projects demands careful management of fixed costs. By controlling these expenses, companies can weather fluctuations in demand, ensure financial sustainability and remain profitable throughout extended project timelines. 

5. SG&A Cost 

KPI Definition: Selling, General and Administrative expenses represent a significant portion of overall costs for aerospace and defense companies. 

Why it Matters in Aerospace and Defense Finance: The aerospace and defense industry operates in a competitive and regulated landscape. By monitoring SG&A costs, companies can optimize operational efficiency, allocate resources effectively and improve their competitiveness in the market. 

6. PPV Cost 

KPI Definition: Purchase Price Variance reflects the efficiency of the supply chain by comparing targeted purchase prices with actual invoice prices. 

Why it Matters in Aerospace and Defense Finance: In an industry where cost control significantly impacts overall project costs and profitability, tracking PPV helps organizations identify opportunities to optimize procurement processes, negotiate better prices and manage suppliers more effectively. 

7. Scrap Cost 

KPI Definition: Scrap costs measure both in-process and out-of-process wastage, reflecting the efficiency of material utilization. 

Why it Matters in Aerospace and Defense Finance: Precision and reliability are paramount in aerospace and defense manufacturing. By minimizing scrap costs, companies can optimize resource utilization, reduce material waste and ensure cost-effective production. 

8. Customer Order Delinquencies 

KPI Definition: This metric tracks timely delivery of customer orders, reflecting customer satisfaction and operational efficiency. 

Why it Matters in Aerospace and Defense Finance: In an industry that prioritizes precision and reliability, on-time delivery is crucial for maintaining strong customer relationships, securing repeat business and upholding a positive reputation in the market. 

9. Annualized Sales / FTE 

KPI Definition: This metric calculates annualized sales over Full-Time Equivalent (FTE) to optimize workforce and resource allocation. 

Why it Matters in Aerospace and Defense Finance: Aerospace and defense projects experience demand fluctuations. By optimizing FTE and resource allocation, companies can adapt to varying demands, ensuring operational efficiency and maintaining productivity. 

10. Working Capital (Capex, AP, AR) 

KPI Definition: Working capital management involves balancing capital expenditure (Capex), accounts payable (AP), and accounts receivable (AR). 

Why it Matters in Aerospace and Defense Finance: Efficient working capital management is crucial for smooth project execution, mitigating financial risks and ensuring the ability to invest in long-term projects while maintaining financial stability. 

Conclusion 

Key Performance Indicators (KPIs) serve as indispensable tools for aerospace and defense companies, guiding them through complex decisions and optimizing performance. By embracing data-driven strategies and leveraging these KPIs as their compass, these organizations continue to transform possibilities into realities, one groundbreaking achievement at a time. The ten KPIs discussed above serve as essential tools in driving efficiency, optimizing resources and ensuring profitability within this complex industry. 

To keep up with our team of consultants on all things finance and accounting, we invite you to subscribe to CFO Insights. You’ll receive notifications whenever we post new articles. If you’d like to learn financial planning and analysis, need external support and/or would like to start a conversation, you can also visit our FP&A page by clicking on the image below.

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How to Evaluate FP&A Systems

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Let’s say you’ve recognized your current processes are slow and can’t possibly scale alongside the company’s massive growth, so you’ve decided to explore FP&A systems. You know a couple household names (e.g., Hyperion, TM1), are aware of recent additions (e.g., Planful, Adaptive), and have heard tell of new options (e.g., DataRails, Cube) popping up within the last few years.

Given the range of options, narrowing the field and selecting a system can seem like a daunting task. But many finance professionals use very common criteria when selecting a system, including reporting functionality, forecasting capabilities, collaboration workflows and more. Let’s focus on a couple of important, but less common, key factors you should consider when evaluating your next FP&A system.  

Growth Profile: How will the company grow over the next few years?

Selecting a system with the flexibility to scale alongside your company is a key factor to consider. When the company grows, acquires companies or creates new revenue streams, the needs will change, and the system will need to adapt accordingly. 

It’d be a mistake to implement a new system today that doesn’t align with company growth, only to start a new system selection and implementation process in two to three years’ time. To avoid this, think of scenarios that have resulted in significant changes to your existing models and processes and determine how a system would deal with those items.

For example, here are some scenarios to consider:  

  • If your company will likely hit $1B, $10B or $50B in revenue in the next several years, does your vendor have customers in those ranges? Understanding the customers they service is a good proxy to understand their ability to service your requirements.
  • If you added a brand-new revenue stream or changed an existing one, can the system handle that?
  • Are you expanding into additional countries with new reporting requirements/FX translation?  

Don’t Boil the Ocean: What are our key deliverables, and how can we keep the focus on them?

When exploring a new FP&A system, many companies fall prey to feature frenzy. Demos and dialog can widen to cover the 100 items on the to-do or would-be-nice lists, when the primary focus should be on how well the system accomplishes the three to five highest-priority items. Most FP&A systems have similar functionality, so it becomes imperative that your selected system meets your most-critical needs. For example, if your company is still figuring out its revenue streams and KPIs, understanding the system’s flexibility becomes paramount. If your company is more stable, then generating reporting/dashboards quickly might be the focus. Whatever your priorities are, focus on them and how well the respective systems address those items.  
 
Here are some ideas of items that might be key priorities: 

  • Expense Forecasting – Is there zero-based budgeting, per HC forecasting, applying growth rates to prior year, etc.?  
  • Scenario Planning – How easy is it to spin up different scenarios or produce what-if analysis?  
  • Revenue Planning – What is the functionality around sensitivity analysis, seasonality, assumption changes, etc.  
  • Dashboards – How easy are they to create, update, distribute? Are dashboards a huge requirement? How self-service are they? What functionality is there? How do dashboards show data that doesn’t have a common key between datasets?  
  • Collaboration/Workflow Capabilities – How well does the system handle tracking workflows, document sharing, commenting, etc.?  
  • Company Industry – Does the vendor have functionality focused on a certain industry (e.g., SaaS)? This may be an advantage of one vendor if they have built in functionality for that industry, but it may be a disadvantage if you’re not in that industry. If the vendor has numerous of your competitors as customers, then it may be a good sign that they have the functionality you require. 

Ease of Use: How easy is it to learn the system, and is there ample availability of resources with hands-on experience? 

Every system will have some sort of learning curve, but issues can arise when staff inevitably turn over, lowering internal knowledge to support the system. Focusing on how easy it is for people to learn the system can help avoid those issues. While some systems can be figured out by digging around, others may require the help of external consultants to help troubleshoot. Here’s a list of ideas to test the ease of use:  

  • Can a typical finance professional poke around and figure out most of the functionality?  
  • How easy is it to create reports? 
  • How easy is it to input data into the various templates/models?
  • How easy is it to create/modify the Revenue and Operating Expense models?
  • Does the syntax used in the system mirror Excel’s? (Because all finance professionals are Excel pros, the more similar the syntax, the better.)

For each of these items, think of the curveballs that you’ve experienced in your current process, how you’ve had to modify existing files/processes and ask how the system would deal with it. You’re looking for relative ease in making similar adjustments.  

If the system isn’t particularly easy to use, then the other consideration is whether the system is widely used enough that ample finance professionals with hands-on experience are easy to find. While not as critical in a system that is easy to use, a large user base becomes more of a consideration for systems that are more complicated. That allows you to find someone who can slot in and manage the system without much issue.

Additionally, if you’re planning to roll out the system to BU partners, then you’ll want to understand their use cases and see whether it is easy for them to use. Can they easily navigate through reporting/dashboards? Can they create their own easily?  

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Data Cleanliness: How clean is your data?  

In order to unlock the full power of FP&A systems, you need to be able to intake data from a variety of sources across your organization. You’ll want to take stock of all the data sources (e.g., GL system, CRM, BI tools, databases) you want to bring into your FP&A system and understand whether the system has native integrations or would require custom integrations. Then you must understand your underlying data structure to determine what it looks like, if it has all the fields you care about and if data cleanup is required. If you’re constantly undergoing data cleanups, changing KPIs, modifying hierarchies, etc., how will the system accommodate that? Some systems require that your data be clean at the source while other systems will allow you to use logic to modify the data as you see fit.

Once you’re done with that, you’ll likely need to do some data cleaning, but if you’re constantly undergoing data cleanups, changing KPIs, modifying hierarchies, etc., then you’ll want to seek out a system that is flexible enough to deal with those situations. 

Some FP&A systems work best when the data is stable and changes are relatively minor, but not all can deal with messy data. 

Where You Work: Do you want users to work primarily in Excel/Google Sheets, or do you want to work in a system?

There are two schools of thought around this question. One school is centered around the belief that you will be the most efficient when you transition work from Excel to a centralized system. The other school believes nothing will ever replace the flexibility that Excel/Google sheets provides.

While many systems offer plugins to also do work in Excel, only a handful of systems are built with Excel/Google Sheets as the primary UI (e.g., DataRails, Cube, Vena). Of course, you should expect natural differences in systems that were built with Excel/Google Sheets in mind and those that added that functionality over the top.  

It is up to you to determine what you think makes the most sense and how you want your team to operate. When it comes time to decide which approach makes sense, go back to your pain points and see which can handle them better. For example, if you have a ton of data, can these Excel/Google Sheets-based tools handle it quickly and efficiently?

Online Community: How can you ask questions, find answers and suggest improvements? 

The more robust the system’s community is, the more resources that will be available to quickly troubleshoot issues and collaborate on functionality you want to explore and implement. These communities become places where other finance professionals share their struggles, and many members share their solutions. Additionally, the communities often function as a way for the vendor to gather ideas and eventually implement them into the system. It’s quite common for a given community to vote on desired functionality and for software companies to roll out that functionality over time.

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The process of selecting and implementing any system can be difficult at best and a complete failure at worst. We know from experience that many companies make avoidable mistakes in regards to new systems, such as delegating the implementation process to internal employees, avoiding formality or not planning for post go-live support. If you’d like to learn more about the support we offer, then visit our financial systems consulting page and start a conversation. If you’d like to learn more about systems implementations, then download our free guide below:

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How to Create and Manage a Research and Development Budget

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Consumer products, whether it be food products or gaming software, are initiated from intense research and development before launch. This test bed, also known as research and development or “R&D,” resides in most companies and refers to a systematic process of creating new products or technologies or improving existing ones through research and experimentation. Developing new R&D products can be very expensive and can run into the thousands and even millions of dollars for some companies. For this reason, careful management of a research and development budget, including all planned project expenses, is important.

To accurately budget for newly introduced products, every cost related to labor, material and indirect overhead needs to be accounted for, and this is done by the Finance team working closely with the Project Stakeholder. The approach I have taken for this is to assign new R&D projects a project code and assign costs that are directly attributable to the project. Costs that are not easily assigned, such as indirect overhead costs, will be applied using rates from an assumptions table. 

Let’s review the lifecycle on a research and development budget for projects starting with project code assignment then accounting for all costs using bill of materials. Let’s also explore the process for obtaining management approval and working close with Project Stakeholders to accurately reforecast project budgets. 

Assigning Project Codes 

A finance partner working closely with the R&D team will understand how expenses flow within the department. Either the expenses are standard department operating expenses related to brainstorming ideas or expenses directly related to projects and budgeted accordingly. 

In the brainstorming stage, also known as discovery/exploration phase, the focus is on generating ideas, conducting preliminary research and exploring potential opportunities. The goal is to identify promising concepts or research directions that have the potential for further development.

It’s not until the potential new product gets to the concept development stage where a prototype may be created. It’s this stage that a project code is then assigned, and costs are then tracked to help build-up the initial budget layout. Most ERP systems allow for project tracking within the GL account stream, which helps with monitoring and controlling activities specifically related to projects. Once the project code has been set up with information such as project description, owner name, default GL expense account, expenditure limits, approval limits, approval routing names, etc., then the new project code can be handed to the Project Stakeholder for ordering materials and accounting for coding of vendor invoices and cross-department resource charges. 

Bill of Materials (BOM) Planning 

Planning for any project takes a considerable amount of communication with the Project Stakeholder to identify the goals, deliverables and milestones. This understanding will help align the budget with the specific project requirements. 

The Stakeholder will set the stage on the length of the project from concept to development. They will also lay out the number of hours required for each skill level (e.g., software developer, electrical engineer, food tester). Additionally, the Finance partner and Stakeholder should work together to build up a bill of materials (BOM). The BOM is a comprehensive list of components or ingredients, raw materials and other required items to assemble one finished product. For planning purposes, the BOM will serve as a structured document that outlines all needed materials, quantities, labor hours and overhead. 

Table A1 below shows an example of a BOM schedule. The schedule is broken out by material cost, labor cost and indirect and overhead costs. For the material section, a full description is provided, along with the part number, vendor, quantity, cost and total cost. For labor, the required skill labor is shown including the number of hours and fully loaded rate. Finally for each indirect and overhead cost, the driving rate, which comes from an assumptions table, see Table A2, is applied against the quantity to produce the total indirect and overhead costs. 

research and development table a1 bill of material example
Table A1

Below is a more defined description for each BOM category and sources for obtaining estimated costs. 

Labor Costs

The BOM will also layout the required hours needed for each skill set. Working with the Payroll department will help to obtain fully loaded rates, which will include both salary and benefits. Working also with the Project Stakeholder to estimate the resource requirements for the project. This includes personnel costs, such as salaries, wages and benefits for researchers, scientists, engineers, technicians and support staff. Consider the time commitment of personnel, including full-time equivalents (FTEs) and any additional resources required, such as equipment, facilities or external consultants.   

Direct Costs

Direct costs are those directly attributable to the project, such as materials, equipment, prototype development, testing and data collection. Sourcing material costs requires working with Supply Chain to obtain material pricing. New material, not already set as standard costs, will require new pricing from vendors.   

Indirect Overhead Costs

The final costs to include are indirect overhead that support the operations R&D line of business. Indirect costs include shared costs that support R&D activities but are not project-specific, such as laboratory or facility expenses, utilities, IT infrastructure and administrative overhead. There are several ways to allocate costs and every company does it differently. I have found it easier to build an assumptions tab within your model and set specific rates as drivers to the model. (See Table A1 as an example.) If the plan calls for a change with planned unit sales, which would result in a rate change, it can easily be done from the assumptions tab. Having the rates linked to the model would result in immediate and live changes to the rest of the budget model. 

table a2 for research and development budget article, indirect assumptions table example
Table A2

Project Funding Approval

Obtaining project approval from management is the single most important step in the project’s lifecycle. Without proper approval, the project is closed. For most companies, all projects will be reviewed during the review process. This will include existing projects, new projects and projects requesting additional funding. The reason for reviewing existing projects is to track its status and determine if the project is still aligning with the company’s strategic goals. Or perhaps another project that carries more importance will supersede another less important project and therefore the budget dollars will shift over. 

The project review process is certainly a strategic process of allocating funds toward projects that make the most sense. The primary reason behind the shifting is because companies will generally only have a set annual research and development budget for all projects, and management will determine how much to allocate on a quarterly basis based on projected cash flow. For example, if a company has an annual budget of $10M for R&D projects, then management will determine, based on cash flow, how much to allocate per quarter. As mentioned, this is also a time for any existing projects to request additional funding if the project is deemed to go over budget or over its initially projected BOM plan.   

Finance is responsible for managing this process and preparing a detailed financial evaluation of all projects, as shown in Table A3. The summary will include a list of all projects to be reviewed, which as mentioned includes existing, new and projects requesting additional funding. There are a few factors that go behind management approving a project – for example, market demand for the product, sufficient return on investment (ROI) and strategic company alignment on its long-term objectives. It’s at this time that the management team will review and discuss each of the project proposals, and it will decide to either approve as is, approve with cuts or not approve the project. In some cases, management may request revisions or seek additional information before making a final decision. Once management approves the project, the necessary budget funding and resources can be applied. 

table a3 for research and development budget article, Project plan summary table example
Table A3

Stakeholder Partnership and Project Re-Forecasting 

Keeping the project spending on budget is crucial and it’s the partnership of both finance and the Project Stakeholder to work together on this goal. As mentioned, although a project has been approved, the project will be re-evaluated at each Project Review cycle. This is not always the case with companies; however from my experiences, this is most common. Utilizing the project code assigned to the project helps keep track of actual spending coming from the ERP system, compared to budget. Table A4 illustrates actual project spending for the first two quarters compared to budget. With an annual budget for the company of $10M, YTD spending through the first two quarters is already over $1.3M. To get back to the annual budget, management will need to decide on what project(s) to reduce or eliminate. From our example on Table A4, the Dual dosing of WF6 was decided by management to be eliminated for the rest of year (ROY) after Q2. Also, the Tomography Module project was reduced in the 4th quarter by $100K.   

table a1 for research and development budget article, project reforecasting table example
Table A4

Making budget cuts are not easy, but it is necessary if a company is to achieve their strategic objectives and maintain investor confidence. 

Research and Development Budget Takeaways

In summary, the key to effectively creating a project research and development budget starts with good communication between Finance and the Project Stakeholder. Absorbing all costs is crucial to build an effective BOM. Additionally, proper documentation, analysis, and weekly meetings with the Project Stakeholder to review spending are helpful to stay on budget. Stepping outside of the box and engaging other Project Stakeholders to provide input into your project will feed positive constructive criticism. Lastly, consider taking notes as lessons learned to be carried on to future similar projects to enhance the accuracy and effectiveness of future project budgets. 

If you’re unsure how to proceed, want resources to help your budgeting efforts and/or want to complement your team, 8020 Consulting can help. Our team of 120+ finance and accounting consultants has a wide range of skills and experiences that you can put to work to achieve your objectives. Click the image below to explore our financial planning & analysis services, or visit the contact page to start a discussion.

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What is Anaplan? Empower Budgeting and Forecasting Beyond Excel

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Excel is a popular tool for budgeting, forecasting and analysis in many organizations. However, as the needs of a business change and models are forced to react, a multitude of issues can arise. These issues can negatively impact both the front line and executive teams, making it difficult to manage the business and gain valuable insights from the data available. In this blog post, we will explore six of these issues and how Anaplan, a powerful Corporate Performance Management (CPM) tool, can address them. 

It’s important to note that, while Anaplan is a great CPM tool for budgeting, forecasting and analysis, it may not be the best fit for every company. Small businesses with limited financial resources may find Anaplan’s subscription costs to be too expensive, and companies with highly customized Excel models may not be able to migrate their models easily to Anaplan. Additionally, companies with very small teams that do not require collaboration or complex modeling capabilities may find Anaplan’s capabilities overkill for their needs. In these cases, alternative solutions such as Google Sheets, Microsoft Power BI, QuickBooks or even Microsoft Excel(!) may be more appropriate.  

Signs You Might Have Outgrown Excel 

Excel can cause issues that negatively impact the front-line and executive teams, making it difficult to manage the business and gain valuable insights from the data available. Here are some signs that you might have outgrown Excel: 

  • Broken Links: One issue that can arise with Excel models is broken links. This can occur when a forecast or budget file is copied for the next cycle and moved to a new folder, but supporting files change due to being renamed or moved for the new cycle. This issue can be time-consuming to fix and may lead to incorrect outputs. 
  • Formula Management: As formulas of varying complexity are created across a vast number of worksheets and files, it can become difficult to effectively manage, audit or have control over calculations. This can lead to outdated formulas, which can result in incorrect calculations or wasted time maintaining formulas. 
  • Workbook Management: As processes mature, Excel workbooks can become large, with 200+ worksheets when forecasting and budgeting at granular levels such as by product, customer, department, salesperson and scenario, etc. This leads to stale data, an inability to really audit results and a basic lack of desired visibility/control in the process. 
  • Difficulty in Managing User-owned “What If” Scenarios: Management may wish to create their own dynamic “what if” scenarios that use the latest assumptions and calculations from the planning/forecasting model. It can be challenging to support dynamic, user-controlled “what if” scenarios in an Excel or other reporting/planning-focused environment. 
  • Model Drilldown and Calculation Auditing: Excel does not inherently offer “drill down” capability, making it difficult for users to understand the calculations within the model. This can be problematic when trying to trace or audit formulas to the original source module or list within the module. 
  • Managing/Administering Template Files: Excel template files can be difficult to manage across multiple users, leading to wasted time, challenges in data updates and version control issues. Separate files sent to multiple users also make file management difficult.

Why CPM Tools 

Corporate Performance Management (CPM) tools are becoming more popular for budgeting, forecasting and planning due to their advantages over traditional spreadsheet-based methods. CPM tools offer greater accuracy, better collaboration and improved efficiency, which can improve performance and decision-making. Leading CPM tools in the market include Anaplan, IBM Planning Analytics, Adaptive Insights, Oracle Planning and Budgeting Cloud Service and Planful, which offer powerful features and user-friendly interfaces to address challenges in budgeting and forecasting. 

How Anaplan Addresses Excel Pain Points 

We encounter Anaplan a lot due to its ability to handle large datasets and complex calculations, making it one of the go-to tools for many organizations. In our experience, Anaplan’s strengths help resolve the Excel pain points identified previously: 

  • Broken Links: Anaplan provides dynamic links, which means that if a referenced module or line-item name changes, all referencing formulas and processes are automatically updated. This eliminates the need to manually fix links, saving time and reducing the risk of errors. 
  • Formula Management: Anaplan’s architecture of multi-dimensional databases using Lists, Modules, Formulas, Dashboards and Actions better supports the development of complex formulas. It allows formulas to be broken down into small calculation segments that are easier to manage and audit. Because of the dynamic cloud-based environment, formulas can be made once and used across many modules or lists. Formula updates automatically flow through all modules and lists, reducing the risk of errors and ensuring that data is always up to date. 
  • Workbook Management: Anaplan’s usage of multidimensional databases reduces data management complexity by allowing logical grouping (i.e., consolidating) of data. This simplifies data management and makes it easier to audit results and gain visibility/control in the process.
  • Scenario Management: Anaplan’s multidimensional and modular architecture allows the creation of user-specific modules with custom scenarios that can be dynamically linked to the “working” model. Access and restrictions can be managed via security, ensuring that each user can only access the scenarios they are authorized to use. This feature allows management to create various scenarios and assess their impact on the business, giving them the ability to make informed decisions about how to move forward. 
  • Model Drilldown and Calculation Auditing: Anaplan offers drill-down capability on both modules and dashboards, enabling the ability to trace or audit formulas to the original source module or list within the module. This feature provides users with greater visibility into the calculations that are driving the results, which can help them make more informed decisions. 
  • Managing/Administering Template Files: Anaplan’s cloud-based solution offers users access to modules that can be dynamically linked to source or import master modules. This ensures that the latest information, formulas, formats, etc. are current in templates, and consolidations can be instantaneous or on-demand as needed. This feature can help organizations save time and reduce errors by streamlining the consolidation process and making it easier to manage and administer template files across multiple users. 

Why Anaplan? 

Anaplan’s popularity among its competitors in the CPM space is largely due to its user-friendly interface and flexibility. Its platform is accessible to a wide range of users, allowing them to create models, build reports and perform analysis without the need for IT support. Anaplan’s scalability also allows larger organizations to handle large amounts of data and complex calculations. Finally, Anaplan’s cloud-based platform enables users to access data from anywhere, at any time, making it easier for teams to collaborate and work together while ensuring data security and up-to-date information. 

In our experience at 8020 Consulting, we have seen the limitations of Excel for budgeting, forecasting, and analysis. That’s why we have often turned to Anaplan to help our clients gain greater visibility and control over their data. By utilizing Anaplan’s multidimensional and modular architecture, as well as its cloud-based environment, our clients have been able to streamline their processes, reduce errors and make more informed decisions. Anaplan’s powerful features have helped us deliver better business outcomes for our clients. 

To learn more about how Anaplan has transformed our clients’ businesses, check out this Anaplan case study. 

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How to Work With Cross-Functional Teams When Building Your New Product Financial Model

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Financial modeling is not just the responsibility of the finance team. It is important to involve cross-functional teams such as marketing, sales and operations along with your finance team from the beginning of the process. Without proper collaboration and input, important factors in your new product financial model may be overlooked, potentially leading to inaccurate or incomplete financial projections.

Incorporate Stakeholders Early in the Process 

On a past project, I was tasked with analyzing and modeling out new strategic revenue opportunities. In my case, I gathered a cross-functional team with finance, sales, marketing, operations and product development representatives, and we spent a day working through a series of different exercises and frameworks to help us choose the right service offerings.

Incorporating the key stakeholders early in the modeling process creates buy-in and will help to identify problems early, create a collaborative environment, foster accuracy and build support for the final model. You can further increase your chances of success by:

Clearly Define Roles and Responsibilities 

When working with a cross-functional team, it’s important to ensure that each member understands their role and responsibilities in the financial modeling process. This includes identifying the key stakeholders, decision makers and subject matter experts who will be involved in the project. By clearly defining roles and responsibilities, each team member can focus on their specific contributions and avoid duplicating efforts.

Establish Communication Channels 

Effective communication is essential when working with a cross-functional team. Establishing clear and open communication channels can help ensure that everyone is on the same page and that important information is shared in a timely manner. This includes regular meetings, email updates and shared project management tools that allow for real-time collaboration and feedback. 

Emphasize the Importance of Data Accuracy 

Financial modeling relies heavily on data accuracy, and it’s essential that the entire team understands this reliance. Establishing data standards and ensuring that data is verified for accuracy can help avoid errors and mistakes down the line. This includes conducting regular data audits and testing assumptions to ensure that data is reliable. 

Foster Collaboration 

When working with a cross-functional team, it’s important to foster a collaborative environment where everyone feels comfortable sharing ideas and contributing to the project. This can be achieved by establishing a culture of respect and inclusivity, encouraging teamwork and sharing successes together. 

Understand the Business Opportunity 

Once you have the right team, the next step is making sure your new product financial model is both functional and accurately models the potential opportunity. Understanding the business opportunity will involve researching the industry, market and target audience. You should also have a clear understanding of the product or service being offered, and the key features and benefits that differentiate it from competitors. This understanding will help you to identify the key assumptions that are required for the financial model. 

Overall, a thorough analysis of the market and competition is crucial to identifying both challenges and opportunities that can impact the success of a new business venture within an existing company. In this analysis, you should: 

  • Identify the problem or need that the opportunity aims to address. 
  • Conduct a SWOT analysis to assess strengths, weaknesses, opportunities and threats associated with the opportunity. 
  • Define the target market and potential customers. 
  • Evaluate the competition and market saturation. 
  • Assess the potential impact on the organization’s resources, including finances, personnel, and infrastructure. 
  • Consider the feasibility of implementation, including technological, legal and logistical factors. 
  • Determine the potential return on investment and long-term growth potential. 
  • Gather input from each member of the cross-functional team to ensure a comprehensive evaluation accounting for various perspectives and expertise. 

Remember to prioritize opportunities based on their potential impact, feasibility and alignment with the organization’s mission and goals. Using common tools like SWOT Analysis, Porter’s 5 Forces, and outlining your Value Chain can be useful frameworks for aligning a team on what key factors to consider. 

In our project, we made sure to research the market landscape and competition for each of our new potential service offerings using Porter’s 5 Forces and STEEPLE Analysis to make sure we understood the external market. Then we went through a Force Field Analysis and Porter’s Value Chain to really outline and clarify our internal strengths and weaknesses. This helped us build a clear SWOT Analysis for our company. Looking again at our potential options through the lens of the SWOT Analysis highlighted some aspects that we might have overlooked. For example, going through this process helped us identify which potential revenue opportunities were in demand with our existing customers and helped us focus on services that leveraged our current employees’ existing skill sets and that we had the bandwidth to execute. 

We then took these opportunities and made sure they aligned with our long-term vision and goals. With this in place, we mapped the opportunities onto an impact/effort matrix to clearly show which new service offering should be our top priority. The impact/effort matrix identified what we felt was both important and executable for the team. Working through this process together caused alignment and clarity on why and how we wanted to approach the new venture. 

Identify Your Assumptions 

Before you start modeling, you need to identify your key assumptions. This involves looking at the market, the competition, the target audience and other factors that can potentially impact your business. Clearly outlining your assumptions can help you avoid some of these common mistakes when modeling opportunities:

  • Underestimating Competition: Failing to recognize potential competition can result in unexpected challenges and decreased revenue. 
  • Neglecting Operational and Logistical Constraints: Understanding potential limitations and constraints is essential to ensure the venture is sustainable in the long run. 
  • Ignoring Legal and Regulatory Requirements: Failure to comply with legal and regulatory requirements can lead to legal consequences and financial losses.
  • Not Accounting for Financial Resources: Insufficient funding can prevent the venture from achieving its full potential. 
  • Undervaluing Human Resources: Neglecting the importance of skilled and dedicated employees can hinder the venture’s success. 
  • Failing to Adapt to Changing Market Conditions: Markets are dynamic and constantly evolving, and it’s important to be adaptable and flexible. 
  • Overlooking Potential Risks and Threats: Proper risk assessment is necessary to anticipate and mitigate potential threats to the venture. 
  • Not Considering the Impact on the Existing Business: Introducing a new venture can have unintended consequences for the existing business, and it’s important to consider how it will affect overall operations.

With our team in place, we gathered assumptions to build out the financial model. We made sure to design the financial model to incorporate various scenarios including low, base and high revenue targets to help us understand our risks and potential rewards. The cross-functional team was integral in each stage of this process to make sure that their ideas and assumptions were incorporated into the model. Having the different departments as part of the team really helped refine assumptions, which allowed us to model expenses more clearly in each scenario instead of having the typical % of sales estimates. Assumptions built from collaboration and a mutual understanding of the basis of each scenario helped the final model have support across the major departments for approval. 

Create a Flexible Model 

When modeling new business opportunities, it’s important to use a flexible model that can be adjusted easily. A flexible model also helps you to identify the key variables that are driving your business, and it allows you to test different scenarios and see how they impact your business. For example, what would happen if your sales were lower than expected? What if your costs were higher than expected? 

Once you’ve built out your financial model and gotten approval from management, make sure your hard work isn’t wasted by creating a clear strategy for implementation and execution. 

Create an Evaluation and Review Process With Potential Contingency Strategies 

Failure to adjust the model based on changing business conditions can effectively waste all the hard work that your team did in developing the financial model. It is important to regularly revisit and update the financial model, taking into account any new information or changes in the market or industry.  

To develop strategies for adjusting financial models based on changing market conditions, there are a few key steps to follow: 

  • First, it’s crucial to regularly monitor and analyze market trends and data to identify changes that may impact the financial model. This could include shifts in consumer behavior, changes in the competitive landscape, or broader economic factors such as interest rate fluctuations. 
  • Once potential changes have been identified, it’s important to evaluate their potential impact on the financial model. This could involve revisiting key assumptions and inputs, such as revenue projections or cost structures, to ensure they remain realistic and accurate. 
  • Develop scenarios. Once the potential risks have been identified, it is important to develop different scenarios for how these risks could play out. This will help in creating a plan for how to manage each scenario. 
  • Based on the scenarios, create a contingency plan that outlines the steps to take if each scenario arises. This plan should include specific actions and responsibilities for each member of the cross-functional team. 

It’s also important to regularly review and update the financial model to reflect ongoing market changes, rather than relying on a static model that may quickly become outdated. By staying vigilant and adaptable, cross-functional teams can build robust financial models that can withstand the volatility of today’s business landscape. 

Once approved, the team was brought together again to lay out a strategic deployment plan for execution. The deployment of our initiative was tracked using detailed action plans with clear deadlines and KPIs to track progress with each department being responsible for the KPIs that matched the assumptions incorporated in the finance model. The plan included a contingency plan if we weren’t hitting our goals, so we knew when to pivot or reassess our offering. The deployment was incorporated into the monthly review process with any changes updated into the financial model to keep it relevant. 

If you’d like to learn more about collaboration across teams, consider downloading our cross-functional project management infographic. If you’d like to learn more about modeling best practices, our free guide to subscription-based financial models is a great resource too:

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