Get our sample capital expenditure report to learn how to put together your own documents. It offers key sections to include in your reports, as well as a focus on brevity, without compromising on comprehensiveness in answering the main lines of inquiry.
Crisis Management in Finance: The Importance of Flexibility
Some of the largest challenges that many of us have faced in our careers occurred during the COVID-19 pandemic. At the start of the pandemic, I was leading finance and accounting for a middle-market luxury home furnishings company, which experienced a quick drop in sales in late March and April of 2020. This instance of crisis management in finance, meeting adversity and charting a course through challenges is a good reflection of how leaders can support flexibility and adaptation to the fast-paced changes brought about by any crisis.
Managing Cash Balance
The company had always been financially conservative but operationally aggressive in the pursuit of growth. In this case, we took a very careful and cautious approach to ensure access to cash to keep the business running smoothly.
Our first financial activity was entirely based on managing our cash balance to ensure business viability. We met that drop in sales with a detailed cash receipts and disbursements forecast to empower decision-making and a daily focus on the cash balance. We also changed banks (over a weekend) to enable prompt access to a Paycheck Protection Program (PPP) loan. With that change in banks, I negotiated a doubling of our credit line as well. We cut every expense that we could, and some, such as travel and trade shows, were cut for us. We also put in controls for spending, with approval limits by person and a secondary review of every payment as weekly payments were being made. We also had to make the particularly painful decision to pursue limited layoffs.
One final key to this instance of crisis management in finance – we didn’t cancel any orders with our vendors. We slowed some orders down to manage our cash flow, but avoiding cancellations bought even better relationships with our vendors.
Shifting the Focus Toward Income
The next step was a line-by-line budget down to net income, focusing on income rather than just cash. This was the first time the company had pursued this level of detail. I met with various leaders of the business to model each and every line of our detailed income statement. Some lines were rough estimates, others were driven by revenue and the payroll expense budget was built month-by-month for each employee with compensation including estimated overtime and bonuses. This allowed a detailed review of all costs and the ability to review variances every month against present-year expectations rather than prior-year actuals.
A lot of this activity decreased reviews of every variance to prior year and put focus on the variances to budget in the present year. For example, we wouldn’t need to discuss an increase in rent from prior year if it was just the lease for a newly acquired property that would already be reflected in the budget for present year. The approach offered a way to shine a spotlight on what was truly an unexpected variance, good or bad, that needed additional review.
Scenario Planning & Active Monitoring: Tools for Crisis Management in Finance
At this point, we had prepared financially for a severe downturn but left incoming product available as needed. Operationally, the business let everyone who could work from home do so, and we also put protections in place for everyone who couldn’t. This set the stage for reasonable and manageable business results and business stabilization despite the environment. Our plan from here was to monitor daily, weekly and monthly results and adjust as needed. We looked at a variety of scenarios to ensure we had a reasonable plan with various options for success. These scenarios included a variety of sales levels to ensure we had a solid game plan for fairly significant decreases over many months.
Learn more about Crisis Management in Finance in these related posts:
Running With Opportunity
What came next was a great surprise to the business – as we got to summer, the business began to meet and exceed pre-COVID sales targets. The combination of people locked in their houses without travel and other ways to spend money turned out to be a strong driver for the company’s sales growth. Our sales grew at a much faster rate than our already high growth rates, driving the company to record sales for days, weeks and then months. Combined with tight expense control, we ended 2020 with record sales, record profit and record cash.
The major push behind cash flow at this point became having the right cash at the right time to provide access for major investments in doubling the size of our corporate headquarters/warehouse and taking additional space in showrooms and tradeshows.
It is definitely a balancing act to gain comfort in moving forward through uncertainty. This was a period of reflection to ensure our recent sales successes could support long-term capital investments. We needed additional warehouse space before COVID, but with the long-term nature of real estate, we focused on taking space that would support the business for years to come.
Additionally, we looked at an acquisition and had discussions with companies that wanted to invest in our company. We prepared two valuation exercises – one with an investment bank and the second with a tax valuation expert. We also chose a company to embark on a quality of earnings exercise.
Adjusting to a New Landscape
Last, but not least, was a review of underperforming pieces of the business. The most important exercise here was the consideration of opportunity cost. This was a step beyond cash or income to understand where the best return on investment was going to come from.
This is a tough exercise, particularly for people who are used to successful ventures. Simply put, it is best to invest in areas with high probabilities of high returns. If a company, division or product hasn’t been as successful as others, it pays to try and understand why and determine the best path forward. The difficulty arises when details necessitate the emotional, painful decision to close a business.
The business was producing significant cash that had always been invested back into the business or new product/brand introductions. Some places needed more focus and investment to drive them to success.
When assessing options, my primary question was always: How do you focus enough on the smaller products and entities to ensure their success? The secondary question was: When do we close off the funding and stop the new venture?
This led to a lot of spirited discussions as we found footing for these businesses. In all cases to that point, the answer was adjusting plans and strategies, but not closing off any funding.
Crisis Management in Finance: The Relationship Between Strategic Planning and Flexibility
All in all, this is a story about flexibility. No matter how good our forecasts are, the Black Swan events can impact us in strange and volatile ways – and often to better or worse degrees than we might assume. Having a strong finance leader in place allows companies to remain flexible enough to adjust quickly to decrease risk and take advantage of opportunities when they arise.
You can learn more on our financial planning & analysis page, and if you have any questions, we’d be happy to answer them. If you’d like to explore the process of financial forecasting, you can also download our free guide:
About the Author
Bob has 25 years of finance and accounting leadership experience serving companies from the Fortune 500 to the middle market. Prior to 8020 Consulting, Bob led finance and accounting as the Vice President of Finance for Ardmore Home Design, a high growth wholesale luxury furniture company. He has leadership experience with TechnipFMC (oil and gas equipment and technology), Panasonic (in-flight entertainment and communication), Hawker Beechcraft (general aviation) and Ford Motor Company. Bob also worked with the CapAnalysis Group as a litigation consultant supporting attorneys and clients with finance, accounting and economic analysis. Bob holds an MBA in Finance and Accounting from the Ross School of Business at the University of Michigan and a B.S. in Economics from the W.P. Carey School of Business at Arizona State University.
Creating a Rolling Forecast Planning Environment: Changing Mindsets
Change is hard. When it comes to a business’s financial planning initiatives, that is never more evident. Annually, many companies, regardless of industry or size, still usurp three to six months of their internal resources’ time through the traditional compilation of an annual operating and capital expenditure budget. Often, by the time the final iteration of the budget is approved and published, the plan itself is obsolete. An alternative to the traditional, static budgeting process is a more dynamic, continuous planning approach. Enter the rolling forecast, which is prepared on a specific cadence (monthly or quarterly) and for a set period (12 or 18 months are usual suspects) that continues to roll forward in the future as the months/quarters are actualized.
Depending on your type of business and external business environment, implementing a rolling forecast may or may not make the juice worth the squeeze. However, companies experiencing high growth and facing business model volatility should find a great deal of value in adopting this forecasting strategy while laying to rest their annual budgeting program.
The first step forward on the road to a successful process roll-out will be to ensure buy-in and solidarity from these primary stakeholders:
- Senior Management/Board of Directors
- Functional Management/Business Segment
- Finance Team
Each stakeholder group will have different concerns to address, and it will be imperative to secure their confidence in effective implementation.
“It is not the strongest or the most intelligent who will survive but those who can best manage change.”
– Charles Darwin
Securing Senior Management Buy-In for a Rolling Forecast Planning Environment
Convincing senior management to give up their annual budget can be a daunting task. Framing the discussion to highlight the key benefits behind the transition to continuous planning instead will be key. These benefits include:
- The ability to align shorter-term planning to the longer-term strategic plan more frequently than with the traditional budgeting process
- More meaningful variance analysis and explanations that can assist in guiding business segments with future decision-making and assumptions
- The ability to recognize the need to pivot the business model faster when internal or external trend models indicate trouble on the horizon
Updating and projecting forward a 12- or 18-month rolling forecast with revised assumptions derivative of historical data (actuals) and emerging internal and external business environment trends should prove a more highly elevated strategic tool to review company performance, versus a traditional static 12-month calendar forecast that is truncated as the year progresses. In addition, using the rolling forecasting approach can engender a more conscious effort toward business alignment with the long-term strategic plan. If the projected data begins to indicate a continued trend deviating away from the strategic plan, this should serve as a critical signpost that a pivot of the business model may prove prudent.
Recently, I was a part of implementing a rolling forecast planning environment at a small, high-growth media company. The strategic benefits of the continuous planning method over a traditional budgeting scenario made the rolling forecast easy to sell to senior management. The company had a project slate mix of films, TV series, live theatrical experiences and podcasts (all in various stages of development through distribution). Podcasts aside, projects generally took 18 months or longer from gestation through monetization.
Senior management was quick to acknowledge that scheduling such a slate within a 12-month static budget provided a very limited picture of individual project performance as the months would be actualized. By updating an extended reforecast each quarter, they could more effectively capture the significance of changes in assumptions (e.g., changes in the number of and/or release dates of greenlit projects, new or dormant development projects to be incorporated into the release schedule or removed) as they related to the longer-term strategic plan. They could also contemplate a faster pivot of the business model away from the production of traditional theatrical films and towards streaming media products.
“A journey of a thousand miles begins with a single step.”
– Lao Tzu
Earning Functional Manager Trust and Gaining Support for Training in Rolling Forecasts
Functional or business segment managers focus on ensuring their product lines are meeting targets, which are generally derived during the budgeting process. Eliminating the budget and transitioning to a rolling forecast planning environment may cause confusion in terms of how the segment manager relates to his business – and lead to hesitancy and mistrust in the new planning system. It will be important to document and communicate the process, how it works, how it is different from the traditional method, what the forecasting cadence will be and what information will be needed from the functional/segment team to ensure the implementation is successful. Most critical of all, the benefits and business-related value add of the rolling forecasting initiative need to be clear and concise to gain segment management buy-in.
After the media company’s senior management committed to the concept of continuous planning, I sat down with each of the divisional managers to walk them through the rolling forecast model for their division and explain the updating/reporting process on a quarterly basis. Physically walking them through the forecasting mechanics gave them the opportunity to help refine the flow of the information and how assumptions were embedded into the model. This walkthrough served important opportunities for:
- The FP&A team to ensure the buildout of the model and embedded assumptions were correct and
- The divisional managers to develop a comfort level with the rolling forecast process.
After a few periods of reporting, the team soon saw the great value in less time spent each quarter preparing the extended reforecast, versus expending months slogging away on an annual budget where the input assumptions were essentially irrelevant by the time the plan was approved.
“The secret to change is to focus all your energy not on fighting the old, but on building the new.”
– Socrates
In addition, reporting to senior management on actual performance to forecast variances provided more valuable insight into how the division should continue to address changes to project assumptions within their divisional slate. This ultimately resulted in more control and insight into how their divisions responded to external environmental stimuli. For example, they could refocus the slate to greenlight additional TV series and reduce the number of theatrical film projects in development due to more content demand by the major streaming platforms, or they could be more inclusive of ethnically diverse projects. It also cut out the time normally spent explaining to senior management variances to obsolete budgeted assumptions that offered little insight into future performance of the division.
Learn more about forecasting in these related posts:
Encouraging Finance Teams to See the Rolling Forecast as an Advantage
Finance teams can be the worst offenders of proving resistant to change. Most finance departments of small, high-growth startups are leanly staffed, so introducing additional workload onto the team may prove a morale buster. It will be important to sit down with the team members who will participate in the rolling forecast process and, similarly to senior management and business segment owners, lay out the benefits of introducing and training related to such an initiative.
If the rolling forecast will take the place of a traditional budgeting process, finance staff will reap the benefit of regaining three to six months of bandwidth that would normally be focused on the compilation of the budget. In addition, the team will also derive the advantage and insight of being a part of regular strategy-centered discussions, which could reduce the amount of time spent analyzing variances and increase the ability to spot performance trends from data more easily.
Getting the continuous planning approach up and running with the FP&A staff at the media company was a challenge. This was primarily due to the amount of time demanded over the first few quarters to iron out issues within the new consolidated forecasting model and meetings with each division to gain an understanding of changes to their individual slate assumptions. There were many long days suffered and iterations of each reforecast that needed to be closely analyzed and refined to ensure that revised assumptions continued to produce a forecast that remained in alignment with long-term planning expectations.
Ultimately, the finance group became a more integrated business partner with the strategic decision-making process and found a greater voice at the table, proving a motivating factor in getting team buy-in despite the initial additional time burden. Like with most change, there were growing pains, but the team forged ahead and in due course extricated ourselves from what had become a lengthy and no longer relevant traditional budgeting process.
“Change is the only constant in life. One’s ability to adapt to those changes will determine your success in life.”
– Benjamin Franklin
Ditching Tradition and Gaining Agility With a Rolling Forecast Planning Environment
For many high-growth companies, the traditional static budgeting/forecasting process is not dynamic enough to allow the business to be nimble and react timely in response to external threats. Transitioning to a rolling forecast planning environment can provide that strategic edge. However, solidifying buy-in of all applicable stakeholders will be of prime importance to ensure successful implementation. Taking the time to document and communicate the benefits and provide the necessary training of the process to each stakeholder group will be time well spent.
If you need expert support in building buy-in across your organization, you can learn more and/or contact us through our financial planning & analysis page. You can also learn more about building traction toward organizational goals in our operational review program ebook:
About the Author
Over the span of 20 years, Jo Ann has curated a strong finance and accounting background within the media industry through experiences working within large public corporations and small, high-growth startups. Through management and leadership roles with such companies as CBS Films, Propagate Content, GK Films, Tennis Channel and Sony Music, Jo Ann’s areas of expertise spans the controllership function, FP&A, financial reporting, modeling and analysis, building successful finance/accounting infrastructure for high-growth startups, post-acquisition restructuring, managing systems and decision analysis, data conversion and ERP implementation management, process improvement, cash flow planning and treasury management including credit facility oversight and banking relationships, working with third-party valuation firms on film library and purchase price asset valuations, film/TV international distribution finance and oversight of multi-entity partnership taxation. Jo Ann studied Engineering for two years at Iowa State University, subsequently completing a Bachelor Business Management at Toronto’s Ryerson University with an emphasis in Accounting. She graduated the two-year Society of Management Accountants of Ontario CMA program in 2001 and holds a CPA with the California Board of Accountancy. In her spare time, Jo Ann is an accomplished pianist, enjoys studying real estate investment and is an avid animal rescue advocate.
Post-Pandemic Entertainment Finance: Film Release Strategy, Ultimates & ARPU
The COVID-19 pandemic caused seismic changes in the entertainment industry as movie theaters shuttered and productions were forced to go on hiatus. With so many consumers quarantined, the industry witnessed a remarkable level of adoption of streaming at home as anticipated new subscriptions in 2021 were pulled forward into 2020. More than that, the pandemic also shattered the long-standing distribution paradigm. In this blog, I’ll explore the implications of new hybrid film release strategy approaches by movie studios and how forecasting film ultimates has become more complex in the current environment. I’ll also cover Average Revenue Per User (ARPU) as applied to streaming services – and how this key performance indicator is critical for finance leaders to measure and forecast accurately.
In Film Release Strategy News, Flexible Windowing is Here to Stay
Stopping and restarting a major marketing effort as a movie progresses from a long theatrical window to the home entertainment window is a terribly inefficient use of capital. Motivated by a desire to piggyback on the awareness resulting from a movie’s theatrical marketing campaign, studios attempted several times pre-pandemic to shorten the theatrical window, only to face intense pushback from exhibitors.
As it happened, COVID-era lockdowns and theater closures emboldened Hollywood executives to experiment with new approaches to film release strategy. One such experiment, premium video-on-demand (PVOD), has become the hottest industry craze. Studios have shattered the traditional 90-day exclusive theatrical window by offering their movies early for a premium price at home. In doing so, they’ve ushered in the age of the hybrid release option, in which a film is released theatrically and on PVOD simultaneously. This “day-and-date” strategy is now firmly in the studio’s arsenal, along with a shortened exclusive theatrical window such as 45, 31 or even 17 days.
The distribution flexibility that the day-and-date affords is a matter of subjectivity. Disney CEO Bob Chapek remarked, “We’re really celebrating that flexibility…we’re trying to offer consumers more choice.” The National Association of Theater Owners had a much different take following the July 9th day-and-date release of Black Widow, calling the hybrid release a “pandemic-era artifact that should be left to history with the pandemic itself.”
Consumers have benefitted the most from this change: they have access to more content on more platforms than ever before. This change has also been good for studios, which have been desirous of greater distribution flexibility for many years. It took an exogenous shock on the scale of a global pandemic to overcome the inertia, and there is no turning back.
This new age of hybrid releases as a part of film release strategy also means pressure will be placed on finance managers to create robust forecast models able to accommodate a wider range of potential financial outcomes. One size does not fit all in the new world of film distribution.
Is PVOD Revenue Really a Net Gain?
Even before COVID-19, studios distributed blockbusters that sell the most tickets and popcorn differently than niche films that win Oscars and festival awards. But now, especially within the tentpole category, maximum flexibility will dominate the consciousness of Hollywood C-Suite executives.
The marketing efficiency gained from a compressed theatrical window is not in question, nor is the fact that PVOD margins are terrific – a fact often overlooked by theater owners that emphasize total revenue when criticizing hybrid releases.
However, what remains inconclusive is the extent to which hybrid releases will cannibalize theatrical sales. It’s also unclear if PVOD will provide a consistently additive revenue stream above what would have been realized from a more traditional VOD window after accounting for lost grosses at the box office. Revenue that is merely pulled forward is not truly additive.
The (Slow) Comeback of the Cinematic Experience
Movie theaters are reopening, and several analysts put the theatrical business back to normalized levels of capacity and revenue eventually – though perhaps not for a few years. The shared experience of being in a theater with other people is not something that advancements in technology can fully replicate at home. There is good reason to expect a rebound in movie exhibition, although the relationship with content creators has been permanently altered.
Universal Pictures recently struck multi-year deals with exhibitors to dramatically shorten the exclusive theatrical window. In exchange, they’re offering the theater chains a cut of the new digital rental revenues. The agreements allow the studio to release a movie on PVOD platforms such as iTunes or Amazon Prime in either 17 or 31 days post-theatrical release, depending on whether the movie hits a $50-million opening box office threshold.
Disney is likewise emphasizing optimal flexibility, with movies such as Black Widow and Jungle Cruise going day-and-date, while other planned releases such as Free Guy and Shang-Chi going with a shortened 45-day window. Warner Bros. isn’t eliminating all exclusive theatrical releases either but will pursue flexible windowing that will be equally difficult to predict from slate to slate. In July, WarnerMedia CEO Jason Kilar stated that the company will produce 10 movies next year exclusively for its streaming service HBO Max, while reserving the right to release tentpoles at the local multiplex. It’s fair to say that exclusive theatrical windows are not going extinct. Some movies will still have an exclusive theatrical run, but not all. And for those that do, the window will be considerably shortened.
Flexible Wi(n)dow Results in the First Breach of Contract Lawsuit
Another consequence of day-and-date releases and condensed windows is the way A-list actor compensation is likely to be structured. On July 29th, it was reported that actress Scarlett Johansson is suing Disney for breach of contract. The lawsuit claims the studio knowingly violated Ms. Johansson’s Black Widow contract by shifting profits out of the theatrical window and into Disney+ PVOD, while leaving key partners (such as talent) out of the new financial equation. In this case, the hybrid film release strategy may have cost Ms. Johansson tens of millions of dollars in backend compensation tied to box office ticket sales.
Regardless of the legal outcome, we should anticipate the highly public nature of this dispute to impact contract negotiations going forward, and in turn, the structure of participations and residuals for high profile talent. In the context of calculating talent bonuses, finance departments will have a key role to play in determining the right metrics to gauge a film’s success on streaming, as simply pulling up box office receipts on Monday morning is no longer sufficient.
Ultimates Forecasting in the New Distribution Paradigm
Finance managers responsible for forecasting movie performance typically run several box office scenarios and utilize comparables analysis to derive long-range revenue and net contribution conversions across the home entertainment windows. The value of all future cash flows over a 7- to 10-year timeframe is referred to as a film “ultimate.” About two weeks prior to domestic theatrical release, finance managers update their expectations for box office returns and the corresponding film ultimates in the various transactional and licensing markets – with particular emphasis on how revised baseline forecasts compare to what was originally planned.
The distribution flexibility studios now enjoy will allow for greater revenue optimization within the film slate. And yet, finance departments should be prepared for higher window-by-window variances in cases where the actual release strategy differs from what was assumed during the planning period.
Learn more about Ultimates in these related posts:
- “Entertainment Finance: Perfecting Film Ultimates”
- “Common Mistakes When Creating a Film Ultimate”
- “Adjusting Film Ultimates in Response to COVID-19 Impacts”
How Comparable are Comparables?
Another forecasting challenge will be finding good, meaningful comparables (“comps”). Finance managers build ultimates by leveraging historical comps, which are catalog titles in the same franchise or recent titles in the same genre.
Although still valuable as model inputs, comparable titles from only a couple years ago will reflect results from renting and selling movies in a strikingly different distribution landscape than what we see today.
Entertainment finance professionals are accustomed to updating methodologies as technology changes the content delivery mechanism. For example, over the past decade, we have seen a rapid decline in DVD/BluRay revenues as a share of the overall economic pie, while electronic sell through (also referred to as “electronic home video”) and VOD have grown significantly. Ultimates needed to account for this fundamental shift from physical to digital and will once again need to be refined to accommodate the current trend toward flexible windowing.
Assumptions, They Are A-Changin’
The underlying assumptions driving ultimates (such as decay curves) are generally only adjusted once per year, at the end of the year. Considering the dramatic disruption to windowing over the past 18 months – the effects of which haven’t fully settled – these assumptions may need to be revisited more frequently.
In terms of decays, an average film would traditionally decay about 50% per week in the standard theatrical window of old. But that’s not the level we are seeing so far on hybrid releases. Marvel’s Black Widow is a good case study. Despite opening weekend domestic box office of $80 million, week-two grosses fell 68% to $26 million.
That’s a steep decline in only one week and the steepest ever for a Marvel release. It’s exacerbated by the fact that viewers could simultaneously stream the film on Disney+’s Premier Access for thirty dollars. This begets a host of questions:
- Would those PVOD viewers have still been there in a more traditional post-theatrical VOD window while also showing up to theaters?
- Would piracy have had less of an impact on theatrical grosses without day-and-date being a factor?
- Was the second week drop-off driven by PVOD or by the fact that audiences were simply underwhelmed by the movie?
There are no conclusive answers to these questions, but finance managers should be thinking of creative ways to use data to lead us toward clearer understanding.
Don’t Forget the Potential Impact to International Markets
It will be important for finance managers to carefully evaluate their approach in estimating content sales ultimates in international markets. As a matter of practice, finance managers model international ultimates by running regressions on domestic box office (DBO) versus international box office (IBO) for previously released comparable titles. Then, for any upcoming film about to be released commercially, they use this historical relationship to estimate the corresponding IBO for every given DBO scenario in an expected range.
The estimated IBOs are converted to international revenue and profit ultimates across all release windows such as DVD/BluRay, electronic home video, VOD, Pay TV, and Free TV. Finance managers build these pre-release ultimates on a by-territory basis, consolidate the results into a total international view and then combine them with the domestic model to gain a global perspective. This approach remains sound. However, close attention should be paid to how shifting domestic release strategies such as day-and-date theatrical with PVOD will impact IBO projections – and consequently, all downstream international financial returns.
ARPU & Why It Matters
While the industry press likes to focus on which streaming service is ahead or behind expectations on subscriber count, the metric that should be given more attention – and the one closely followed by Wall Street – is Average Revenue per User (ARPU).
Investors care not only about the amount of revenue generated, but the quality of that revenue. That’s where ARPU comes into play. The number of subscribers is certainly an important measure of consumer demand for a streamer’s product offering, and it makes for great headlines. However, the real winners in the “streaming wars” will be those that best monetize their subscribers by converting them into higher levels of revenue received on a per-user basis.
The ARPU metric is not unique to entertainment. It’s widely used in companies that rely on monthly recurring revenue from subscriptions, whether from selling memberships in a streaming platform or from selling software licenses. The basic idea is the same:
ARPU = Total Monthly Subscription Revenue / Average Number of Users of the Service
Beginning MRR in Current Month = Ending Revenue in Prior Month + Revenue from Projected New Subscribers and Upgrades to Higher Price Tiers – Revenue from Cancels and Downgrades to Lower Price Tiers
Therefore, the key to boosting ARPU is to increase revenue growth faster than user growth, either by raising the standard price point over time (as players like Netflix and Disney have done) or by encouraging customers to pay more for premium offerings such as bundled content, Ultra HD availability, ad-free experiences and the ability to stream to multiple devices at the same time. (That’s the nice thing about math: it gives some very clear guidelines.)
Subscriber Growth & ARPU: An Inherent Trade-off?
Not all subscriber growth generates the same financial returns. ARPU can take a hit if a streaming service hits saturation in the domestic market and must look elsewhere to keep up with the rate of subscriber growth that Wall Street expects. The total addressable market is massive. However, if a significant percentage of new subscribers comes from less lucrative territories where rollout prices are much lower, this will put downward pressure on ARPU. As was revealed in Disney’s recent quarterly results, the launch of Disney+ Hotstar in India lowered Disney’s overall ARPU. Raw subscription growth in lower priced regions will lower ARPU over time if prices are not raised elsewhere to compensate. The deadly combination that a streaming platform does not want to see is both slowing subscriber growth and declining ARPU.
Netflix’s ARPU dominance over Disney+ has been a hot topic of late, and the numbers (sourced from company reports) tell the story:
- Netflix’s domestic ARPU sits at $14.54 per month.
- Disney+’s ARPU excluding Hotstar is $5.61.
- Netflix Global ARPU increased 8% in its most recent quarter.
- Disney+ Global ARPU declined 29% to $3.99 in its most recent quarter.
Comparing paid membership counts, Netflix is king with 209 million subscribers, followed by Disney with roughly half that amount at 104 million. But Netflix had a 12-year head start. In the next handful of years, it’s not unreasonable to expect Disney+ to surpass Netflix in global paid membership count – but still fall far short in revenue due to ARPU. Disney+ isn’t going to catch Netflix in the ARPU game for a long time to come.
Investment in Content Boosts Customer Retention
Having the highest ARPU in all the land isn’t necessarily Disney’s main objective, however. The biggest players in the space, particularly Disney, have strong IP that allows them to continue pumping out branded films and series to boost user adds and keep existing users in the monthly recurring revenue base.
Content is king, but it’s also expensive. Where does the money come from to pay for all this new original programming? Through the higher fees charged to streaming customers. Higher fees raise ARPU, as discussed, while customer attrition (also called “churn”) is held in check by funneling the added revenue into the budgets of new, high-quality productions that satisfy the desires of paying customers.
At the end of March, Disney+ initiated its first price hike in the first 16 months of launch and reported no increase in churn. The price increase was even more pronounced in Europe, where churn actually improved because more content offerings were added to the mix. Netflix also reported churn in the most recent quarter below prior-year levels, despite U.S. price increases in its standard and premium plans, providing further evidence that growth in perceived product value can support higher pricing.
It will take years for the dust to settle on the streaming wars, and there will be winners and losers. Only those services that offer high perceived value relative to cost will survive. Finance managers will need to continually hone their forecast methodologies, test their assumptions and focus on the right performance metrics to position their companies for long-term operational success and profitability.
You can learn more about subscription modeling in our Subscription-Based Financial Model Guide.
Get Support for Film Release Strategy and Entertainment Finance
If you’d like to learn more about entertainment finance, we invite you to download our guide to operational finance in entertainment, which covers best practices for competitive mid-level entertainment studios. You can also subscribe to the 8020 Consulting Blog to keep up with our team’s perspective on finance and accounting subjects, based on their real-world experiences in the field.
Additionally, if you need film release strategy support, finance or accounting project support, interim financial management or specialized consulting talent to help you drive your goals, download our service sheet below. It offers a rundown of how our team supports entertainment companies:
About the Author
Chris has 15 years of diverse finance experience across a variety of industries including entertainment, healthcare, distribution, retail, financial services, and information technology. He has held various positions in middle-market, high-growth and Fortune 500 companies. Prior to 8020, Chris held manager and senior manager finance positions at The Walt Disney Company, Focus Features (a division of NBCUniversal), Blue Cross Blue Shield Association, and SpartanNash Company. He consulted for Universal Pictures Home Entertainment and Zacks Investment Research after beginning his career as Equity Research Analyst for Piper Jaffray. Chris has a broad range of experience in financial reporting, budgeting, financial modeling, M&A transactions, contract negotiations, strategic planning, business development and post-acquisition integration. He holds a M.S. in Applied Economics and Management from Cornell University and a B.S. in Applied Economics from the University of Minnesota.
Accounting & Finance as a Strategic Business Partner or: 3 Ways to Shift from Bean Counter to Bean Grower
The bean counter is dead. Long live the bean grower. Finance and Accounting professionals’ role within the corporate ecosystem over the decades has evolved from the proverbial bean counter to emerge as a bean grower. No longer is the finance team viewed as the pocket-protector-sporting, 10-key-toting, necessary annoyance relegated to the back rooms of the office. Now, we have earned a right-hand seat at the strategy table, where we provide key insights on where to plant, how to steward crops, when to worry about weather forecasts and impending draughts, floods or other natural disasters, what to do to mitigate harvest risk and how to maximize yield. Managing these risks and opportunities, from the perspective of a startup ecosystem, calls upon team members to wear multiple hats with responsibilities spanning accounting, FP&A, strategy, treasury, information technology and human resources.
Growing accounting and finance as a strategic business partner for senior management while juggling such competing priorities can prove challenging—to say the least. To assist in coping with such challenges over the years, I’ve employed three key strategies that all finance professionals can seamlessly build into their day-to-day:
- Maintain an awareness of the shifting macroeconomic environment.
- Stay abreast of functional, niche software developments and new platforms.
- Curate a solid professional network sphere.
1. Maintain an awareness of the shifting macroeconomic environment.
Or: How to learn to read macroeconomic tea leaves
Staying informed of the current macroenvironment can ensure that finance can interpret broader economic trends and leverage those learnings internally. For example, a film/TV production company risk mitigation strategy is to produce their films and TV shows in states offering generous tax incentives. Companies will secure single-picture financing or leverage their credit facility established with a banking institution to cover the portion of the budget that will eventually be offset by the collection of the incentive monies.
Depending on the state, a significant divide in timing can exist between the engagement of the financing and the cash inflows from non-transferable incentives, which can expose the company to interest rate volatility risk. The individual or team overseeing the administration of the project financing should be well versed in the day-to-day benchmark interest rate shifts to take advantage of the most economical rate settings.
In May 2019, the yield curve inverted allowing for long-term rate settings to fall below short-term settings. At the time, I was working for a company that had produced a film in a state which provided for a generous non-transferable tax incentive on qualified production spend. However, the incentive was to be reimbursed to the company over a period of four years. (Depending on the threshold of qualified spend of the production, the credit would be reimbursed over the period of two or three years, but the actual timeframe from wrap of post-production to receipt of cash from the state could push out the completion of collection to four years, depending on which state allocation year your project was assigned to.)
While this timing had been factored into the financing model on the film and the tax incentive factored against the credit facility, the film performance was exposed to interest rate fluctuation, which over the four-year collection period had the potential to result in a significant hit to the film P&L. To mitigate this risk, I was vigilant at monitoring rates, and when the yield curve inverted, I engaged an interest rate hedge with our credit facility bank to lock in the lower long-term rate over the four years. Keeping abreast of market fluctuations was as simple as turning on CNBC while having my morning coffee before work and translating that information into a practical work application that resulted in a strategic value-add.
Learn more in these related posts:
2. Stay abreast of functional, niche software developments and new platforms.
Or: How to get out of the tech weeds and expand your digital transformation consciousness
Another way to help management see accounting and finance as a strategic business partner is by reviewing and expanding your company’s digital transformation plan where opportunities exist beyond the traditional general ledger system, ERP or forecasting software. Taking advantage of such opportunities can add additional functional efficiencies that significantly reduce the need for human capital bandwidth on non-value-added activities.
TV and film production companies can have significant fluctuations in cash flow from day-to-day when cycling through physical and post-production on a slate of projects. Managing that cash flow can be a daunting task for most small to mid-sized companies that generally operate leanly.
Many companies still manage their cash forecasting via an Excel model, which can be onerous, clunky and time intensive when updating on a weekly basis. This was the case at a company I worked for recently which was cash flow centric and operated using multiple banking partners. When I discovered (via an unsolicited marketing email in Outlook) an open banking subscription-based platform that instantly lets you know your consolidated cash position and offers accurate and automated cash flow forecasting, I quickly envisioned the incredible efficiencies that implementing such a software could build into daily finance operations.
A forecasting process that would take a week could recognize a significant reduction in preparation time by leveraging the AI and APIs utilized by the software. The bandwidth freed up through employment of such a software product could mean an opportunity to lower overhead costs through reduced headcount or be pivoted to more value-added activities such as analyzing cash usage to find ways to mitigate other operating inefficiencies. Either way, the return on investment should be realized in a short timeframe and prove quantifiable.
This is one example of the ever-expanding universe of niche, cloud-based software platforms that can be a game changer for finance. Take a few minutes out of your day to respond to a request for a demo on a platform you may never have heard of previously—but seems interesting—or ask someone within your network sphere to recommend a product to inquire after. Those few minutes are worth the potential cost/benefit and functionality that you may eventually find yourself in a position to deploy.
3. Curate a solid professional network sphere.
Or: How to get out of the cubicle and grow your networking sphere
One of the best opportunities to position yourself as a better strategic partner is through leveraging the technical knowledge base and insights on finance and industry trends of your professional network.
Working for startups presents interesting challenges that one may not have been faced with previously during their career. Often, you need to figure things out on the fly or design processes or systems that you previously had no experience implementing. This is where the wealth of knowledge found within a professional network can save the day.
Over the years, I have taken advantage of several opportunities to grow my potential outreach pool. I joined a social group championing women executives in the media space, which has regular meet ups and informational events, RSVP’d for various seminars and sponsored events hosted by various CPA firms and requested connections via LinkedIn—all of which have afforded me access to invaluable professional relationships—both industry related and not.
Some examples of leveraging these relationships into successful strategic initiatives include:
- Resourcing a specialized IT consulting firm to assist with securing appropriate software products and partnering on a successful systems implementation, which resulted in significantly elevated reporting and data analytics capabilities.
- Cultivating banking relationships that translated into the negotiation of a credit facility to optimize the capitalization structure for a high-growth startup.
- Having access to a wide swathe of human capital recommendations when staffing issues arose.
The Continual Shift Toward Accounting and Finance as a Strategic Business Partner
To recap, finance and accounting professionals are being leaned on to provide more strategic value to their organizations, especially within startup environments, where they are called upon to wear multiple hats. Three key approaches to your continued evolution as a finance professional include maintaining an awareness of macro-economic trends, being vigilant of emerging niche software opportunities, and finding ways to expand your network sphere.
If you’d like to keep up with our consulting team’s perspective on optimizing the finance and accounting function, then subscribe to our blog to receive notifications when we post new content. You can also further explore supporting strategic endeavors for your company by downloading our free timeline for building a strategic financial plan:
About the Author
Over the span of 20 years, Jo Ann has curated a strong finance and accounting background within the media industry through experiences working within large public corporations and small, high-growth startups. Through management and leadership roles with such companies as CBS Films, Propagate Content, GK Films, Tennis Channel and Sony Music, Jo Ann’s areas of expertise spans the controllership function, FP&A, financial reporting, modeling and analysis, building successful finance/accounting infrastructure for high-growth startups, post-acquisition restructuring, managing systems and decision analysis, data conversion and ERP implementation management, process improvement, cash flow planning and treasury management including credit facility oversight and banking relationships, working with third-party valuation firms on film library and purchase price asset valuations, film/TV international distribution finance and oversight of multi-entity partnership taxation. Jo Ann studied Engineering for two years at Iowa State University, subsequently completing a Bachelor Business Management at Toronto’s Ryerson University with an emphasis in Accounting. She graduated the two-year Society of Management Accountants of Ontario CMA program in 2001 and holds a CPA with the California Board of Accountancy. In her spare time, Jo Ann is an accomplished pianist, enjoys studying real estate investment and is an avid animal rescue advocate.
Opening an Office in Another Country Whitepaper
Transform Your Budget and Forecast Process: From Excel to Oracle NetSuite PBCS
For small to mid-size companies, relying on Excel can create stress every budget season, including a forecast cycle or two, if time permits! Excel is a great tool for analysis and data representation. However, the pain of consolidating, linking and maintaining version control with multiple spreadsheets and several users to create an annual budget takes up valuable time and resources. The finance team should be spending time on actual analysis, reviewing information and telling the story of the company’s financials. Let’s review how moving from Excel to a platform like Oracle NetSuite PBCS (Planning & Budgeting Cloud Service) can help.
Consider an Enterprise Performance Management Solution
Are you and your team drowning in Excel files during budget season? Is the business changing rapidly, making it more difficult for your team to maintain static templates? Are static Excel templates emailed to budget owners and returned via email to your team for consolidation? This situation is an all-too-familiar scenario for many finance groups. And to add fuel to the fire, emails go missing, or multiple versions are re-sent to your team.
An Enterprise Performance Management (EPM) solution facilitates a budget process more efficiently. Utilizing an EPM system provides a central repository of financial data that can be sliced and diced using an Excel add-in, which is a familiar tool used for financial analysis. Many of the EPM solutions have reporting and dashboarding capabilities for senior leadership to digest financial information quickly. Budgets can be entered and reviewed by P&L owners, and there can be an approval workflow and audit trail of changes.
Having experienced implementing an EPM solution, specifically Oracle NetSuite PBCS, switching from Excel to an EPM tool brought the following benefits to the budget process:
- Transparency
- Manageability
- Collaboration
- Data Integrity
Learn more about identifying whether you need an automated system for budgeting and forecasting:
Finding the Right Solution, and Selecting Oracle NetSuite PBCS
The selection process of an EPM solution can be overwhelming. Factors to consider include, but are not limited to, the speed to implement, integrations and application features. To speed up implementations, a cloud-based option is the path businesses often choose. Another consideration involves the integration of data between your ERP and EPM tool, specifically how data will be loaded. Each tool has unique features and specifications. During the RFP and demonstration process, the solutions considered were Workday Adaptive Insights, Host Analytics and Oracle NetSuite PBCS. Though there are many Oracle Planning and Budgeting Cloud benefits, with NetSuite as the company’s Enterprise Resource Planning (ERP) system, implementing PBCS was the most obvious option for four main reasons:
- Compatibility within the same Oracle ecosystem meant there would be a seamless connection to and from NetSuite and PBCS.
- A drill through feature from PBCS to NetSuite allowed users to access transactional data.
- PBCS utilizes the popular Excel add-in, Smart View, which all other vendors were comparing themselves against.
- PBCS was robust and could scale with our rapid growth, both organically and through acquisition.
Learn more about the process of system selection in our guide to selecting a system for ASC 606. It offers transferrable principles and processes: “Selecting a Revenue Management System for ASC 606” [Whitepaper]
Design for the Future
After an EPM solution is selected and requirements are gathered, the design phase of the project begins. During the design sessions, it usually becomes clear that current budget processes and finance views will not work in a future-state solution. For example, a finance process improvement and redesign process may include the requirements for how workforce would be budgeted, how volumes and rates would be captured (which may not be readily available by product) and structuring the organization for proper workflow approvals.
To meet the requirements within PBCS, the Workforce cube can be utilized to manage existing and new employees, and a Revenue cube can be developed to capture volume and rates—along with the enablement of the Financials cube for a consolidated view of all financial data. You can also take advantage of PBCS Valid Intersections functionality, where foreign entities can budget in their home currency with no concerns of inputting data to invalid currencies. Finally, PBCS can perform allocations where applicable, such as Cost of Goods Sold.
Training, Testing & Roll Out of Oracle NetSuite PBCS
Before go-live of PBCS, routine meetings with internal stakeholders and sponsors can help mitigate risks and surprises and ensure requirements are being met. Training for users is often completed before, during and after User Acceptance Testing (UAT). During the UAT phase, bugs will be identified and fixed by your implementation partner. Input and review forms are also modified during UAT to help increase performance, when applicable. Once the model successfully passes UAT, the solution is rolled out to all end users.
An important consideration, and a cost not usually considered, is a resource to administer PBCS. If the current finance team does not have the bandwidth and/or skillset, a systems administrator is strongly recommended. The administrator will be responsible for updates and maintenance, running business rules, documentation, and security controls.
The phases of implementation for an EPM solution take time from the day-to-day operations of the finance team. For future Oracle NetSuite PBCS implementations, keep 8020 Consulting in mind and we can guide you through the selection, design, and implementation process. If you have questions or would like to connect, take the first step by contacting us, or visit our financial systems consulting services page to learn more:
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5 Best Practices for Automating and Scaling Financial Operations
As businesses prepare to scale once again, finance teams are looking to do more with less. Striking a balance between speed and precision can be challenging, but through automation and scaling, you can bridge the gap. As an added benefit, both strategies are important for the long-term financial health of any organization. Let’s review five key considerations to increase the chance of success when automating and scaling financial operations:
1. Start with a solid foundation.
Before automating or scaling any process, it’s important to be sure that it’s worth doing in the first place. Scaling or automating a process that is broken or inefficient will create more problems later, not fewer. So the first step to automating and scaling finance operations is to take stock of the current business process and ask:
Does the current process have a solid foundation, and is it a good candidate for scaling and automation in its current state?
What does a solid foundation mean? It means open lines of communication between finance and other functional departments. It means it eliminates outdated processes throughout the business and that the finance team is thinking proactively, rather than solving problems reactively. Lastly, it means decision makers have access to the data they need in real time.
Before scaling any finance operation, make sure the company is scaling the right way. Prepare a gap analysis to identify weaknesses or deficiencies in current processes. Scaling financial operations is all about small decisions that combine into big impacts. Putting best practices in place now that teams can scale later is the best way drive results.
2. Embrace automation to unlock operational efficiencies.
Scalability doesn’t mean adding people or departments when more work needs to be done. Scalability means empowering teams across the organization to do more by automating. Process automation is one of the most powerful and value-added activities the finance team can initiate. Existing technologies can automate a significant amount of finance and operational activities which can translate into hours of time back to an organization which then can be redirected toward higher value-added tasks.
3. Empower the rest of the company to operate independently.
In order for the finance department to scale its effectiveness, it needs to scale the rest of the company’s ability to make financial decisions quickly and independently using standardized KPIs. In other words, finance shouldn’t be the bottleneck in any decision process.
KPIs should be identified early on for any business of any size. If a business does not have “official” or “standardized” KPIs, then figure out which statistics have the highest impact in decision making for a particular business or industry. KPIs should be also be reviewed periodically especially in rapidly changing business environments. This information will prove priceless.
4. Ensure real-time access to KPIs.
Looking back at the past year or at lagging indicators masks current reality and business trends. Every company should have key KPIs and financial metrics on a dashboard that is easy to update and navigate. With the proper system in place, management can see where they stand in real time.
Learn more about KPIs in these related posts:
- “Building a Balanced Scorecard & Using SMARTER KPIs”
- “KPIs for Finance and Accounting Departments; Development Tips for Effective Enterprises”
- “KPIs & Scenario Planning: Tracking the Right Business Metrics for Modeling”
5. Unleash impact at scale.
Scaling finance and business operations is about much more than adding headcount or increasing spend. It’s about finding systems that empower all teams to be more strategic without adding additional resources. With planning, direction and thoughtfully implemented automation, finance teams can initiate scale in operations in a way that has a lasting positive benefit for every department and the company as a whole.
Need Support Scaling Financial Operations? Bring in Our Team of Experts.
If you’re thinking about increasing automation and scaling financial operations, 8020 Consulting can help. We apply the intellectual capital, technical expertise and energy of our team to address a range of financial projects for clients ranging from Fortune 50 companies to middle market and venture backed firms. Our team’s financial and operational experience, backed by effective methodology created by our team of nearly 100 professionals, supports value realization and certainty of closure. Contact us to start a conversation, or visit our FP&A page to learn more about our work:
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