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ERP System Implementation Project Management [Video Q&A]
In this video, one of our senior ERP system implementation project management experts, Dan Lauten, sits with David Lewis for a discussion about selecting a project manager for an implementation. Watch to learn why common resourcing approaches often set companies up for failure, so you can start your implementation on the right foot.
We’ve posted the full discussion below along with the full audio, but if you’re in a rush, you can also skip through the playlist for shorter segments featuring key questions.
Watch the Video
Listen to the Recording
We’ve also included the full transcript (with time stamps) below for convenience. Happy viewing, listening, and/or reading!
Introductions (00:00 – 03:00)
David Lewis: Welcome to this riveting webcast, and it will be riveting. What we’re going to be talking about is search, selection and implementation of an ERP system. And specifically the benefits of using a third-party project manager to lead this extremely challenging effort. And a corollary of that, by the way, is why it would be disastrous to do otherwise in our view. So, I am David Lewis, I’m the CEO of 8020 Consulting. My good colleague, Dan Lauten, who’s an expert on this, will be joining us. And we’re going to start out by having Dan give us a brief overview of your experience in terms of project managing ERP implementations, types of systems, scope and the types of companies and industries you’ve worked in. Dan.
Dan Lauten: Okay. Thank you, David. Thanks for having me today. Throughout my career, I have project managed implementations for, several ERP systems, including NetSuite, SAP, Sage Intacct, Microsoft Envision, QuickBooks. I’ve also led implementations for other systems, such as Concur for T and E, accounts payable, also for Cognos, Carta, Expensify, Softrax Revenue Manager and various other systems. And I’ve done that for a variety of companies ranging from small startups to large global companies in a variety of industries. I’ve also been called in to help fix the implementations that have not gone so well for some companies throughout my career, which has been a very interesting work.
David: Hmm. Okay. That’s great. So in other words, Dan is eminently qualified. To brag a bit about Dan’s background, he’s spent a considerable part of his career at Accenture doing business process optimization and also financial system implementations in large enterprises. He was part of the accounting and financial and financial systems infrastructure building effort at a large carve out of Accenture called Avanade, which was a joint venture of Microsoft, from there moved into senior leadership roles, first at the global consumer products company, actually a wine business, a global wine business, and from there has been a CFO at startups in that space. Since joining our company, his work has been focused almost entirely on financial systems and business process, project management and in the technology and entertainment space, including post-acquisition and post-merger accounting and financial system integration.
Using a Third-Party Consultant to Drive the Effort (03:01 – 06:58)
David: So I want to talk a little bit about why companies should choose a third-party consultant for ERP system implementation project management. I’m specifically interested in hearing your perspective on some better practices — some people would say best practices — for leading a successful implementation, but I’m also interested in what you’ve learned from clients you’ve helped, where you had to go in and remediate failed implementations. What, if anything, did these implementations, the not-so-successful ones that you came in once it was done have in common?
Dan: Right. You know, David, I think in every situation where I’ve been called in to help fix failed implementations, there’s been one thing in common and that is the reliance on that company to use an internal resource to lead the project management efforts for, you know, very sophisticated, very complex ERP implementations.
David: Okay. That’s interesting. And I’m wondering why that is because I know that many companies have the idea that they’d like to give the project management role– It could be one of the company’s IT project management staff, it could be that they pull somebody out of a full-time finance or accounting role who, you know, they view as bringing some institutional knowledge to the design and implementation process. So why doesn’t that work?
Dan: Interesting question. And a lot of companies do assume that that’s the way to go. Pull somebody from the internal resources to lead that implementation, but it’s really not a good idea. And I’ll tell you why. There’s two main reasons. Number one, a project management of an ERP implementation is a very demanding assignment, and it requires a hundred percent of the attention of the person leading that implementation in order for that implementation to be successful. So if you’re going to pull somebody out of a full-time role and also assign them a full-time role as the PM, for something that’s very complex and very demanding, you are essentially going to be setting that person up to fail, not only in their previous job as Controller or Director of Finance, but most likely at leading this implementation. It’s just really hard to pull somebody in two different directions at the same time.
Dan: And you know, you’re also going to pull that person away from their regular duties. So they’re not going to be able to attend to their direct reports and others they support the business. And therefore, you know, others are going to lose confidence in that person in their regular duties. So the other thing is that successful implementations require the skills and expertise of a very seasoned project manager. And when I say seasoned project manager, I mean somebody who has worked extensively with software developers, implementers, the VARs and cross-functional groups such as IT and business intelligence within your organization. That person who’s leading that implementation has to have experience with transforming, mapping, migrating data, designing processes, procedures, reports, and developing content for the user acceptance testing and also for user training as well. And most importantly, you need somebody who has got very strong PM skills to lead that complex engagement and without having that in place, again, I think you were setting yourself up for a failed implementation. It’s virtually impossible to find one person who has all of those PM skills and has also risen the ranks in finance and accounting. So it’s just very difficult to find that– all those, all those particular skills in one person.
Using a Qualified, Internal, Full-Time Resource as a Project Manager (06:59 – 09:45)
David: Okay. That’s interesting. So let’s just pose a hypothetical. Let’s say that I have a senior member of my finance staff who does have strong project management skills. Somebody who’s led other ERP implementations in the past. So they have past experience doing that. Would– in that case, would you recommend assigning a project management role to them if you could successfully back-fill their current position?
Dan: I wouldn’t recommend that because, as I said earlier, the PM role is a full-time responsibility. And also transitioning your role to somebody else is going to be very time consuming. So let’s say if I’m the Controller or Director of Finance, and I’m setting up somebody else to back-fill that role so I can take over the PM responsibility. I’m going to get pulled in a lot of directions at the beginning of that project. And that’s a really critical point in a project, when you’re setting it up. And it’s just going to be a big distraction for that person, and it’s going to lead to burnout. It’s going to be very frustrating for the direct reports of that former Controller or Director of Finance and potentially lead to a failed implementation. So, you know, and also I think people get used to the relationship with their Controller or their Director of Finance.
David: Sure.
Dan: If there’s an issue down the line, they’re going to come back to that person and try to get their help to resolve issues, and it’s going to pull them away from that project. So another thing I’ll say too, David, is, you know, the nature of the role of a PM is somebody who has to at times, I guess, be the bad guy or the bad gal in this situation. They are assigning tasks to employees at all levels to get the implementation done. So people at all levels, so their direct reports, people who are senior to them in the organization, and it puts that person in a very awkward position. Because now you’re assigning responsibilities and making sure those things are getting done. And you’re communicating with people who are potentially seniors in the organization. So it just, it’s very awkward for someone to step into that role.
David: That makes sense to me, somebody once said that being the project manager of an ERP implementation is no time to be taking new friend applications because you won’t make many.
Dan: That’s very true.
David: And the other, the other is, you know, sort of the tyranny of the urgent over the important. And what I’ve seen is that, you know, if there’s an emergency or some urgent need state that involves a day-to-day transacting of business, people are just going to get pulled back into it. I would say that my observation reflects what you’ve just indicated.
Using Internal, Non-Finance or Non-Accounting Employees to Manage the Project (09:46 – End)
David: What if a company uses a non-finance or non-accounting employee to lead the implementation? So that would be for example, an IT resource who has project management experience, they understand the infrastructure backbone of the company, and they’re not going to be distracted by the day-to-day rigors of the accounting and reporting group’s responsibilities. So could that work?
Dan: Yeah. I’ve seen companies do that. And they do that when they assume that an ERP implementation is simply taking some data, transforming it, uploading it to a new system, maybe integrating their CRM system or accounting software with the new system. That’s not really what ERP implementation is.
Dan: When you think about the, you know, when you think about the end user, right? Typically it’s the accounting and finance team. And an ERP implementation is not simply just an advancement of technology or a change to new technology or something that’s shiny and new. I mean, it’s going to involve reengineering accounting, processes, procedures, controls, and it’s going to completely– it’s going to completely change the way accounting and finance professionals do their job on a day-to-day basis. So they are the administrators and the users of the system. So you need a resource to project manage your implementation who has a very strong finance and accounting acumen, as well as those PM skills I talked about earlier, if you want to be successful with your implementation. So a lot of companies do go that route. I don’t recommend it for those reasons, so.
David: Okay. Thank you. So if I think about the implementation, you have a software company, right? And so a lot of the VARs that are referred as– let’s say they’re the technical integrator. So you have the technical integrator and then you have the software company itself. Sometimes the VAR will actually have project management people that they would seek to, or would have historically, put in charge of the implementation. How does that work versus what you’re talking about is a more optimal solution?
Dan: I wouldn’t recommend that approach either, David. If you think about what the PM is doing, they’re representing your company, the company that’s doing the implementation. They’re– I would call them the conduit between the company and VARs and software developers or the software company. So that PM needs to be acting for you, for your company. And they need to have a thorough understanding of your business goals, your business needs, the direction that business is going in, and they need to represent you, the company. So I think by assigning that to a VAR or software company developer or a PM on that side, you’re not going to get the best representation from the project management effort.
Dan: So I would recommend that you, what we just discussed, you select an independent third-party project manager to lead the implementation. So that person is going to be your best representation, or represent you, the company. You’re not going to be pulling somebody off of your team or try to pull them in multiple directions to lead an implementation while still doing their old job. And you’ll be assured of getting somebody who has project management experience that knows how to lead a complex engagement, has also a high degree of finance and act and accounting acumen. And assigning that person as the ultimate, I guess, person who’s going to drive that implementation to a success.
David: Okay. That’s great. Thanks, Dan. It’s been great talking to you today. Let’s reconnect soon. Shall we?
Dan: Love to. Thank you.
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About the Featured Consultant
Dan has 20+ years of global finance and accounting experience across multiple industries. As an Accenture alumnus, he has over 14,000 hours of project management experience in the areas of Business Process Development and Re-engineering, Systems Integration, FP&A as well as M&A due diligence and post-acquisition integration. Throughout his career, Dan has created finance and accounting processes, implemented systems and built top notch finance and accounting teams for several business start-ups and acquisitions worldwide including Avanade, a joint venture with Accenture and Microsoft where he also served as VP of Finance for the Americas and Asia Pacific. Prior to joining 8020 Consulting, he was VP of Finance and Continuous Improvement for the 2nd largest wine company in the world. Dan holds a Bachelor of Arts degree from Texas Tech University, a Masters of Commerce degree from the Burgundy School of Business in Dijon, France and an MBA in Finance from Loyola University of Chicago.
Selecting Revenue Management Software for ASC 606 Whitepaper
NetSuite Features & Capabilities Q&A [Video]
In our new video, 8020 Consulting’s Julian de Luna and David Lewis discuss NetSuite features and capabilities that are often underutilized and underleveraged. Watch to learn common issues, misconceptions and forward-looking opportunities of one of the most commonly implemented financial systems around.
We’ve posted the full discussion below along with the full audio, but if you’re in a rush, you can also skip through the playlist for shorter segments featuring key questions.
Watch the Video
Listen to the Recording
We’ve also included the transcript (with time stamps) below for convenience. Happy viewing, listening, and/or reading!
Introductions (00:00 – 03:13)
David Lewis: Hello everybody. Thank you for joining this soon-to-be riveting discussion—and I actually mean that—about NetSuite. My name is David Lewis. This is my colleague Julian de Luna. We’re both with 8020 Consulting, as you may know.
The reason we selected this topic is that NetSuite, out of all the financial applications that we are familiar with—which is essentially all of them—NetSuite is the most widely used accounting and ERP package among our clients, particularly among emerging growth and technology companies and even mature software, hardware companies, et cetera. And there are reasons that it is widely used. What’s interesting is that it also seems to be the most massively underutilized or underleveraged piece of software that we have seen. We frequently hear from our clients that there are very basic things that they haven’t been able to execute on the software.
We also find there to be a modest amount of awareness at best about all the things that this software can actually do. Our hypothesis here is that a greater understanding of NetSuite’s capabilities will do several things. Number one, allow you to enjoy more benefits of automation and make the lives of your team better and easier and more interesting; it will make your company more scalable and effective; and you will probably also save money on software. And here’s why: because there are capabilities that NetSuite has in particular areas that people are not as familiar with, and because of that lack of familiarity, people go out and buy other pieces of software to bolt onto or integrate with NetSuite.
So, I have with me, Julian de Luna. The reason we have Julian here is that out of our hundred people, he is one of the top one to three NetSuite gurus we have. In his five plus years with the company, he’s worked on four different engagements. All of them were various phases of NetSuite. One was a start-to-finish implementation at a complex multichannel consumer products company. Another one was an already live, but in need of remediation, NetSuite environment in a multi-hundred-million-dollar equipment rental business. The next was really about expanding and broadening the applications and use of NetSuite within a high-growth, $20-million and recently purchased electric vehicle charging infrastructure company. And he’s currently on a project at a $130-million high-growth app company. And so, I introduce to you Julian de Luna.
Common Problems with NetSuite (03:14 – 04:53)
David: I have some questions for you, Julian, and I’m going to let you do most of the talking today. The first is: What are some of those common problems you’ve seen NetSuite users experience?
Julian de Luna: I think actually the most common problem that NetSuite users have is basic training and reporting and navigation. So, for example, a stock income statement rarely has enough information for you to do any thorough analysis. So, users often don’t know which fields to pull, how to find those fields, et cetera.
And even once they actually find those fields and know how to customize a report, they often don’t publish a version to their team. So multiple people within that team continue to modify the existing stock P&L over and over and over again. So, there are ways to save it and publish it and gain those kinds of efficiencies in that reporting.
David: Sounds like something that I would be very interested in doing if I had that problem. What else are you thinking about in terms of answers to that question?
Julian: Even in terms of basic navigation, for example, users like to look at invoices by vendor. So, the common way of doing it is to go through the vendor record and look at the invoices or transactions associated with that vendor. Instead there are ways around it, like creating a saved search, a saved search by invoice with a filter for vendors. So, you can pull the same report, but use it for multiple vendors. There’s lots of little tips and tricks in NetSuite customization like that to help that day-to-day.
David: In the companies that you’ve seen, are they often not doing that?
Julian: They’re often not doing that.
Gaining Efficiency with NetSuite (04:54 – 08:10)
David: Okay. All right. That’s great. For some of the more experienced users, are there any other ways in which the system can be used to improve efficiencies in day-to-day accounting operations?
Julian: Yeah. There’s tons of stuff.
A few examples off the top of my head. You can set up notifications for internal users for things like purchase order creations. And those people might not necessarily be part of the approval process, but they need to be informed of those, that those transactions were created. So, you can set up, you can set up notifications to those internal users.
You can set up approval workflows to make sure that people within the departments are seeing invoices, for example.
You can set up email notifications for things like remittance advice.
And a lot of these things that help the day-to-day don’t actually need to be—you don’t need to actually have any development or coding experience to do these things. You just need some training and, you know, a little bit of ability to configure the system.
David: That’s great. Good. Okay. And then, NetSuite users, the impression I have is that there’s a lot they can do on their own that they may not know about. And, they also may not know what some of the capabilities are of NetSuite beyond some of the basic blocking and tackling and accounting. So, can you talk a little bit about some of the more complex processes that you’ve been able to implement and execute through NetSuite?
Julian: Yeah, I think some of the more complex processes actually require NetSuite engagement and maybe a solutions architect in house. And some of the things that I might be describing, like automating financial processes with NetSuite including subscription billing, for example, or schedule billing, which is decoupled from Rev Rec. And Rev Rec is actually another process that can be a little bit complex on the get go. And this includes handling multiple Rev Rec principles from anywhere from inventory to software. NetSuite also can handle projects, and ultimately project profitability, time-tracking, even demand planning and supply chain management.
David: Wow. Where have you—can you give me an example of some of the warehouse management application of NetSuite and/or what you integrated it with to get that operational?
Julian: Yeah, there was a client who was using a homegrown inventory management system that was connected to warehouse facilities. But it was decoupled from their finance, from their accounting system, right? Their accounting system at the time was QuickBooks, and they were switching to NetSuite. NetSuite has the functionality of managing inventory in different warehouses in different countries. And then it immediately interacts with the financial statements. So, eliminating that homegrown system and then having that direct integration with all the warehouses and picking and packing and fulfillment and all of those processes were within the system.
David: That’s great. Very good for those of our clients who are e-commerce for example, or just really anybody who’s manufacturing or distributing a product.
Technical Support, ASC 606 and Advanced NetSuite Features (08:11 – 14:29)
David: Can you talk about the—one of the things that people like about cloud-based software is that hypothetically it requires, I guess, a less technical expertise on the part of the company’s IT or programming staff, so that they have time to work on product and other customer-facing, revenue-generating activities. As we all know, if somebody in a company’s IT or programming area has a choice between working on accounting and reporting projects and product, or new product development, they usually choose the latter. And so that’s a concern or issue I’ve heard from many CFOs.
So, for some of these more complex processes, do these require either internal or external IT people or programmers to come in and do this stuff?
Julian: Yes and no, but at the same time, I think accounting teams really can handle or at least maintain most of the NetSuite solutions. I think that’s some of the strength of NetSuite. You don’t actually need to be, you know, a hardcore developer to handle some of these things, especially to maintain it, but it does get a little complicated. So, knowing the general architecture of the system is helpful, and this includes records, record types, list segments, and how those—how that data is organized and those records are organized.
And I think to piggyback on that a little bit, the dependencies across those records and record types. Rev Rec journals, for example, you can press a button, right? And then it will create the Rev Rec journals. But then also what’s happening in the backend are plans and arrangements and elements are all getting created—there’s backend processes. So, having an understanding of how these are created and how that data is organized is helpful. But again, you don’t necessarily need development or IT background to do this.
David: Okay. Yeah. I want to ask about that because a lot of our clients have gone through what I would call Phase One of ASC 606 compliance, which is to say that they are technically compliant, but the solution that they’ve implemented is often not a purpose-built software. So, the first wave of implementations in many cases were done by public accounting firms because technical compliance was required. However, those solutions are not scalable. As bundles, pricing, configuration of the service offering, acquisitions take place, those revenue recognition models are going to become unstable or not useful at all. And so, the next wave that we see in 606 will be implementing more scalable software solutions. There are some out there that are purpose built, but my understanding of my conversation with you is NetSuite has pretty robust capabilities in this as well. I’ve heard different things about that. What are your thoughts?
Julian: I think so. I think definitely as we navigate through the migration to ASC 606, I think it would be helpful to have—for most companies to have a solutions architect that can engage with NetSuite. A lot of these things are navigating new territories within the way that the system handles it.
But after speaking with a number of people within NetSuite, I do know that there are solutions built. For example, software and all the different configurations as it pertains to ASC 606. Every company is different obviously, but I do know that there are solutions that are available in NetSuite.
David: OK, I think the answer is probably before you go purchase and work to integrate a revenue recognition software solution, first find out if your existing ERP has those capabilities.
Julian: Absolutely. Certainly.
David: All right. So where do companies go to get this type of information, the information to inform these more leveraged uses of the system, especially the current team doesn’t have that knowledge base already?
Julian: I think ultimately a dedicated resource to help implement the solution and get this information is key. Somebody who’s not necessarily bogged down with the day-to-day of closing books who could really focus on scoping, configuration testing and developing training materials. That knowledge transfer is key, right? So, ultimately that dedicated resource who can provide training materials, communicate solutions, offer ways to debug and really empower the accounting team to be self-sufficient after that dedicated resource leaves.
David: If only I knew somebody like that. Oh wait, Julian—
Julian: I don’t know.
David: Well, one thing I do want to say is that—in fact, I had a conversation today about a company that’s doing a NetSuite implementation. There are really difficult implementations, but there are no easy implementations, especially if you try to do all of the functional project management work yourself. What we see a lot of is that a company brings in a technical integrator with NetSuite—it’s actually the NetSuite implementation team, you know?
But NetSuite is a software company. So, they alone are not going to be able to run the entire implementation. And so the functional subject matter expert piece, absent somebody from the outside, is going to fall on the existing accounting and finance team, for whom there are day-to-day job duties that are probably already 50 to 60 hours a week of things that are always more urgent than the implementation. So, the implementation will get inadequate attention. And what we see is that therefore 70% of the way through, perhaps the users are doing some preliminary user acceptance testing. And all of a sudden, there’s a realization that the construction project, which was this implementation, needs to be started again.
Concluding Remarks (14:30 – End)
David: So, having somebody—some companies are able to actually free up more of their own team to work on these things full time, we don’t see that that often—but having somebody who can really be the emissary or quasi-clone of the Controller, who can work on these projects, who can help hold the software company and the technical integrator accountable, and also who can be there to train the users and particularly the post-go-live hypercare work that I know you’ve done, Julian. I think that’s critical because after the system goes live, and also through at least the first month-end close, a lot of issues are going to come up. If people are not trained well, and if they’re uncomfortable using the system, then there will be errors in the first month.
And so even if there were not implementation problems, there are going to be transaction processing problems that can arise from inadequate training that will then show up in the reporting for the first and second and other months. So, this post-go-live hypercare role is vital, as is the development and also guide to the location and use of training materials.
So, I think we’re going to wrap up, but what I would say is this: Implementations can be great experiences, but they’re challenging experiences and they can also be horrible experiences resulting in things like implementation fatigue and the termination of the implementation. Going most of the way through an implementation and having to do a fairly complete rebuild or in the worst-case scenario going live. And we’ve seen companies almost get shut down when there is severe dysfunction with the software and users’ knowledge of it. So, the good news is these types of adverse outcomes can actually be avoided. And whether the person comes in from our company or from some other organization, we strongly encourage people to do a careful review of how they’re resourced going into the implementation and post-go-live if they would like to have a survivable and actually prosperity-inducing experience.
So, with that, we will close. Julian, thank you so much for sharing your thoughts, time, energy, and brain with us today.
And thanks to all of you who tuned in. Have a great day.
Want More?
If you’re looking for more insights, we invite you to subscribe to our CFO Insights blog to receive emails when we post new content. To learn more about selecting a financial system and automating financial processes, you can also download our free checklist:
About the Featured Consultant
Julian has diverse finance and accounting experience in various industries including financial services, entertainment, consumer electronics, and consumer products with companies including Capital Brands, Video Equipment Rentals, Belkin International, Deluxe Entertainment, and Pacific Life. His expertise includes FP&A, budgeting and forecasting, financial modeling, financial process improvement, financial system implementation, treasury operations, and cash flow forecasting. Julian holds a Bachelor of Science in Business Administration from the University of California, Riverside and a Master of Business Administration from the University of Southern California.
Cash Flow Management & Forecasting Q&A [Video]
In this video, 8020 Consulting’s David Lewis and Mitch Browne discuss the importance of cash flow management and forecasting, particularly in times of economic disruption and uncertainty. Watch to learn how good forecasts are built and leveraged—and how a bottoms-up approach can better inform executive decision-making.
We’ve posted the full discussion below along with the full audio, but if you’re in a rush, you can also skip through the playlist for shorter segments featuring key questions.
Watch the Video
Listen to the Recording
We’ve also included the transcript (with time stamps) below for convenience. Happy viewing, listening, and/or reading!
Introductions (00:00 – 02:10)
David Lewis: Alright, let’s get started. My name’s David Lewis. I’m here with my colleague, Mitch Browne. We are with 8020 Consulting, based here in Southern California.
Today’s topic is cash flow forecasting. Our view as a firm is that this is something that it’s almost impossible to pay too much attention to, especially in the current economic financing, lending and capital environment. Not to mention the more-than-modest amount of uncertainty about future economic prospects. We’re optimists in our company, but it’s still good to be prepared.
Just a brief background on Mitch Browne. He’s an MBA from Washington. He has a very nice blend of corporate and investment banking and securities in his background. He worked at Wells Fargo Securities as an Analyst Associate and Investment Banking. He worked at Yahoo as a Senior Financial Analyst in the Corporate Finance area. He worked at Hulu as a Finance Manager. And at AECOM, which is now about a $20-billion global engineering services firm, he built experience in sell-side investment banking, buy-side corporate development, and corporate financial planning and analysis. So, he’s an excellent authority on cash flow forecasting and the subject of forecasting in general.
He’s been with the company for a number of years, and many of his projects have been around forecasting capital requirements for emerging growth and technology companies. He’s done a lot of transaction support on the sell-side, in which cash flow forecasting was an important part of determining the working capital peg—a key point of negotiation in M&A transactions.
So, Mitch, welcome to our remote and virtual world.
Mitch Browne: Thank you, David. Always good to see you.
Deficiencies & Opportunities in Cash Flow Forecasting (02:11 – 03:22)
David: The first question people might be asking is, what might be wrong or deficient with the way that we’re doing cash flow forecasting and reporting today, versus what might be going on in the environment, and what I should be doing?
Mitch: Good question. I think there are two main reasons we might think of it differently now than we would have a couple of months ago. Traditionally, companies consistently look at the P&L performance, they sometimes look at their balance sheet and they only occasionally look at cash. And as a result, many companies have cash flow forecasting setups that are essentially afterthoughts or backed in two types of calculations. And we’ll talk a little bit about what we mean by cash flow forecasts at 8020.
But the other way it is significantly different today is that forecast we built only 8 – 10 weeks ago likely didn’t incorporate all the variables and toggles that we would consider today. What I mean by that is, there are certain things that companies are reacting to today, whether it’s a decline in sales or trying to control costs. And there are things that we would want to plan for and assume that we just wouldn’t have taken into consideration a couple of months ago.
About Ground-Up or Bottoms-Up Cash Flow Forecasting (03:23 – 07:47)
David: Alright. Mitch, I’ve heard you say a lot about the fact that if a company hasn’t done this already, due to the change in economic circumstances, most companies should be rebuilding their cash flow forecasts “from the ground up.” Why is that and what does that mean exactly?
Mitch: Sure, this varies from what people might traditionally do with an annual plan, which is talking about our cash flow planning, we do it at a weekly level, and it is starting at the bottoms-up. So instead of taking prior periods and adding a percentage or taking away a percentage, we go at the most granular level and build up expected cash receipts and disbursements. That can be large items like rent and payroll and understanding exactly when they’re going to come out of our bank accounts.
It also includes future events for expected expenses that we maybe didn’t really think about. Whether it’s annual maintenance of some assets, whether it’s some sort of cash payments for taxes, things like that. In general, we add those things that when you’re planning at a bigger scale, either a quarterly or annual view, you might not care when those values are going to hit.
What we’re talking about is a bottoms-up cash flow analysis that lets you know what your anticipated cash balance is going to be every given week.
David: Why do you think that’s important now?
Mitch: Well, simply, it’s important because you don’t want to run out of cash. This is a consideration that is a reality for some companies all the time, but for many companies, this might be their first time or at least first time in maybe a decade where they’re looking at cash balances. And they really want to know: where is that turning point? Where are they going to need to ensure they have additional financing lined up?
Additionally, and we’ve encountered this with our small startup or high-growth companies, it also can inform when you want to raise money. You don’t want to raise too much money and over-dilute existing shareholders. And so whether it’s trying to conserve cash or trying simply just to know when your next round of financing is necessary, and how much—those are both valid reasons that the company would want to revisit or create a cash flow forecast.
David: Okay, that makes sense to me. And, I know that, particularly in Los Angeles, there’s a very large number of companies that are venture-capital-backed that may have paths to profitability, but the path may run out a few years into the future.
And so in a different kind of a funding environment, they might need to shift gears in terms of their burn rates and maybe getting to profitability, or at least cash flow breakeven much more quickly, which could necessitate some dramatic changes at the enterprise or a change in their business model.
What kinds of companies would you say are good candidates for this type of forecast?
Mitch: Well, it’s anyone who’s looking at cash a lot harder and maybe looking at cash balances for the first time. And it can be tempting to look at your traditional forecast and traditional P&Ls and do a proxy for cash, but it really doesn’t give you that same level of certainty. I think going through the exercise of bottoms-up comprehensive cash flow forecasting can expose the drivers of your costs on a true cash basis as opposed to a P&L, which one can exclude some cash costs for whatever reasons.
It also really articulates what level of investment is required. Instead of spreading investments over a longer period of depreciation, you’re actually saying, “Oh, I need to go spend a million dollars on this physical item or this piece of software.” You can see where those bumps are, and understand which of those things are truly necessary or may be pushed out, delayed or spread out over a longer period of time.
And similarly, you can think about headcount, hiring as well. Companies that, like you said, might be smaller, high-growth companies may have had a certain path to profitability. If they know they’re going to need to make that cash last a little longer, they may need to revisit some of the things they’re planning to do the rest of the year.
Scenario Analysis and Changing to the Economic Conditions (07:48 – 09:50)
David: Okay, that makes sense. That’s a good point, in terms of making fixed asset investments or other things that get amortized over time. They may not look that consequential if you take them over their useful life and you’re just recognizing the expense every month. But that can be very significant cash outflow at a time your company should be looking at cash.
I believe it’s true that there are some very unusual things about the suddenness of the change in economic circumstances. And how it’s impacting companies operationally. And things that you would typically have extrapolated from an EBITDA forecast into a cash flow forecast today. There are risk areas, there may be opportunity areas, but there are certainly risk areas on the cash flow forecast that probably people were not thinking about two or three months ago.
You mentioned earlier in our discussion about some of the toggles and scenario analysis or input areas you’d like to have today that you might not have thought seriously about three or four months ago. Can you talk a little bit about what those are?
Mitch: Sure, there are some of the bigger-picture items. Maybe you’re thinking about expanding your footprint real estate-wise or making new hires—those are sort of the easier ones to wrap your head around. Those are maybe areas you to wait on or reduce.
A few of the areas that would be considered today that never would have crossed one’s mind perhaps eight or nine weeks ago would be things like furloughs or leaves of absence or having salary reductions across the board types of reductions. Even some relatively smaller things that no one may have thought of, like 401k matching contributions, or smaller areas of G&A overhead that in most traditional or typical budgeting processes don’t even come up as an option to toggle.
Incorporating Deterioration of Credit Quality (09:51 – 11:07)
David: That one makes sense. How do you integrate deterioration in credit quality of your customers? I’ve thought about that for clients in certain sectors, but can you talk a little bit about that and how you build that in your cash flow forecast?
Mitch: Yeah, that’s a great point really. In addition to the expense side, which does get a lot of the focus, is the receivables and collectibles. And so understanding is part of a cash flow forecast, we go at the creditor level and look at each amount owed to the company and owed out, and we work to be able to evaluate the likelihood of collecting and maybe revisit historical assumptions around bad debt.
If historically it was 3%, is that still a reasonable assumption? You really want to go account by account to understand the risk associated with each. The last thing you want to do is build out this cash flow forecast, assuming everything’s perfectly collected, and realize you haven’t really had a comprehensive approach and your data is not accurate. Because then you’re not going to collect the way you assumed you would have eight weeks ago.
Making the Case for Prioritizing Cash Flow Forecast Updates (11:08 – End)
David: So it could either be that you have business failures that are actually causing your write-offs to go up significantly—I mean by orders of magnitude—or you have a stretching out of payments, which obviously can come in cash. So all of a sudden, if you don’t have a revolving credit facility in place, now is not the best time to be going out looking for one. But I know that a lot of companies are drawing their facilities down so they have cash, part of which might be needed because even if their customers are paying them, they might be stretching out the payment terms beyond plan. So I think that makes sense.
Anything else in terms of thinking about the benefits of doing this exercise? Most of our people in finance, the CFOs and others that we know, generally are always trying to do more work than they really have the capacity to do. Most companies don’t exactly over-invest in the size of the accounting and finance team. If somebody is wondering what the benefits of doing this are versus the more urgent compliance and reporting and control requirements they have, what would you tell them about why cash flow forecasting is a worthwhile exercise?
Mitch: Good question. I think everything gets viewed with a certain level of urgency. And that’s only increased over the last couple of months.
If you’re asking me to defend a cash flow forecast, I’d say it’s probably the core analysis. What is the thing that keeps the light on? It’s cash, right? At the end of the day, that’s going to be as important, and I’d say probably more important, than any sort of traditional forecast or view on a prior period. Both of those are great to have, but you really do want to have a very certain idea of how long your cash is going to last and what your capital needs are. So obviously, it’s a little self-promotional, but I’d say put it at the top of the list.
David: I agree. It is self-promotional, but I think you’re right about that. Somebody once told me a long time ago, they said the number one rule in business is never run out of cash. It probably sounds obvious, but what I have found that, first of all, we know you can grow yourself right out of business if you’re not properly capitalized and financed.
The second thing is that, particularly in the middle market to lower-middle market, I think many companies don’t realize that you don’t want to wait to the last minute to find out that you need to go raise more cash. By that time, there are all kinds of bad things that can happen—including ending up losing operating or equity control of your enterprise to your lenders, for example.
It’s important to identify points in the future when cash might be at a premium well ahead of time. That’s one thing.
The other thing I would say is that one of the greatest gifts a CEO or CFO can have or give is the gift of peace of mind. I know that when we headed into this, one of the first things we did as a firm was build a very robust and dynamic cash flow forecast. So even though we don’t know with certainty how the economy is going to perform over the rest of the year, or how our business will perform, we’re quite confident we have a very long runway to operate, pivot the company if and as necessary and adjust the size of the enterprise if we need to do that.
It gave us the mental space to take the time to plan deliberately and let things play out. We were in a position from a financing cash perspective that we didn’t need to make any rash, deep or dramatic cuts in the organization. So that was good for us. And I think any company should have that. Because it tells you if you have a one-year planning or five-year planning horizon, but you’ve got six months of cash, that doesn’t work very well. So, I just think it’s a responsible thing.
One of the analogies you gave me—I know that you did a long project for a client of ours in the electric vehicle space—is that knowing exactly how much charge is left in your battery and how many miles that will get you is a lot better than wondering with some degree of imprecision. I think the same thing is true for an organization with regard to cash.
Did you want to add something else?
Mitch: I just wanted to add onto that. You made a comment that’s worth pointing out or re-highlighting. Getting this as early as possible is always better. Similar to the car example you just said, you want to know the news as early as possible because the longer you wait, the fewer options you have.
If you find out you have one week of cash left, there’s very little you can do. Your hands are going to be very forced as to what your possible remedies and actions are. The earlier you can find out that there is a potential crunch or problem, you’ll have a lot more flexibility for optimizing cash flow. You can make decisions that are good for the company in the long run, versus having to make last-minute drastic measures.
David: That is correct. Well, thank you Mitch, as always, it’s a pleasure to spend time with you. I hope that anybody watching this found it useful—and riveting in fact. With that, we’ll wish all of our listeners and watchers a great afternoon, evening or whatever the case may be.
Thank you, Mitch.
Mitch: Thanks David.
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