When the coronavirus pandemic placed countless challenges on a global manufacturing company, the CFO decided to see it as an opportunity to modernize the business.

As Vice President of FP&A, I was tasked by the CFO with coming up with a budgeting system that worked for everyone. By prioritizing alignment and transparency, actively seeking collaboration, and developing trainings that effectively communicated with non-finance staff, we successfully created a robust system prepared to meet the demands of any current or future scenario. 

The AFP FP&A Case Study series is designed to help you build up key FP&A capabilities and skills by sharing examples of how leading practitioners have tackled challenges in their work and the lessons learned.

Presented at an AFP Advisory Council meeting, this case study contains elements that are anonymized to maintain privacy and encourage open discussion.

Insight: A driver-based model can create alignment and transparency by focusing on what drives the business rather than the minutia of modeling.

Company Size:	Medium
Industry:	Manufacturing
Geography:	Global
FP&A Maturity Model:	Finance & Business Acumen

Finance and business acumen: FP&A translates corporate and business strategy into a financial plan and supports the enactment of that plan through resource allocation. Processes generate input and insight through financial analysis, supported by enabling technology.

Background: General Information About the Company

We are a privately held, global manufacturing company and direct seller of dental products. Our annual revenue is less than $1 billion, and about 1,700 people are employed here, with the majority working out of our headquarters in the western U.S.

We also have offices in China, Brazil, Japan, Germany, France, Italy and Australia. And we have one other manufacturing plant in South America. Products are sold internationally through distribution and dealers in 181 countries, and we also recently launched a consumer business. One of our points of pride lies in being a heavily RD-invested company.

As the Vice President of FP&A, I manage a team of seven. Finance oversees 574 active cost centers, and the FP&A team is responsible for building a budget for all of them, at the country level. We also manage CapEx, fixed asset accounting, valuation of deals and investment opportunities and financial monitoring, in addition to the management reporting for the company.

Call it a motto, or simply a way of operating, but in our finance department, everyone strives to be fast, efficient, customer-service-focused, transparent and as accurate as possible.

Challenge: The Work or Difficulty FP&A Had to Address

The year 2020 was incredibly challenging for us; Covid hit us hard. We had a bit of a warning from our European teammates that a storm was coming, but we weren’t prepared for the enormity of it. Our CEO announced that all the office teams needed to start working from home tomorrow, and they didn’t know when we would be coming back into the office. Our primary goal was to protect manufacturing and make sure we could keep the building as safe and efficient as possible.

So that was one of the main catalysts that set us on this path of investing in warp-speed forecasting and modeling. We in finance spun up so many models at different levels of what does this look like? What costs can we cut? How quickly can we cut? A lot of the foundation had already been laid out, and this was our chance to flex and use some of those capabilities that we had been working on.

During that time, while our CFO recognized that it was a terrible global crisis we were going through, he also pushed us to build out a plan for modernizing the business.

Approach: How FP&A Addressed the Challenge

There were two guiding principles to our approach:

1. The model won't be perfect, so let's be faster at incorporating actual results and spinning up a revised forecast.
2. Let’s keep looking for ways to be even 1% better every month.

Start with Alignment

When making any significant change in a business, such as modernization, one critical factor to success is alignment — alignment of both staff and leadership with the end goal. We chose the driver-based model for exactly that reason: It provides transparency and, therefore, builds a culture of trust.

Implementation of driver-based planning simplified the conversation with our planning partners. There are 17 drivers for the whole company, mostly tied to revenue. People were able to see how the numbers move, and we provided a high level of finance training for all managers.

After the revenue and COGS projections, we budget and forecast just two lines on a department’s income statement: 1) wages, and 2) everything else, which we call opex (operating expenses). How the managers spend their opex money is their responsibility.

The beauty of this is that, with those 17 drivers and the full model, we can tell people what their budget will probably look like next year and even two years out based on our current pace, the way the economy's going, and the way our industry is going. In the past, people would get to November and December and cross their fingers and hope for a good allocation. Now, months ahead of time, they can get a sense of what is coming, good or bad, and make plans for it.

To illustrate how this works, picture a General Manager for Latin America. Once our team has received the GM's forecast, we then calculate the resulting gross profit and multiply that by Latin America's expense ratio. This calculation results in the amount the Latin America team will receive for business as usual — it also ensures that expenses never outpace profits.

The automatic calculations are a baseline. We adjust for various things, such as strategic investments and different costs of operations around the world. But having a transparent formulation provides another advantage: Managers know that giving money back to finance to be reallocated in one year doesn’t mean they will be limited in their budgets the next year because they know how the budget will be set.

For example, when Covid hit and our European sales dropped, I called our sales executive in Europe. He knew exactly how much money he had to give back to me to balance the ship; I didn't even have to ask. He said, “I know you're looking for this much money because that's how much my sales dropped and here's the impact on my gross margin.” It's taken years of training to get the teams to that level.

Setting Up the Drivers

What drives our business is our sales and COGS, so most of our 17 drivers fall within these two categories. Facebook’s profit algorithm is one of the tools we use to inform our drivers. We then use machine learning to create our demand forecast and employ a breakback calculation to anticipate its meaning at an item level.

Then our GMs provide us with their top line — does it match? What does this look like, and where are we different?

For COGS, we have drivers for the manufacturing teams. A lot of regression analysis was performed to decide on the best fit derived from sales and the cost of doing business in regions around the world.

For all the operating departments beneath sales, development and manufacturing, we don't have a lot of that same variability; therefore, we based our other expense lines on ratios of the gross profit in order to drive the budget forward.

The Model

The expense ratios drive the calculation for each function. In order to demonstrate transparency, we document all of the calculations and how we're getting the information.

It was a separate effort to get people to agree on what they wanted to see in their dashboards; we didn’t want to confuse anyone by discussing the calculations and the outputs at the same time. So, we partnered with our IT business intelligence and data architecture teams to build a system that automates our business processes as much as possible. The shared goal was to develop our reporting rules into data, which would minimize manual transformations and duplication of data and streamline the company's daily, weekly and monthly reporting.

We did this by integrating our ERP system with a custom data warehouse that leverages the complete Microsoft BI platform, including SQL Server, Microsoft SSAS Tabular, Power Apps and Power BI. We also integrated our Oracle data with custom attributes maintained through Master Data Services/Dataverse that would allow additional reporting attributes and aggregations, as well as automated expense algorithms, time intelligence calculations, dynamic security access and reporting flags like "through date."

A huge security model was built in the data warehouse with admin rights on who gets to see these cost centers, and that's how we're able to have one dashboard feed 150 people — because when they log in, they only get to see their department. Getting that to work the way we wanted it to work was the hardest part.

The Collaborations

IT

We have a really great partnership with our IT department. Having been deep into our ERP for years, we know how this stuff comes together.

To speed up the iteration process, we build prototypes for IT; that way, they know what we need it to look like when it’s done. To do this, we go into our ERP, export the data we want into Excel, and build all the calculations. Then we document the table name and where that data sits in the database.

It speeds up the process a lot because they know what we want and if they’ve done it correctly. Now we just check in with them once a week.

The one aspect of working with IT that I find challenging is their need for perfection. My proof of concept only needs to be 80% in order to check viability. We can iterate from there.

Business Partners

Financial models can be hard for non-finance partners to grasp, so we work hard to train them in the basics of finance and, more specifically, how the model works — and we make it fun! Two of the ways we’ve done this:

1. Animated video: We made a fun, animated video that walks the managers through the model and shows them what we do.
2. Interactive simulation: We have an in-house, half-day business simulation to elevate the financial acumen of all the managers and team leads (and anyone else who wants to attend). It's fun, humorous and memorable.

For example, we used to have an international executive who wanted to give extended payment terms to all his customers. He went through the business simulation under those parameters — giving extended payment terms — and discovered that all his money was tied up as poker chips in his receivables. He wanted that money out of there to pay bills, but he gave people 200 days to pay in the simulation, so he didn’t get that money. When he left the training simulation, he said, “I am putting everyone on COD (cash on delivery) now!”

Finance

We also work to train our finance team. For us, it’s part of the culture of being an R&D company. Education is highly valued in our accounting, finance and FP&A teams. In FP&A, our whole team sat for the FPAC at the same time. As new people come on board, we send them through the FPAC as well. And we help people maintain their credits by sending them to the AFP Annual Conference.

We're always looking for ways to be even 1% better every single month. If we go through a situation and there's something that was a little hiccup or that we could do faster, it's not a negative thing. We write it on the board and ask ourselves: How could we do this better? Why was this a challenge? From which tasks or processes could we shave off 10 minutes? It may sound like nothing, but if you shave 10 minutes off of enough items, you become quite fast.

Outcome: What Came of FP&A’s Efforts and What Was Learned

As we’ve grown, our headcount has remained low. And yet, we’ve been able to redirect the time we’ve saved into more modeling and partnering and spending more time with the business overall.

We’ve also achieved the following:

• This model has allowed us to deliver three times the quantity of information to the business and reduced the time of delivery from four days to four hours.
• Our team of seven has 75+ dashboards that feed 300+ analysts, team leads, managers, directors, general managers, and the executive team across the globe. These dashboards are fully automated, and we can update them with a change within 30 minutes.
• We have seven central budget versus actual dashboards that service every level of management, from team leaders to C‐level executives, and are integrated with security. Our team manages and services all 290+ managers within the company, and these dashboards are available and easily accessible day or night via PC, tablet or phone. Each dashboard allows the user to view current period data and up to five years of historical data, while also giving them the ability to drill down into expense line‐item data.