Why the numbers behind the numbers are the most important

Michael Huthwaite - Thursday, June 11, 2015

Think back to the last time you were in a management meeting and someone started throwing around projected financials. 

"Revenues are going to be 'X' next year and expenses are going to be 'y' ." 

Did you believe them?  Did you find the presentation engaging or were you naturally skeptical? 

If you were like most financial leaders, you immediately want know the numbers behind the numbers.  But this is where things usually get messy.  That's because financial data is often presented at an aggregate level and thus any supporting data is likely to be in the form of a financial roll-up. 

As a result, the focus of the meeting is always on bottom-up or micro-level planning.  This is a classic case of not being able to see the forest among the trees. 

Of course, having drill-down visibility is vital as it supports a key operational or "single version of the truth" requirement.  This is what Operational planning tools do well.  But for business leaders, this view of the world is often just a starting point. 

Typical Top-Down Band Aids

Almost every financial plan comes with an Executive Summary reports, which helps sense-checking the numbers, but they quickly become too high-level and don't allow for any scenario analyses.   

So, in order to build in some sense of top-down scenario capability, its not uncommon to see a series of complex triggers and switches that are weaved into the model typically via complex conditional statements. 

With all these complex custom formulas running throughout the model, the process quickly becomes a black box.  What are you truly sensitizing?  How dynamic are these formulas? Are the formulas even working right and what happens to them over time as the model evolves?

Why Less Is More

At FinanceSeer, we recognize that BOTH bottom-up and top-down planning are critical.  As a software vendor, we recognize that by focusing on one area (top-down in our case) we can actually do more.  This is because it frees us up from having to also address a host of operational planning challenges (which must be addressed in a much different way and usually involves different people).  As a result, the user experience (UX) is able to speak directly to the needs of our modelers, actually solving their pain points rather than marginalizing them or pushing them down a more difficult path. 

Mono-Value vs Multi-Value Data Storage

Because, most financial planning tools are used for operational planning, they take a mono-value approach to storing data.  In other words the system either stores an input or calculates a derived value.  

This mono-value approach is commonly denoted in the spreadsheet world based on the usage of an "equals" sign in the cell.  "No equals" means the spreadsheet is storing a value, where as an equals sign means it is running a formula.  In either case, its either one way or the other (a mono-value approach). 

On the other hand, FinanceSeer takes a unique multi-value data storage approach.  This means that each data point has two or more values associated with it. 

In financial modeling terms, this means that FinanceSeer stores both an "assumption" and a "result" for each data point.  The user is free to enter or import which ever value he/she would like, but not both.  So for example lets assume that "Sales" in "2016" is forecasted based on a growth rate.  Under the multi-value data storage approach the user is free to enter either a growth rate or a sales value.  Whichever one is entered, the remaining values are then derived. 

Empowering Business Leaders

Under the multi-value approach, business leaders can start by importing their bottom-up operational plans directly into FinanceSeer.  Because the level of detail in the FinanceSeer model is generally less, the data is aggregated on a many-to-one basis.  Business leaders/modelers than determine what high-level drivers make the most amount of sense and FinanceSeer automatically backs into the appropriate assumptions (we call this "backcasting").  Because FinanceSeer stores the mapped values there is no need to worry about any bottom-up vs. top-down variances.

Because FinanceSeer helps establish dynamic relationships across financials at an aggregate level, we can take it a step further and enable business leaders to create their own scenarios on the fly.  Because the scenarios always reference the assumptions by default, the model retains its high-dynamic nature regardless of whether you started with static financials or not. 

About FinanceSeer

FinanceSeer is a financial modeling and simulation tool that enables business leaders to evaluate strategic opportunity and risk.  We are a complementary solution to operational planning tools that help centralized data submissions across the entire organization, ensuring a "single version of the truth". 

 

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