Risk-based Financial Management. BBRT Annual Conference Chicago, 27 th April 2011 Copyright 2011 David A.J.Axson

Transcription

1 Risk-based Financial Management 1 BBRT Annual Conference Chicago, 27 th April 2011

2 Two of these countries have never won the Olympic ice hockey gold Finland United States Sweden Great Britain Russia Canada Czech Republic 2

3 On 18 th April % $1,493 $106! 3

4 New world demands new approach Then Manufacturing centric Demand exceeded supply Local to national markets Few competitors Long product life cycles Constrained capital Weak special interests Now Service centric Supply often exceeds demand Global markets Many competitors/alternatives Short product life cycles Easy access to capital Organized special interests Simplicity Predictability Stability Complexity Volatility Uncertainty 4

5 Embrace Risk 5

6 Understand the drivers of risk + + = Market Structure Execution Risk Profile Structure Competition Regulation Volatility Globalization Business model Policies Organization Staffing Sourcing Technology Productivity Cost Service level Quality Cycle times Control 6

7 Use the right tools High Candidates for scenario planning and crisis management Primary focus of business risk management Materiality Ignore Develop and test risk mitigation processes Low Low Probability High 7

8 We are all global now GDP Growth Weak recovery, rising unemployment, softening demand for oil Patchy growth, flat demand Political Risk Market Size Strong government fuelled growth, rapidly rising demand GDP Growth GDP Growth Political Risk Political Risk Market Size Market Size Strong growth, significant new local oil finds China driven growth due to commodities GDP Growth GDP Growth Political Risk Political Risk Market Size Market Size 8

9 Focus on your customer s customer 9

10 Isolate revenue at risk Parental Incomes Home Values 22% 16% 19% 3% 20% 20% 17% 8% 5% 4% 44% 22% < $50K $50 - $100K $100 - $150K $150 - $200K $200 - $400K > $400K < $100K $100 - $250K $500K $500 - $750K $750 - $1,000K > $1million 10

11 Ask The Right Questions 11

12 Which of the following actors was NOT born in England? Elizabeth Taylor Charlie Chaplin Bob Hope Richard Burton Hugh Laurie Julie Andrews Vivien Leigh Helen Mirren Stan Laurel Stewart Grainger 12 12

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15 But 15

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18 Better Not More Information 18

19 The game has changed Yesterday Internal, financial and lagging Calendar-based Hierarchical Budget-centric Single answer Today & Tomorrow External, market and predictive Event-triggered Relationships Tactic-centric Boolean 19

20 Redefine balance Financial Operational Internal External Lagging Leading 20 20

21 Measure real value Example: Global aid organization Time & Budget Value Realized Results Delivered 60% complete 59% to budget 55% to time 6/10 wells completed 3/7 filtration systems installed Mortality rate down 7% Cholera rate down 11% 21

22 Metrics evolve over time Market share Earnings growth Sales per customer Growth Sales growth Brand awareness Cash flow Retention Margins Productivity Time to market Sales growth Time 22

23 Make reporting relevant 23

24 Drive insight and action 24

25 Insight matters Relevant ratio Marketing expense as % of Revenue Early alert Tolerance!! Call to action Forecast impact Trend New model year launch costs up 17% Additional context Q3 Q4 Q1 Q2 Q3 25

26 Which US state still has the British flag on its state flag? 26

27 Embrace Uncertainty 27

28 Rolling forecasts? Benefits Consistent time horizon Provides a baseline for future plan periods Captures the longer term impact of changes Reduces reliance on a obsolete budgets 28

29 Understand the limitations Match the time horizon to the rhythm of your business Understand your predictive ability Level of detail driven by decision making needs Can create confusion with annual performance targets 29

30 Communicate confidence levels Sales - products 1,234 - services 798 COGS - product cost service cost 370 Gross margin 668 Marketing costs 201 Sales costs 175 Admin costs - Facilities 35 - IT HR 80 - Legal 21 - Corporate 35 Net margin (4) Product sales typically difficult to predict more than 90 days out Some long term commitments but exact spending varies with short term demand Almost all facilities are on long term leases 30

31 Utilize scenarios Examples Strategically Model long term economic scenarios Model capital requirements Analyze market, demographic, and social trends Tactically Marketing strategy Project portfolio management Staffing and sourcing Financially Cash flow forecasting Budgeting Expense management 31

32 Alternative approaches Spectrum Matrix Binary Scenario A Scenario B Scenario C High Scenario A Scenario B Scenario A Primary Driver 1 or Primary Driver Low Low Scenario C Primary Driver 2 Scenario D High Scenario B 32

33 Example Consumer Electronics High Rate of Technological Innovation It s a Rich Man s World Regionally Focused Markets Boredom Stagnation Wild West Disruptive Global Innovation Dinosaur Dominance of Established Players Slow Low Global GDP Growth High 33

34 Describe credible scenarios Fast Rate of Technological Innovation Rich Man s World High innovation/low global growth Innovation available in affluent markets. e.g. NA, Japan and Europe mid-70s to mid-90s. Boredom Low growth & innovation. Nothing exciting going on e.g. Europe post WWII Wild West Innovation & growth Lots of new companies with cool products e.g Dinosaur Robust growth but little innovation Established players & products dominate. e.g. Europe & U.S. mid-50s to mid-70s Slow Low Global GDP Growth High 34

35 Liberate Professional Staffs 35

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37 Most organizations waste talent MONDAY TUESDAY WEDNESDAY THURSDAY FRIDAY 37

38 The best drive analytics & insight MONDAY TUESDAY WEDNESDAY THURSDAY FRIDAY 38

39 Reward the Right Things 39

40 Align incentives The Problem: Incentives are tied to a fixed plan or budget The Impact: Managers are motivated to be conservative Unexpected events can result in windfall bonuses Exceptional competitive performance may result in no rewards in tough markets 40

41 Payout matrix Outperform Moderate Payout Maximum Payout Absolute No Payout High Payout Under Perform Relative to Benchmark Outperform 41

42 Don t Forget Its Decisions That Matter 42

43 Real time 23 passengers will miss their connections Reservations Crew Scheduling Flight Operations Catering Ground Crew Rebook passengers Reschedule crew Update flight schedules Adjust meal needs Reroute baggage Sell/ fill empty seats Find backup crew Liaise with ATC Adjust fuel loads Update key metrics e.g. On-time, flight P&L s, service quality costs 43

44 Collaborative Competitors can t match our product but they are pricing 5% below us CEO. Let s go after share with targeted promotions and price cuts! Marketing Trend Trend (Last 90 Days) Sales 0% Pipeline + 14% Margins +3% Cash +7 Status Finance We have excellent cash reserves and low receivables Our pipeline has increased by $2m; but close cycles are extending Operating expenses are down; 3% driven by improved productivity 44 Sales Operations

45 Remember By failing to prepare, you are preparing to fail Benjamin Franklin 45

46 Which of the following companies has never been British owned? Kohl s Holiday Inn Burger King Brooks Brothers Dr Pepper Farmers Insurance Kimberly Clark Dunkin Donuts Baskin-Robbins Miller Beer 46

47 Reading list & 47

48 Contact details David A.J. Axson Willow House 1464 Willow Lane Akron OH phone: web: 48