top of page
  • Writer's pictureMark Valdez

📍Welcome to Walley World

Welcome to September – every parent’s favorite month! I mean, I love my kids, but I’m thrilled to have them back in school. Who hasn’t reached their Clark Griswold moment yet? Parents, you know what I’m talking about!

There is something particularly refreshing and exhilarating about a new school year that I felt as a student and now feel vicariously through my kids. The next nine months will be filled with learning, growing, and maturing (hopefully) such that by the time the last bell rings in 9 months, they will be a totally different people. Without devolving into a debate on the American educational system, there is thankfully a structured process for how we achieve the development of our youth – grade levels, curriculums, study guides, report cards, assessment tests, etc. For 18+ years we have guardrails guiding us through life which is why we speak in such dramatic terms about life in “The Real World.”

Our businesses are just like our kids. Seriously! I mean how often do you hear an owner describe their company as “We’re just entering our awkward teenage years.” Similar to our kids, businesses are organisms that are living, breathing, and learning, and therefore it’s important to create the structure, curriculum, and assessments for our companies to ensure they evolve and mature into prosperous adults. No one wants these kids living at home in their 20s!

The challenge that we frequently see is that most small businesses have very limited resources dedicated to their finance function and oftentimes they outsource all of their bookkeeping to a third party. This means that the only person within the company with a finger on the pulse of the business is the owner.

This is No Longer a Vacation. It’s a Quest

Think of it this way – if you’re loading up the family for that last summer road trip to the Walley World, you absolutely want a map to help ensure you reach your destination. Traversing the country is treacherous and you don’t want to be making any wrong turns when you reach St. Louis. So who or what is guiding you along the way? Ideally, you would have the built-in GPS that can reroute you to the optimal path in case of bad traffic, but at the very least need to know the baseline route to get there.

Financial planning and analysis (FP&A) is creating the roadmap for your business, and having good hygiene on your FP&A is particularly important when you hit bad traffic like inflation, rising interest rates, supply chain challenges, and recessions. Any one of these factors can have a meaningful impact on your bottom line and really serious consequences when they all hit at once.

If you already have an FP&A process in place, fantastic! But have no fear if you don’t, we’ll help guide you to putting one in place.

Step 1: Get Organized!

Long-time newsletter subscribers know about our common mantra of Crap In → Crap Out when it comes to business processes, and there is no more dangerous process than conducting your FP&A with crappy data. Yet with disparate systems and paper files, it may be hard to organize a starting point for this analysis. If your business is straightforward, we suggest using Quickbooks Online for bookkeeping and Gusto for payroll. By syncing your bank account and business credit card to QB, all of your expenses will be automatically ingested and tagged into QB. Combined with your sales data, you now have a fully integrated picture of your business. Eventually, you will graduate to a more sophisticated setup. Regardless, without organized data inputs, your output will be crap.

Step 2: Establish the timeline

If you are planning for the new year in January, you already missed the boat. Carve out time in September and October to look ahead to the next year. Sure, you don’t have the full report card for this year, but it's baked enough to give a pretty good idea for where things will net out. This is an opportunity for you to put a plan in place, solicit inputs from your team, and be positioned to hit the ground running on Jan 1. As we discussed above these plans aren’t static, so you need to review at least each quarter and even better if monthly.

Step 3: Create the Map

The ideal map is an operating model that allows you to take certain operating assumptions about the business and translate it into a clear picture of the business’ financial performance. For many businesses, this is as simple as making assumptions such as the number of product or service units delivered, the price of each unit, and the associated gross profit per unit. You’ll also need to make assumptions on “overhead”; for this, you can start with the overhead expenses of prior year(s) and determine if any incremental expenses would be needed to support forecasted growth. Altogether, these assumptions will help you estimate your operating profit or EBIT (earnings before interest and taxes). Building a simple comparison to the prior year time period as well as to your budgeted plan will provide a simple dashboard for checking in on business performance.

Guiding your business through the “awkward teenage years” will require what’s called a 3 statement operating model that integrates the Income Statement, Balance Sheet, and Cash Flow statement. This will help you understand your business at a more fundamental level. Importantly, the 3 statements are interconnected in ways that will guide your decision-making. As a simple example, let’s assume you aim to grow revenue next year by 10% (Income Statement). That will require more Inventory (Balance Sheet), which in turn increases net working capital (Cash Flow statement), and thereby reducing cash (Balance Sheet).

A 3 statement model can ratchet up significantly in terms of complexity when accounting for things like capital expenditures or financing needs, but it’s the one-stop-shop for understanding the company’s operating performance, cash generation, and overall financial health.

Step 4: Plan Alternate Routes

Otherwise known as scenario analysis – typically structured with 3 cases: Base Case, Best Case, and Worst case. By undertaking this exercise you are forced to consider a range of outcomes for the operating assumptions that underlie your business: sales projections, headcount, input costs, etc. The map you created in Step 3 will be wrong – full stop. There is no way to accurately predict what will happen each year (See: COVID-19, 2020), but by conducting scenario analysis you can better anticipate how you might adjust your plan based on conditions that might be more favorable or unfavorable than expected. Being realistic about what could go right and what could go wrong will help you with Step 5.

Step 5: Check the mile markers

This right here is the whole enchilada and what separates the good from the great. Building a business can feel like constructing an airplane as it’s taking off. It won’t be perfect – mistakes will be made, but you have to live to fight another day. Therefore, it is imperative that you set out the operational gates that will cause you to adjust your plan on the fly. For instance, your plan may be to grow 10% next year and hire 10 new people to support that growth, yet in Q1, revenue is flat relative to the prior year. Sure, it’s possible you could make up the growth later in the year, but moving forward with those 10 new hires could put your business in serious risk if that growth doesn’t materialize. Even worse, you may need to turn around and fire those folks to realign the business back to reality. We can’t all be Chuck Norris.

That’s Not a Real Gun, is it Clark?

Devoted newsletter readers are waiting for the punchline of how software easily solves these challenges. That's why you read this newsletter after all, right? Unfortunately, it’s not such a simple solution this time. There is a bit of art and science to an FP&A process and the process becomes circular. Each month produces new data, which may alter your future outlook. FP&A software applications do exist particularly for larger companies where Anaplan, Planful, Workday Adaptive Planning can be valuable tools. There are also newer upstarts focused on SMBs like Mosaic, Jirav, and Cube. But no software will help you if you lack the process we laid out above.

Furthermore, don’t discount the power of the spreadsheet as a starting point. Microsoft Excel won’t win any design awards for intuitiveness or ease of use, but it’s hard to beat how flexible and dynamic Excel is. Not to mention that being able to click through a properly built Excel model will allow you to understand the interconnectedness of the financials and operating assumptions in ways that a more robust software system will not.

Can the exercise of building a financial model from scratch be a pain in the ass? For sure – especially if you don’t have experience building models. You may even believe that the intuition you have about your business is all you need, but we guarantee this exercise will create a more fundamental understanding of your business that you would otherwise not have.

Importantly, you don’t need to do it all yourself. Consider using an MBA intern or financial consultant to build the initial operating model. It’s necessary you have the right map before taking off on your trip, but you also must take the time to know how to “read” it. This investment of time and money could save you millions down the road.

You Didn’t Order the Metallic Pea?

There will come a time when your business outgrows a purely Excel-based FP&A process (although Excel may still play a role). There is no revenue threshold or employee count number that defines when you need to make this switch. But once you have more cooks in the kitchen involved in your financial planning, an Excel model will start to break down as managing inputs and updates becomes much more complicated. The key criteria to consider for a software solution are as follows:


When you have multiple teams of people involved in FP&A, version tracking in Excel becomes extremely complicated to determine who changed what and when. Because financial models tend to be circular in nature, haphazard changes can “break” the model (see below) and create havoc. More sophisticated software solutions help you avoid these potential issues.


You’ve heard from us before that data integrations between software applications are key for building your business system. There’s no better example than FP&A where you can tie together applications for bookkeeping (Quickbooks), sales (, HR (Gusto), billing & operations (Coupa), etc. These integrations can reduce the amount of manual data entry and help ensure data validity.


Quality applications will provide the visualization tools necessary for all stakeholders in the organization to quickly and easily understand the business’ performance. The application is only as good as its ability to communicate inputs and outputs for all stakeholders including those that may be less quantitatively oriented.

Ease of Use

There will not be a system that works perfectly out-of-the-box. Some upfront investment of time and effort will be required to ensure the data integrations and the dashboards are constructed to be most useful to your organization. But usability is still a key criterion given that no number of bells and whistles will be of value if your team refuses to use the product.

This is not meant to be just an eat-your-spinach-type post. The exciting news is that software for the finance function is rapidly evolving and experiencing new innovation as venture dollars are hard at work investing in new startups. We are eager to see new tools and applications for companies of all sizes to leverage and of course, we’ll be keeping a close eye on this space. Undoubtedly, software applications will play an even more meaningful role in the FP&A process going forward, but most importantly get your process right.

47 views0 comments


bottom of page