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For many years I have been building my business, for my family, for my children, for me, because it fulfils me.

And today? One virus, several unprecedented decisions by the governments to limit global movement and the life as we know it, and the growing economy and many businesses are suddenly in chaos, heading for recession.

Discontinued production, missing supplies, sales and logistics are stalling, people at home. Operating money is gradually declining. Everyone is waiting for the banks and the government, to see what relief and rescue packages they prepare.

Experience suggests that our governments will not do much. Limited resources and a large group of applicants do not go together. We are the ones who are expected to show flexibility and provide a solution and, in the current situation, perhaps cause miracles.

I have cash reserves – I’m fine

When a company has reserves in the form of capital in alternative assets, it can be considered to be monetized for business operating purposes. This, of course, provided I find a serious buyer at a serious price and such injections will be sufficient to save the company.

Today, however, I do not know how long this situation will last, a month, three, a half years, or longer? We do not know how severe the decline in sales is going to be. An injection from my reserve may resolve a month, two, or even three. Then maybe not anymore.

What about banks and investors

It is clear that the economy and our companies will need additional capital. We can’t do it ourselves, and we shouldn’t. We have banks, investors and international institutions that have access to capital and offer assistance. However, it will not be universal and selfless. It will help to resolve a specific situation, which will be assessed by specific bank officials and analysts, business as usual for many. Maybe a better maturity for new loans, maybe less demands for minimum equity requirements and maybe a friendlier view on credit criteria, or financial performance. Maybe. Maybe not.

In all respects, capital providers expect you to know what you want to do with money, expect a business plan, expect a strategic decision, and expect a detailed monthly rescue plan and their variants. And they also expect you to return the money. All, together with interest or return on invested capital, if you are considering an equity investor. And this demands a solid plan.

Consultants

In fact, many don’t usually seek consultants. Their advice, even sometimes interesting, does not always correspond to the reality or capabilities of our organizations.

But today’s situation is different. Today it is not about the usual decision-making in the usual and stable conditions. Today it is a crisis management that has other attributes than normal management. Today, it is about quick and difficult decisions with a potentially negative impact on many people, under the fast changing situation that is difficult to predict. Being able to prepare plans and clarify solutions for banks and investors alone with your own team, without consulting with professionals on expert modelling of cash flow variants, on crisis solutions and with a perfect knowledge of the requirements of banks and investors, can be the way to hell. The Independent experts have something that business owners don’t. A personally unbiased attitude and helicopter view on the issues at hand, an experience from similar situations, and a trained ability to work with data, facts and their interpretation. And they work faster.

We at MYGIDE are experts in financial modelling, crisis solutions and risk quantification providing services to SMEs.

We tailor our assignments for our client’s needs, that best match the current situation.

1. Basis of rescue measures
2. Back to stability
3. Strategic plan
4. Outlook Cash flow
5. Capital raising opportunities
6. Sales or acquisitions (necessity or opportunity)

As we settle back to enjoy the summer, many of us will welcome the opportunity to re-charge our batteries before the advent of the Budgeting and Planning Season in the autumn. Indeed, many will spend two or three months in a cycle of strategic planning and budgeting that seems both endless and repetitive. By the end of the exercise, much of the strategy and data initiated some eight or twelve weeks before will have lost it’s imperative in a whirl of top-down and bottom-up iterations of the budget.

Consolidating data from across the enterprise, be it product groups, divisions or geographies is never easy. Or often sheer hell if managed in spreadsheets, in a process driven by an erratic managers. Not only is it a frustrating, costly and error-prone process, but, often micromanaged by various company ‘influencers’. All guaranteed to drive people from FP&A totally crazy. Instead of the value added activity of ‘what if’ analysis, time is spent on who changed this?, why?, is this the real number? Can we do this differently? Or worse, it is all wrong, redo it now!

In the budgeting process, we often experience irrational behaviour and elements of hidden management agendas. The reality is that after spending days compiling your data for review, your manager will change the figures with no reasoning given, or thoughts for the consequence. He apparently knows something you do not! And since the different and uncoordinated messages are sent to different constituents, discrepancies will abound, and many will remain because there is no time to go back, coordinate and re-work the budget based on any earlier premise.

Spreadsheets will be re-distributed for updates, and a quick response demanded that does not allow for any alignment with the actual operation of that division or segment. This results in revised budgets being pushed down the organisation with little regard for the time spent in crafting the original figures. And here also comes the manual overwrite of formula with a plug in number that nobody knows why it has been used. Any relevance to business drivers is lost along with ownership of the data. And at the end of the process, little time is left for satisfactory analysis of the data, trends, seasonality etc. Not to mention the fact that with the data available any assumptions made more than 60 days ago are more likely to be incorrect.

There are not necessarily many correct answers generated during the budgeting process but there are certainly wrong decisions. It is key to balance the high level view with valuable levels of detail provided by the managers running the operational divisions. Planning is not a game of ping pong, it is a team effort, with everyone seeking a common goal.  

While there are technologies that may help manage budget process in a real time collaboration realm, shorten the budgeting period, improve consistency of data, or allow for swift data and assumption updates as the process evolves; a tool to handle irrational behaviour is yet to be invented. So, take a deep breath, and go and get couple of mojitos before you will live on endless cups of coffee.

It is true, you cannot predict the future. However, in today’s turbulent world it is necessary to be prepared for different scenarios. You can, however, make some assumptions about future projections for strategic planning purposes.

Consolidating data from across the enterprise, be it product groups, divisions or geographies is never easy. Or often sheer hell if managed in spreadsheets, in a process driven by an erratic managers. Not only is it a frustrating, costly and error-prone process, but, often micromanaged by various company ‘influencers’. All guaranteed to drive people from FP&A totally crazy. Instead of the value added activity of ‘what if’ analysis, time is spent on who changed this?, why?, is this the real number? Can we do this differently? Or worse, it is all wrong, redo it now!Do you have the necessary insight to identify where your company is today? A quick trend analysis, using charts, will show how your business performed in the past, identify any peeks or troughs, and allow you to make more informed predictions as to future growth.

If you take account of historical performance, extrapolate based on the growth strategy of your company and factor into your projections variables, what do you think might change? Can your planning process consider various outcomes? There can be many versions of the future, and in determining your strategic options, you need to track the variables that have the most impact on your profit margin.

This can range, across the board, from basic sensitivity analysis to full scenario analysis.

• Sensitivity analysis, or what-if calculations, where you are able to tweak one key input or driver in a financial model, to understand the effect of a set of independent variables on some dependent variable under certain specific conditions.
  What-if analysis can involve a data intensive simulation, or you can change some attribute of the data to create a specific scenario.
• Scenario analysis where you identify all the variables that would impact a specific scenario, and manipulating the variables to understand the full range of outcomes. It is possible to create a number of business scenarios, based on different business drivers, to provide insights into how each decision will affect the business.
  While researching your scenarios, you may discover potential problems that can be addressed immediately.

So now you have all these different scenarios, you now need to make comparisons to evaluate your assumptions. You can create a snapshot of the data, change any assumption and save the new snapshot. Of course, is always a good idea to add a description to the snapshots to remind yourself of the key changes.

Whether you need to run a quick what-if-analysis, or a multiple, complex scenarios. You can capture multiple snapshots of your analysis to use at any time. You can compare different versions, review them against budgets or strategic plans, or just determine which of the scenarios best suits to your situation.

Don’t forget, a good strategic plan is one thing, but you need to translate your plan into action, track progress and measure variances. As you execute, use rolling forecasts to track and adjust you plans to adapt to changes in the market.

Over time, it became clear that the key problematic element in MYGIDE’s development was how to eliminate obvious human errors in models whilst still ensuring complete freedom for the user, the do-it-yourself quality and versatility in our solution.

As we developed MYGIDE, we made a series of specific steps to combine this need for DIY capabilities but without the errors. These are just some of the critical steps we made:

The language of finance is in our code

Our programmers translated the language of finance into MYGIDE’s software code. The model, account (general ledger or operational data), modelling parameter and formula, data type (actual, forecast, budget, scenario) thus became structural components of MYGIDE with verified behaviours in the process of model creation and model maintenance.

Formulas under control

Users have a predefined set of best-practice modelling formulas or their own formulas/templates available. These include formulas for capex, depreciation, structured finance instruments, seasonality, income tax, working capital, DCF valuation, etc.

Modelling formulas are applied for each account and across the entire period – history, budget, forecast, end-periods – in one go. Formulas directly reference other accounts that enter account formula as a parameter, not as a generic cell. And, all of this is in a drag & drop environment.

All formulas and parameters are back checked for calculation integrity by the MYGIDE Calculation Engine immediately upon application, including circular references within the entire group of models. This means that MYGIDE would not allow you to enter a mathematically incorrect formula; so unless it is correct you will not be allowed to proceed further.

Account singularity

MYGIDE treats each account as one independent item, without requiring you to create links or references when specific data needs to be displayed in several statements.  This removes a common cause of calculation errors in Excel spreadsheets when external references are entered in a model. Once a formula or value is applied to an account, it is the same for the entire group of models for which it is being used.

Coordinated data grid

The MYGIDE Data Grid combines the time period, account and data type that belongs to one or more models and is designed independently from your models. Essentially, this is your software preferred work place. Once your model is created, you simply display an account and its numeric value that applies or is calculated for the period you want to see within your bespoke data grid.

Safeguards for model integrity

MYGIDE allows users to quickly change models in whole blocks of steps (not cell by cell as is the case in spreadsheets), the same way as if you were building a LEGO castle. This capability includes architecture, the data grid, office of finance components, and the way formulas are applied and frees users from many of the most common modelling errors.

MYGIDE does not allow for the deletion of an account, which is established as a parameter in other formula, so can not delete a reference by mistake. 

Planning is a process of accurate future outlook – informed by the past, accounting for the present, and reliably plotting the future. In planning you are not guessing what the future will look like. You are trying to see what outcome you may expect if certain assumptions are met.

And a budget is a monthly detailed snapshot or a milestone of such outcome to be achieved in a given year. It is in a way very static and as such it needs to be understood.

It represents one of the 5 pillars of a prudent CFO (the others being financial modelling (or brainstorming in finance), valuation, strategic planning, and rolling forecasting).

But when a budget is erroneously seen as money allocated to divisional managers for their expenditure and at the same time as the key decision document to follow regardless of the latest developments on the market, it is a very dangerous tool that can do more harm than good for a company.

Yet properly used and crafted budgets can be effective communication tools that assist a company’s navigation through agreed strategic plans and valuations as defined by top management. E.g. proper budgeting communicates business approach to employees and defines boundaries. 

For effective planning & budgeting, integration is the name of the game. So P&L, balance sheet, cash-flow should all be singing from the same hymn sheet. Being solely cost (revenue) driven just doesn’t cut the mustard – short cuts reduce affectivity and increase risk.

Integrated budgets should also include sales plans, working capital elements, CAPEX, debt service, etc. The sales plan determines material purchases and inventory build-up, which is than transformed into a production plan with costs and cash outflows.  Mistake here, can create potentially big cash flow problems especially for companies with longer term working capital cycles.

And again, a budget is a snapshot, important for a defined time and for specific purposes only. Rolling forecasts should instantly replace – or supplement – the original budget as the financial year rolls-out.

Every now and then, horror stories are published about massive financial losses at enterprises which resulted from spreadsheet errors.

These stories are often shared by those developing alternatives to spreadsheet modelling and include negative comments together with sly hints about how their product is better. From the opposing side, there are claims that Excel is the best environment for financial modelling and that these errors can be simply eliminated by properly setting the model security or by accurately defining the control and handling processes.

The debate misses the critical, systemic reason for many problems with Excel: These errors take place when software which is fine for the individual gets applied to a much larger situation and is stretched beyond its natural working ability. This is the problem of a “my” versus an “our” approach to spreadsheet models. 

Growing from a “my” to an “our” spreadsheet model

I used to be an addict for spreadsheet modelling. I built models very quickly and hardly ever made mistakes in my spreadsheets, however complex they were. I intimately knew my spreadsheets and could do everything that we needed to advise our clients on M&A transactions.

Some years ago my (transactional) models started to progressively change into our (operational) models. The individual short-term models for ad hoc analysis and advisory evolved into a long-term corporate tool for regular management use and restructuring models.

During this change, the volume of data grew massively and the number of data updates became more frequent. Our models became exceptionally complex and were mutually inter-linked within a group of models. They were used repetitively by a greater number of people, who, despite not being experienced with financial modelling, were required to actively participate.

The model maintenance process became a nightmare. Calculation integrity was jeopardized with each model upgrade and we eventually spent more time fixing errors than effectively working with the data. When a change to our models was required, which was often, I was the only one who could work on it to ensure integrity. In addition, with each new user and every model change, there were more questions to field about the models and data. And I grew tired of this.

Looking for an alternative solution

Looking for an alternative and assessing other products pushed us to a higher level of frustration. No product on the market even remotely met our criteria for a financial modelling tool. The primary feature of “alternative” solutions was that they simply stopped at giving user analysis of past performance via cubes, offering various views on company KPIs. What a thrill! And, what about analysing performance and modelling? For this, we were advised to use spreadsheet and import data into their solution’s budgeting and planning modules (read import into columns labelled budget & plan).

That was when we decided to develop a new modelling tool. Not adopt an existing solution, but to build one completely from scratch.

We knew what “our” ideal model required

All we wanted in a modelling tool was something as versatile and flexible as a spreadsheet that possessed its do-it-yourself quality, was immune to obvious mistakes, could be easily changed or connected to data sources, and, of course, be available to team members for concurrent work. And we thought, just as many other corporate finance people, “Come on guys, it cannot be such a problem!”

We quickly learned that this was easier said than done. Our goals often drove us crazy as we discussed issues with the software development team and caused us to nearly lose patience when we encountered their interim solutions.

Today, we have a solution that exceeds the ‘all we wanted’ when we started the process.

MYGIDE is versatile and flexible, possesses that essential do-it-yourself quality, connects to data sources easily, is workgroup enabled and is significantly immune to the obvious modelling errors.  

Managing a business is a great intellectual challenge. Whether you own your business, are a business leader, or help to manage a business, you have to handle an intensifying torrent of data.

The challenge in today’s environment is to be able to turn data into information and transform information into knowledge.

Many managers do not feel capable of doing everything they’d like to with their data for various reasons:

… because the information management tools available make it difficult or impossible;

… because they have to rely on broad teams of people to make decisions – and these teams (permanent or temporary, multi-level, multi-country, multi-divisional, multi-product, and multi-everything) don’t have the tools they need either;

… because new technologies mean the amount and variety of information that management has to process is growing exponentially.

So something’s not getting done – yet this is about key business drivers:

… identifying what depends on what, and how it is sensitive to business performance;

… knowing how this will develop over time;

… understanding what it takes to manage your drivers;

… sending clear sub-goals to other BMP processes; and most importantly;

… unifying the entire organisation around your drivers.

Of all the smart business leaders that I have met, the most successful build their decisions around the business drivers, having ‘in-time’ thinking. They make decisions only after considering:

1. historical business performance (financials showing how they got where they are)

2. probable future development of the company (what financials will look like under various ‘what if’ scenarios)

3. what’s happening with their market (which ‘what if’ to focus on)

Managers that make decisions taking into account only past performance, with no clear idea of the decision’s impact on the future, will be wrong 8 out of 10 times.

Financial Modelling & Valuation is a critical tool for business of the future. 

This is the process that essentially determines WHY we are doing what we are doing and sets a framework of goals that companies shall follow.

Yet the process is often not formally recognised within organisations, being fragmented into un-connected spreadsheet analysis, driven by various individual ad hoc initiatives; and we often pretend that company valuation is necessary only for investors or advisors and that it is an unreasonable burden on already busy finance managers and company strategists.

Financial modelling & Valuation is a brainstorming in finance. It starts where traditional analytics and BI systems finish. It analyses the past as an aide to enable a view of the future. Financial Modelling & Valuation helps companies better understand what their future development options are. It embraces the company business model in all its complexity and tests its long-term viability on the market vis-a-vis shareholder expectations.

A good financial and valuation model of a company should provide a three-year actual history as well as a future period of 3-5 years at a minimum. Adding rolling forecasts for the current year, makes it an excellent platform to identify intrinsic business performance trends, and then to re-plot the simulated course as trends and related decisions come into effect.

So effectively, business leaders know where they were, where they are today, and more importantly they can see the future business performance: to track where, exactly, business performance and company value will be in a month, a year, or several years.

A company financial and valuation model should combine profit & loss accounts, balance sheet and cash flows elements including such categories as CAPEX, working capital, level of capital employed and its structure (equity vs. debt), EVA, return on capital employed, cost of capital employed, DCFs, etc. with operational data (various numeric measures of units) into one holistic data modelling system, built around the selection of key business drivers that best represent the company’s business model.

All this in an effort to achieve desired future business performance and valuation levels.

It is never easy to come to a client meeting where you, in the capacity of an advisor, are to present the first valuation of your client’s business.

Prior to the meeting, you’ve learned about the company business model, received the business’s historical PL & BS, some related operating data (e.g. number of units sold), and perhaps also received the company’s business plan.

In some instances, a friendly hint from your client might have indicated to you what the general in-house expectations of the business value are, especially as your role is to advise the company on disposing the entire business. Of course, just make sure that you provide an unbiased and independent view on the business value.

The business model is not what management believes it is

When you begin creating the financial and valuation model, you may notice that management’s perception of the business model is not necessarily reflected in the company’s financials.  You know those management presentation statements, e.g.: “We are the leading producer of small aircraft engines”. Only that the financials show that for the last three years the company has produced and sold almost no new engines and that 85% of its revenues are actually coming from the repair and overhaul of an existing fleet.

Distorted expectations of the business value

The business plan, of course, is based on an increase in the sales of new engines and shows profitability that, however hard you try, you don’t see likely being achieved in the future. Working capital remains flat despite the increase in sales, and capex is not needed as management claims it has invested enough in the past.

Running your standard DCFs and comparable transaction multiple valuations leaves you flabbergasted as you cannot quite get where the general in-house expectations of the business value are coming from.

Non-operating assets decrease the value of your business

Bearing in mind current value expectations and that there is only one week left before giving your valuation presentation to the management, you begin with valuation alchemy.  This is the most exciting and creative phase in financial modelling as far as I am concerned.

When you accept that a company might operate under a different business model, you open up a wealth of potential. You instantly begin spotting new revenues, costs, and assets that the company does not need to effectively maintain its future cash flows. You eliminate the “hockey stick” of planned revenue for the new engine sales and decrease the costs that common sense suggests are unproductive. In some cases, you can see entire business lines/processes that, if discontinued, would increase the value of the company.

Continuing with valuation, you calculate normalized Revenue and EBITDA, and eliminate unnecessary stock as the result of the decrease in planned new sales revenue and that current stock would cover the next ten years of production. As the result, you outline a plan to relocate operations to a smaller area to further cut into your fixed cost base.

After all these paper changes, the business displays different dynamics, different sales patterns, and much different profitability levels. The capital employed is down and return on capital employed is up, changes which result in a higher value for the business. 

You finish your work excited over what a great company you’re about to sell.

Meeting the enemy on a client basis

Instantly, you realize that the changes which you’ve incorporated into the valuation model are massive. Not only do you need to explain at length to the management why have you taken such an unsolicited attack on the company business, you need to do it in such a manner that they do not look like a bunch of incompetents and you still maintain your advisory mandate.

You also need to suggest a process which will progressively lead to the desired outcome. And you have to be damn convincing.

Conventional wisdom can sell you short

Conventional wisdom suggests that at this point of time, you step back to reconsider the level of proposed changes and come back with a smart compromise.

But you know what? Sometimes it might be better to go and hit the wasp’s nest with a full blow. If there are changes in the company that you as the outsider can see, believe in, and rationally defend, then go ahead and suggest them. Suggest them in a smart way.   By the time this process is successfully over, you may have experienced a moment of victory which will nurture your professional life for a long, long time.

You do not always have enough time to run a full blown company valuation. On the occasions that you are in a hurry, you may take a quick EVA approach. Whilst we all appreciate that transaction valuation is more complex than this and requires more extensive financial modelling and transaction structuring experience, such a quick EVA assessment of indicative value is very helpful during brainstorming and ‘what next’ types of meetings.

We know that company value equals value of equity plus value of debt (interest bearing); while in normal (non-distressed situations) value of the debt equals to its nominal book value, in corporate transactions the variable is then value of equity.

When valuing a business you may get company / equity value

1. equal; or

2. higher; or

3. lower than is its book value.

So let’s start:

1. Analyze normalized EBIT –  Earnings before interest and tax that the company can sustainably generate; (Points 01,02,03 of Sample table bellow.)

2. Take the company’s book value of equity and add interest bearing bank debt to get capital employed (or book value of company). You may adjust it by adding other operating assets and subtracting non-operating items; (04,05,06)

3. Calculate WACC- weighted average cost of capital or how much the capital employed costs – take cost of equity (expected return on equity) add cost of debt (interest rate), both weighted by its respective share in the capital employed prior to the addition; (07,08,09)

4. Calculate ROCE – return on capital employed, which is a division of EBIT over the capital employed; (02,04,10)

5. Subtract WACC from ROCE and multiply the result by capital employed to arrive to EVA – economic value added; (07,10,11)

6. Divide EVA by WACC and add the result to capital employed to get indicative company value; (11,07,04)

7. Subtract the interest bearing debt to arrive at indicative value of equity; (12,13,14)

Indicative value of the company equity is to its book value  

1. equal when ROCE equals WACC or simply said when EBIT equals cost of capital

2. higher when the difference between ROCE and WACC is positive

3. lower when the difference between ROCE and WACC is negative

Please Note

Please note that accounting for taxes, you may use NOPAT – net operating profit after tax instead of EBIT as well as tax adjusted WACC instead of just WACC. In case of low CAPEX requirements going forward you may use EBITDA instead of EBIT. The most accurate item to include in the computation is unleveraged free cash flows anyway, which accounts for taxes, CAPEX, working and other capital requirements. In order to get and indicative value of a company you may even shorten the calculation and just divide WACC over EBIT, which is by the way also the mathematic-financial construct behind valuation multiples (e.g. division by 10% returns the same results as if you mulitpled the numerator by 10). The EVA however is an excellent indicator that helps determine which direction you would like to go to improve the company future valuation – focus on the increase in EBIT, or on the decrease in capital employed, or combination of both…