How I Make Finance Fun

“Don’t you ever get tired of the monthly cadence of reporting and updating the forecast??”

I asked my manager at the time who had already logged 10 years in FP&A compared to my 5 years.

“Um, no.”

And that’s the moment I knew we were built different.

Some finance professionals are okay just going through the motions each month.

But I have a constant drive to do something new and add value in creative ways.

Any my favorite way to drive action?

Show the business how their actions result in outcomes

It sounds simple, but the key is in how you set up the analysis

It can be the difference between your analysis getting ignored or getting you invited in the room.

Here’s an example of how I use sensitivity analysis to drive the business towards action:

1. What metric do you want to drive?

Have you seen a metric that is slipping or going the wrong way?

Struggling to get leadership to pay attention to something you think is critical?

What metric is that?

In our example, we’ll highlight how Gross Margin % is trending the wrong direction.

And let’s assume you are struggling to get leadership to care about Gross Margin % - for some reason all your pleas and cries for attention are getting ignored.

Here’s what you do next…

2. What metric does leadership care about?

The fastest way to get someone to care about something is show them how much money they will lose by ignoring it.

I’ve heard that the research shows people fear losing $1 more than they are motivated to gain another $1.

So we need to know how our business partners are compensated.

And luckily for us, the big goal that our leaders are bonused on is EBITDA.

So our sensitivity analysis will highlight how a change in Gross Margin will drive more/less EBITDA.

Below you’ll see how we are locking in the budgeted sales increase of 3% to show with some basic assumptions how a change in Gross Margin % will impact our EBITDA (those numbers in the table)

The recent trend of Gross Margin of 57% compared to the budget of 59% doesn’t sound like a big deal, but puts the EBITDA goal of $3.54M at risk.

In fact, that drop in GM% is the difference between positive and negative EBITDA.

3. Give a bit more context

Now it’s time to layer on the context to drive action towards the Gross Margin % KPI.

How will we do that?

You could either use Operating Expenses or Revenue to show what would need to be true with either of those to make up for the lost EBITDA.

What we’re trying to do is show the leadership team ‘if you don’t want to improve the GM%, that’s fine, but here’s what you’ll need to do to make up for it with another KPI’

And quickly they’ll see how hard it is to make up for that EBITDA by driving more revenue.

You can see in the view above that in order to make up for the recent trend of GM% of 57%, you’d need to increase your YoY sales increase by 4ppts (from +3% to +7%).

And that’s a huge jump.

By displaying the options in a table like I have above, you are giving the leadership team the options to solve for the missing EBITDA in a few different ways.

I wouldn’t be surprised if the leadership team decided to split the difference and aim for 58% GM% and sales increase of 5% but then solve for the rest by cutting OpEx.

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