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“Focus on the key elements that influence your numbers. You don’t have to create a model so dynamic that every single line item updates perfectly.”
The following is an edited abstract from CFO Thought Leader’s “Ask Ethan” podcast featuring Ethan Carlson, CEO, Carlson Management Consulting, and Jack Sweeney, co-host of CFO Thought Leader.
CFOTL: What’s your advice to executives who may believe driver-based models are too complex or sophisticated for their teams to manage or execute?
Ethan: First, in trying to create a model, focus on the key elements that influence your numbers. You don’t have to create a model so dynamic that every single line item updates perfectly. Think about the standard 80/20 rule in all things — 80% of all expenses are probably focused in a handful of key accounts.
Models don’t have to be complex. Your business will dictate the level of complexity and what you can identify. It’s great if, say, every ten visits to your website translates into a sale and you can categorize how many marketing dollars drive people to your website and that cascades down through sales, or if you can look at salesperson productivity and see how that will translate into sales. If you can’t, that’s okay too. You should focus on what you can quantify.
Models can vary in complexity. They don’t need to be overly complex to be useful. If I were taking an organization that had never done any sort of sophisticated modeling or budgeting but wanted to implement a model, I would take small steps and make sure we focused on a couple of key things and then expand.
All of the topics we talk about here are on budgeting and forecasting, and they are all iterative processes. It’s not like you’re going to come in and overnight transform a model and a business’s way of thinking. It takes time: you start with simple models and drivers and continue to add the sophistication over time.
CFOTL: When people want to adopt driver-based methodologies as part of their entire approach what do you recommend?
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ASK ETHAN is CFOTL’s brand new, weekly podcast that features an actual budgeting or forecasting question submitted from a busy finance executive like you! Ethan offers insights and answers to the challenges business leaders face as they seek to transform finance within their organizations.