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Posts Tagged ‘Corporate Finance’

Anaplan…& Implementing a Robust Forecasting Platform: Billings & Revenue

March 24th, 2017 Comments off

For the first few years at Cylance there was not a huge reliance on our forecasting platform and the need to put a pricey tool in place. There was simply no need to spend a six-figure amount when our business was still an entirely domestic story and the core revenue stream was still Professional Services. While we implemented NetSuite within our first few Quarters as a company, we opted for the NetSuite as our core platform so we could then bolt on additional modules as needed. We opted for their forecasting module almost immediately, but for a very basic forecasting function. As a Professional Services story, we only had a basic need to forecast gross labor hours, utilization rates, hourly cost rates, as well as estimated billing rates. At this point, we still did not have any consideration to Product revenue, and in the absence of, did not have any considerations for revenue recognition at that point. Considering that our Services revenue was not invoiced until completed, it was a very straightforward modeling exercise.

Fast forward to the launch of our Product offering and we knew it was going to necessitate a jump to a new platform as we were already starting to see some weakness in the NetSuite module. This new phase required an entirely different level of forecasting considerations for which there was no historical activity and for price points that had not been previously seen in the security sector. Would we actually realized, and stabilize, at a pricing level that would be many multiples over the incumbent first generation AV offerings. With consideration to the Product forecasting;

  • Average price per node on an annualized basis
  • Billings distribution by contract length…12, 24, and 36-months
  • Flexibility to easily adjust the anticipated weighting of billings
  • Subscription or Perpetual agreements (very few perpetual, but still present)
  • Robust deferred revenue modeling as a result of signed contracts
  • Sales staff hiring and assigned quotas.
  • Implementing any “seasonality” consideration into the model
  • Existing quotas, annualized growth, as well as ramp up period for new hires.
  • OEM, Consumer, and Government assumptions.
  • International entities & expected exchange rates for a consolidated USD view
  • Contra revenue accounts

It’s pretty easy to see that, even the short list above, there was going to be an entirely new level of complexity to our forecasting efforts, which could not be accommodated in our original module. After meeting with one of our key investors and discussing some of the options available, Anaplan seemed to emerge as a strong candidate and we made the decision to move forward. It was time to put a more robust tool in place as we started moving towards 9-figure revenue goals.  Even with the move to a new forecasting tool, we also had an entirely unique challenge as in developing a the components of this Forecast without a wealth of historical performance metrics. This meant that we would be constantly updating the Forecast as we compiled more Product transaction data. Fortunately for us, we saw a relative level of stability in our average PPN and our contract lengths. The two most difficult elements we had to work through during the implementation was the buildout of the deferred revenue forecast and the buildout of the revenue forecast that was supported by a detailed hiring plan and the assigned quotas for each one of those individuals. This was not going to be a simple spreadsheet exercised based on modifying a few cells and voila’…you have an annual number! The goal was to build a platform that would hold up to the scrutiny of our investors as well as easily identify & bridge any performance shortfalls that were realized versus planned.

In taking one example of where Anaplan excelled was in the modeling of our domestic revenues through the quotas that were assigned to each of our sales staff. While a painstaking exercise, there was an itemization of every existing sales staff, as well as those who were recently hired, or planned to be hired. There were individual quotas assigned to each one of these individuals. For those new hires, there were additional considerations to a ramp up period as they learned our tech, the inner workings of the Company, as well as seeding their existing network in their new employment. While these assumptions were usually conservative to reflect a few Quarters of nominal contribution, most were ramping extremely quickly. However, were we going to see the same level of immediate success as we scaled from a few dozen to sales staff to a multiple of that? That’s where we would have flexibility in Anaplan to adjust the model accordingly. From a billings and revenue modeling perspective, the only limits in Anaplan would be those that we placed on ourselves. However, we also had to be careful that the levels of planning detail we opted to incorporate would be important in the planning of the business and not turn into an exercise of planning paralysis.

The second painstaking, but worthwhile effort, was the buildout of the deferred revenue model. With the help of one of Anaplan’s premier implementation staff members, this was efficiently tackled and resulted in a clearly mapped Forecast that was easily trackable after any changes were made to new sales hires, quota modifications, or changes to average contract lengths. It was no longer the “black box” that we were challenged with on our prior platform. The additional benefit of the new Anaplan deferred revenue forecast is that it was easily audited and reviewed against the underlying assumptions. This would have played a pretty key role in our prior financing round in which there was a divide between the models presented by investors and our internal view…on the older platform. As one investor had noted during those efforts…”We’re familiar with that module and it is a bit of black box…”. A nice affirmation of our decision to move to Anaplan, but we were not yet fully deployed on Anaplan to supply the new view.

With respect to our choice to move to Anaplan, we also chose to work directly with the Anaplan implementation team as we wanted to keep our entire efforts and focus inside the Anaplan camp. I opted not to risk having a point of weakness between Anaplan and the efforts of a 3rd party reseller for implementation. It was a great decision and the Anaplan team was fantastic. In the end, the primary goal of moving to Anaplan was to be able to provide complete transparency to our investors, provide them the confidence that there was a robust set of underlying assumptions in the Forecast, and to allow for an intelligent dialogue on the integrity of the underlying Forecast. That once unbundled, it would be easy enough to see where any weakness might be occurring if there was a shortfall against Plan. We’ll jump into the cost of goods and operating expenses in the next round…

Thanks for reading.

Jeffrey Ishmael

Best Of Class Forecasting & The Eternal Struggle…

March 16th, 2017 Comments off

There’s few corporate topics that elicit the levels of frustration and confrontation that budgeting will create amongst teams. Unlike the amusing skirmishes that we’re watching at a government level right now, you’d think that this exercise at a corporate level, when there is only company performance to address and the absence of “political parties”, that this would be a straightforward process. Well this certainly couldn’t be farther from the truth as we all know. Over the next few posts I’ll be diving into not only the process and pain that most companies will go through, but an overview of the budgeting platforms I have worked on and the considerations for each.  While some of my views might seem matter of fact to my finance colleagues, my posts are always intended to provide insights for the rest of the organization when their having to deal with what is typically that “black box” department called Finance.

In the most optimal situation, the compilation of a Budget represents the collaborative process that should involve all the functional areas of an organization. This collaboration in the end will yield a Budget that all individuals are supportive of and will ultimately drive future accountability in delivering results that achieve the commitment made to the Board. In the worst situation, and one that will ultimately result in a broken process at every level, are goals that are mandated at the top level and each functional area is forced to determine what path it will take to get to the end goal, regardless of how reasonable the goals might seem. Ultimately, these goals are not fully supported by the team, will not be met over time, will yield resentment, as well as create unnecessary levels of conflict amongst the team as they resources become scarce in the absence of results and fingers are pointed in every direction as goals that were never their own are missed. These are absolute extremes, and in most cases, the majority of corporate budgeting efforts fall somewhere in between and need to be navigated through effective communications, compromise, and support.

What is important to keep in mind, at least with consideration to what the Finance department is managing, is all the elements that they’re compiling and that the budgeting process is really a mechanical process…there is no emotion involved in this process. Even though it will prompt emotional responses across functional areas, it’s really mechanical for the Finance team. With that in mind, it’s also worth understanding what the endless data points are that are having to be compiled for the Budget. I’ve worked in smaller $30M turnarounds that have a relatively small product offering and limited international distribution….to much larger entities such as DC Shoes / Quiksilver, as well as MGE, which then reported on a consolidated basis to Schneider Electric. The latter organizations had extremely complex budgeting practices that had been decades in the making, involved consolidations with dozens of international entities, while also having to balance both GAAP and IFRS reporting. Not only were there challenges with international consolidations, but there were countless other elements to work into the planning process, which included…

  • Establishment of company codes depending on subsidiary considerations.
  • Delineation between the multiple sales organizations
  • Considerations to the multiple distribution channels that were at play
  • Breakdown between customer types
  • Inventory segregation
  • Product segregation to allow further performance reporting
  • Seasonal considerations, which in apparel, likely meant 4-5 seasons annually
  • Demographic segregation…Men, Women, Youth, etc.
  • Product categories…Bottoms, Tops, etc.
  • Fabric segregation…Denim, etc.

It’s easy to see with the list above why the Budget process is a very mechanical process and NEEDS to be absent of any emotion in the process. It’s also easy to see with the list above that the process also needs to be a collaborative one with EVERY functional area to ensure success in the process and an end budget product that is supported an endorsed by the team.

With some relief, it was a much simpler budgeting process at Cylance as we were still a primarily domestic story with Protect being the main product offering. We ran a separate P&L for the Services business as that was a strategic part of the organization, but we also had to ensure that the Services team was operating in a profitable manner. Services was an incredibly profitable business at MGE and there was no reason it shouldn’t be at Cylance and we had the reporting enabled to be able to track whether that was the case. While there was still some developing international business, it was going to be a fairly small percentage of our overall results, at least over the next 12-24 months while the domestic business was still going to be the main growth vehicle. Did we need to plan at a regional level and monitor the spend…absolutely. However, for the stage that Cylance was at, and for the foreseeable future, there was no reason to complicate the process and create a ton of busy work to keep Finance busy and engaged. There was no reason to build a P&L based on hundreds of departments or cost centers that was more akin to what was necessary at a $40B Schneider organization. As with manufacturing, and other supply chain philosophies, lean P&L management in early stages leads to a very straightforward process, one that does not require extensive interpretation, and ultimately leads to a clear & concise path that was developed by the team, is supported by the team, and is easily navigated by all constituents.

So how do we bridge the gap between supporting the teams with what they need, effectively consolidating and considering their feedback, and the platform that is utilized to bring it all together and present the detailed view to the Board? That’s what we’ll dive into over the next few posts and jump into some of the key areas of the P&L. The common theme that I’ve always carried over the years, is that the success of an organization is tied to the collaborative approach and one that considers and respects the feedback of the team. Ultimately it’s the team, or the CEO, that is presenting the Budget to the Board. A Budget that is expected to be delivered on and achieved. It should be a safe assumption that the Budget is the product of an entire team collaboration and one the team is committed to rather than being dragged along for the ride. I’ve had to endure every situation, but without a doubt, I’ll always side with collaboration…

Thanks for reading…

Jeffrey Ishmael