"Financial Planning: mastering the key value drivers"

Mario Antonio Vinzia Head of Planning, Administration & Control for EniServizi Professor of Corporate Finance at SDA Bocconi, Milan (Italy)

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Abstract

What is the real reason for planning? Is there value beyond simple revenue and P&L forecasting?

While attempting to forecast future events is certainly useful, it must in no way become the end of the planning process. Indeed, full financial cycle planning – not just profit planning, but also balance sheet and cash flow planning – can be used to achieve a series of objectives that make the planning and control process not merely valuable, but point of competitive differentiation. These objectives may be summarized as follows:

1. Internal Guidance - planning and guiding daily operations toward the creation of value through the effective control of financial value drivers that are appropriately integrated into the company’s incentive systems

2. External Guidance - ability to communicate key company data to shareholders, banks, customers, suppliers, and other stakeholders in order to “sell” the company’s credit rating properly

3. Compliance - strengthening the company’s ability to comply with governance requirements including the Sarbanes-Oxley Act in the United States and European requirements.

Most companies should understand the importance of properly forecasting cash flow in order to effectively manage operations. This paper challenges companies not to stop there, and to take full advantage of holistic forecasting efforts in order to achieve the three objectives above.

This white paper discusses the main issues surrounding these three objectives and provides a detailed analysis of financial dynamics and metrics that can be used to implement an effective financial planning model. In particular, the paper highlights the theory and the techniques that provide a foundation for defining and planning primary value drivers.