Do you get beyond the spreadsheet?

Ask your team to use financial projections to support strategic decision-making, not the other way around.

It is easy to let financial projections take on a magical power. “Lets wait and see the financials” - I’m guilty of that line myself. “The Numbers” that are conjured up are eagerly seized on as a lifeline promising precision in an uncertain world.

Awareness of this tendency is the first step in returning “The Numbers” to their rightful influence. At core, financial projections are a set of assumptions. The risk is that Excel spreadsheets make it very easy to create financial projections that show a very attractive financial opportunity. Every competent middle manager will shape a proposal before bringing it to the CEO to maximise the chance of a “yes”, with investment hurdle rates met and backup to defend every individual assumption.

Rather than get lost in individual assumptions, the CEO has to force strategic thinking by asking the question “why?” As nature abhors a vacuum, markets abhor attractive profits. This opportunity will only be different because of the competitive edge the company brings to the table. The CEO can constructively focus their probing here – What is the edge? How can we deploy it most effectively? How do we know it matters? What do we have to assume for this edge to overcome competitors? How do we prove this assumption quickly and cheaply?

If these questions can be answered clearly and credibly, it is time to bring out the financial model.

Ask your team to estimate the unquantifiable

Ask your team to quantify the most important assumptions that underlie your strategy as an exercise to build understanding and dialogue.

Accounting discipline teaches great accuracy in numbers, even when they are not important. Strategic thinking requires inaccurate estimates to be made of numbers that are of critical importance.

The key numbers in strategy tend to be the hardest to quantify. “What market share will we be able to capture and defend if we enter this new market? What is the value of synergies between business units?”

Great understanding and insight can come from attempting a rough estimate of the most critical questions to support management judgement. For example, we attempted to answer what value cross-border synergies could bring to different business units in different countries. This required quantifying everything quantifiable, then putting a broad range on all the ‘soft’ benefits possible.

The answer was that the international network could contribute about 5% of profit to business units, with a range of 0 to 10%. This very rough estimate was enough for strategic decision-making – any strategy based on capturing global synergies was likely to fail to deliver the numbers. The deeper understanding of synergies also identified the key strategic indicator to track that would change this situation, namely the growth in multinational customers.

Ask your team the most important questions, and challenge them to quantify the answers. Even if they come back with a wide range, the attempt alone will create understanding and a richer dialogue.