Recently, I came across a post on LinkedIn from a founder, now an ex-founder, announcing the closure of a business that had launched only a few years prior. Sadly, this is not an isolated story. Posts like these seem to be appearing more frequently, underscoring the struggles many companies face, even when armed with great products or innovative ideas.
These challenges are not always immediately visible, but for someone in Financial Planning & Analysis (FP&A), they often surface in the financial models companies rely on to navigate their operations. A recent experience brought this into sharp focus.
Pitching for our mutual benefits
I reached out to a company I suspected was facing financial turbulence. How did I know? FP&A gives you a unique lens to spot trouble from the outside—be it erratic financial signals or sudden strategic shifts. Initially, the CEO was too busy firefighting to make time for a meeting. Undeterred, I sent a follow-up email, attaching a version of my FP&A model with simple instructions. I left the ball in their court.
A week later, I received an urgent call. The CEO had implemented my model and was keen to discuss the results. Now, I had a choice: play hard to get and bolster my stock or accept the meeting and enjoy another productive FP&A session. I chose the latter, eager to understand the company’s existing approach.
Unpacking the Problem
During the meeting, I discovered their FP&A team was using a model rooted in “correlation equals causation” logic. These models—what I call “click-and-drag solutions”—rely heavily on predictive forecasting: if something happened in the past, the same will likely happen in the future. On paper, these models produce impressive-looking forecasts, but in practice, they often fail to account for the complexities of real-world business dynamics.
Here’s what I saw:
- Revenue Overestimations: Forecasts painted overly optimistic revenue projections.
- Operating Expense Underestimations: Opex was consistently understated, creating a deceptive view of operating cash flow.
- Investment Cash Flows Underplayed: Cash outflows from investments were minimized, further inflating free cash flow projections.
- Cost of Financing Ignored: Post-ZIRP (Zero Interest Rate Policy) environments were overlooked, leading to unrealistic assumptions about financing costs.
These inaccuracies create a rosy financial picture that collapses when reality strikes. The result? Repeated surprises when actual results fall short of forecasts, leaving the company in deeper trouble.
Why Driver-Based FP&A Models Are Essential
For businesses, especially those operating on razor-thin margins, these forecasting errors can be catastrophic. The need for a driver-based FP&A model cannot be overstated. Unlike traditional models, driver-based models focus on the core business inputs—what truly drives revenue, costs, and cash flow. This approach ensures:
- Precision: Avoiding underestimations in opex or overestimations in revenue.
- Granularity: Understanding cash flow at a monthly level, not just on an annual basis.
- Resilience: Preparing businesses to adapt when unexpected changes occur.
Since working with this company, I’ve seen their trajectory improve. They now have a clearer financial runway and better insights to guide strategic decisions. That same CEO shared my model with another founder facing similar challenges, leading to even broader impact.
Your Financial Reality, Reimagined
If you’ve ever used a driver-based FP&A model, you’ll understand the frustrations with traditional approaches. For those who haven’t, it’s time to rethink how you plan and analyse your company’s finances. A poorly designed model can obscure your financial reality, overstate your runway, and leave you unprepared for what’s ahead.
Drop me a direct message to request a copy of my FP&A model. It’s straightforward: input your company’s business drivers into the input section and see how your financial runway truly looks. Whether you’re thriving or struggling, gaining clarity is always a step in the right direction.
In FP&A, the best tool isn’t the one that looks good—it’s the one that gets it right.