Thursday, October 28, 2010

CFOs Want to Predict The Future - Here’s How With Revenue Assurance!

When it comes down to it, CFOs are primarily concerned with “do I have enough money to run the business.” They may delegate that responsibility to the controller, or to various Line of Business managers, but the fundamental need to ensure that the business has enough money to function effectively does not go away.
Because of this, CFOs are constantly looking to any indication of how the business is doing, and ways to forecast a telco’s performance in the coming months. Hard as it is to believe, CFOs are not opposed in principle to losses or leakage (though no CFO will admit to actually being happy about them). They are more concerned when these losses are not detected early and only become evident months after they actually occur. This leaves CFOs no time to plan for how to address them - through adjusting the budget in line with such real-world conditions.

A CFO's Worst Nightmare

When your revenue figures are suddenly far less than projected based on your forecast and your sales figures, you end up with large cash flow problems that severely affect how the business can be run. Huge sudden unexpected shortfalls in revenue due to revenue loss or fraud that were also undetected and not represented in the sales figures, are often a CFO’s worst nightmare. These shortfalls can lead to severe cost cutting, or borrowing large sums/re-capitalize at extremely short notice.
If a CFO knows that losses are occurring, or are going to happen, they can plan and adjust the budget accordingly. CFOs deal with losses all the time, what they don’t like are SURPRISES. This is why they use whatever tools available to forecast how the business will perform in the coming months, in the hope that those forecasts turn out to be accurate and meaningful by the time revenue is finally accounted for.

Planning, Forecasting, Wishing, Hoping

One of the key planning tools a CFO has is the budget, which is effectively based on a forecast of sales activity for the coming year. A forecast of sales activity is borne out/proven by the actual sales numbers that occur. This in turn is an indication of how much revenue will be received (once service is delivered), and the amount of profit that will be made after direct costs are taken out.
But even though forecasts are regarded as an educated guess based on past performance, they are incredibly important, because that is what the CFO uses to plan until interim numbers (like sales figures) come along. These interim numbers allow the CFO to make adjustments and re-assess the budget. Of course in the end, revenue and profit will be accounted for – but by that time it’s often too late. The earlier a CFO can make decisions, the greater effect those decisions will have.

But Marketing and Sales Say We’re Going to Do Better Than We’ve Ever!

Realistically, the only way CFOs can have confidence in the forecast of sales is by implementing marketing assurance, so they know what the marketing people tell him will be the “lift” from their activities will have some actual relationship to reality when the sales figures come in.
But in the end, what CFOs are most concerned about is not forecasts, or even sales figures. They are concerned with the revenue that comes from rendering service. More importantly, they are concerned about the profit this revenue represents. In particular, this manifests as the margin a telco earns once direct costs (such as payments to interconnect/roaming partners) are paid out.
In effect, forecasts and sales figures are simply ways that CFOs can help themselves judge/predict how well the company is going to do once the accounting is done – for instance at the time of a periodic trial balance. These management accounting balances help a CFO get a sense of whether the sales numbers were really a good indicator of how things were going.

The Beauty of the Truth – or Reality

The way a CFO can ensure that the sales numbers are a good indication of reality is through revenue stream assurance (leakage control) and margin controls. That way when the final margin/profit is calculated and accounted for, there are no big surprises that can reasonably occur. This is because, to a large extent, whatever was sold was billed and realized, and done so in a way that is in line with the margin assumptions that were made.
This is the key value that Revenue Assurance can provide as a finance function that reports to the CFO. Revenue Assurance can give the CFO confidence that the numbers being used to forecast, adjust budgets and make business decisions are actually useful and accurate and not random numbers that have no relationship with reality.

Big Money, Big Decisions, Big Problems

When a CFOs get funds, decisions need to be made such as:
  • Do I ring fence those funds because I know there will be substantial losses coming, or bad debt that will never be collected?
  • Do I invest the money in new equipment, more marketing, hiring more staff etc. because the forecast/sales figures indicate a potential huge rise in revenue and a need for increased capacity to capitalize on it?"
If CFOs are not sure of the forecasts and whether the sales figures will be borne out by the revenue figures, they have to play it safe. They may then miss market opportunities, because they never know what surprises are in store, hidden in the overoptimistic forecasts and inflated sales figures that ultimately manifest as lower than expected revenue due to leakage/fraud. And even when bad things do not happen, and no surprises pop-up, that is still bad, because the CFO is left with money he could have spent but didn’t, which represents dozens, even hundreds of missed investment opportunities. That ultimately manifests as lower future/expected revenue over time.

At the other extreme, a CFO can overspend and not have enough money to run the business by the end of the year because he trusted the forecast and sales figures that ended up not being borne out by the final revenue numbers. This cash flow problem will mean reduced budgets, staff cuts, and an inability to invest in potential future revenue streams. And all this because revenue assurance wasn’t involved in ensuring the figures were accurate, had integrity and not subject to large amounts of fraud or leakage that lead to surprises and abrupt needs to borrow money or drastically reduce costs.

How Does a CFO Determine Their Appetite for Risk?

The question is not whether a CFO needs this assurance, its how much assurance does one need. Depending on the revenue of the company, and the potential upside gains of focusing attention and capital on new investments/opportunities, a CFO may say that a variance between forecast and sales, and between sales and revenue of $10 million USD for a quarter, is acceptable. Most of us would say that’s high. But if a telco can realistically expect an upside potential of $50 million USD profit each quarter by continuing with investments at their current/optimistic levels rather than being conservative with expenditure, a CFO may say that amount of variance (and potential loss) is more than acceptable.

But as CFOs want more accuracy in terms of the numbers they use to plan, the more they will want to invest in a function that helps them have more confidence in those numbers. The more accurate those numbers, the more faith they can have in them. The more risks that can be safely taken and managed, the more investments can be made to generate potential future returns. And that’s what CFOs really want – they want to be able to invest in things that grow the business, and to be able to do so without unreasonable fear that it’s the wrong decision.

That’s why I (and CFOs!) Love Revenue Assurance!