With Q1 nearly complete many organizations will have an opportunity to assess their progress against their goals. This typically takes the form of monthly assessments against the annual operating plan. Variance analysis is likely to drive conclusions about the 1st quarter performance but what about he implications for the Annual Operating Plan (AOP) and the longer term outlook such as a 3 or 5 year plan? This post explores what organizations typically do and what they can do for a more robust understanding of their financial performance and future outlook.
Comparisons to the Current Forecast
For companies on a calendar year, Q1 comparisons to the current forecast should be the equivalent of comparing to the AOP. The reason is mostly timing. Organizations should not be reforecasting Q1 when they just completed an AOP a few months ago. Variance analytics across all three statements should result in minimal departures from what was in the AOP. If there are significant variances so early in the year, then it suggests significant changes are likely in the balance of the year. From a mathematical and statistical perspective, the balance of year or 18 month rolling outlook should be significantly changed. What happens in practice is that most leaders are loathe to make significant revisions to the outlook so soon after presenting the AOP information to the board. What FP&A teams can do however is make note of the significant variances in order to prepare a different outlook. A scenario that incorporates a new perspective based on Q1 should be in the back pocket of any FP&A team. At some point in the process of their communications, if significant variances continue, they are likely to need this scenario for communications either internally or externally.
Comparisons to the Longer-Range Outlook
What often falls by the wayside is consideration of the long-range plan – the 3 or 5 year outlook. Performance in Q1 may highlight some reconsideration of the long-range outlook. This is particularly consequential in recurring revenue business models such a SaaS business. In those businesses, Q1 misses can be particularly consequential as a revenue miss pushes in Q1 pushes the waterfall of revenue recognition not only into subsequent quarters but into the next fiscal year. For example, if a company has a sales miss in January and February in a recurring revenue business, there is not just a period-based impact but one which impacts all future months especially beyond the current fiscal year as seen below:
Two months of missed sales makes getting caught up on this revenue more and more challenging as time goes on. While progressing through the fiscal year the window for revenue recognition closes – time is the enemy. Companies are then not only making up for a sales miss, they have to make up for the miss and the run against the clock. For reasons such as this example, a Q1 miss on the top line, though early in a companies AOP timeline, is consequential not only for the current AOP but for the longer-range plans as well. FP&A teams provide value in companies by understanding the implication of Q1 performance and looking out further in time to understand the impact.
If you have a SaaS business facing these types of analytical challenges, that’s where FP&A Expertise can assist.
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