Wall Street Prep

FPAMC© 1: Intro to
Financial Planning
& Analysis (FP&A)

wallstreetprep.com
What is FP&A?

FP&A stands for Financial Planning & Analysis

F • Responsible for analyzing, understanding, and overseeing

all aspects of financial operations and reporting

• Utilize financial AND operational data to plan the

P company’s future financial performance, and how that
& affects headcount, costs, etc.
A • Analyze both past results and current trends to develop
insights necessary to support major operational, strategic,
and financial decisions
2
Why do we need an FP&A function?

• Accountants know history, but what about the

future?

• Business partners such as pricing, manufacturing,

and human resources manage their own employees
and budgets, but who monitors & supports them?

• Marketing knows total revenues and customer

acquisition costs, but doesn’t manage variable and
fixed business costs

• FP&A connects all these dots to provide

management with the insights necessary to
effectively solve business problems
3
FP&A sits right in the middle of every other business function

• FP&A consolidates and coordinates all of

this information Accounting

• Other functions have access to operational

Human
data, but not sensitive financial information Resources
Biz Intel

• FP&A is the only function in the business

with access to both financial AND FP&A
operational data

• FP&A partners with business leaders to Engineering Marketing

provide valuable insights, add focus to
financial decisions, and track progress
Product /
towards goals Mfg.
FP&A work is detective work!

• As an FP&A analyst, • You investigate • Turns out the change

you recently noticed further by pulling is happening primarily
that your company’s data from the for a particular
overall revenue company’s product, where data
increased over the operational reporting shows volume has
past few months. system with a flag for increased but margins
product type. declined!
FP&A work is detective work!

• So, you run a SQL query to • You also notice • It turns out that the
pull transaction and charge that the average drop in margin
details; looks like the volume unit price has corresponds with
increase was driven by one declined for when the product
marketing channel, so you another product, team launched a
reach out to marketing, who so you check data new pricing system,
confirms they’ve been trends there as and it’s charging a
running a promotion that well as each lower-than-
increased website visitors! transaction anticipated markup
on each transaction
 What types of work does FP&A entail?

Long-Term
Annual Plan &
Recurring Reports Projects Ad Hoc Analyses
Budget
& Strategy

Typical Analyst Workload (Time Spent)

0% 20% 40% 60% 80% 100%

Long-Term
Annual Plan Ad
Recurring Reports Projects &
& Budget Hoc
Strategy

7
Key Tasks in FP&A

Recurring Reports
Weekly, monthly, and quarterly-updated One-off Weekly
Analyses Trading
reports and forecasts Updates
Strategic
Annual Plan & Budget Analysis &
Monthly
Accounting
Annually prepared, deep-dive plan and budget Benchmarking Close

Long-Term Projects & Strategy FP&A

Quarterly
Multi-period or multi-function projections Long-Range Forecast
Plan Updates
Ad Hoc Analyses
Short-term or individual projects and analyses Headcount Annual
and Expense Plan
Budget Forecast

8
FP&A is incredibly interesting, but challenging as well…

In order to be a great FP&A professional,

you need to ...

• Be comfortable with Accounting,

A true
understand financial concepts.
FP&A pro
understands
• Be able to translate questions into flexible both the
financial models, build persuasive numbers and
presentations using charts and graphics. the narrative of
the business
• Be able to connect and partner with
individuals throughout the organization.
 … as you need to be knowledgeable across multiple skill sets

Accounting Finance Financial Presentations Data Analysis & People

Understand Know key Modeling Present and Visualization Partner with,
financial principles such Build clear, persuade based Data sourcing, support, but also
statements and as time value of flexible, on findings cleaning, challenge key
interrelationship money, automated, and analysis, and assumptions
between profitability integrated visualization
accounts value drivers, financial models
etc.
 Where does FP&A sit in the organization?

CFO

Internal Business Corp. Dev. / Tax and Investor

Accounting FP&A
Audit Operations Finance Treasury Relations
The size of the FP&A team varies between organizations

Structures can vary

greatly by the size and One or two experienced
strategy of the company. finance professionals at an
early-stage startup …
Teams range from:

… to 100+ professionals
in large public companies
Finance Orgs are Structure is generally set up by function or
typically setup division/product
one of two ways
• Function – Most common, Finance is a separate
support function, where all Finance individuals sit
and work together, and responsibilities are assigned
by a central head of Finance

• Product / Division - Finance professionals are

assigned to a product line or specific business
segment, and report to the heads of those
products/segments directly, and tangentially to a
central Finance team
Functional FP&A
CFO
Organization
Structures
Director FP&A

Senior
Manager

Manager Manager

Senior Analyst Senior Analyst

Analyst Analyst
Divisional FP&A Organization Structures

CEO CFO

FP&A
Planes Trains Autos Hotels Trips
Director

Division Division Division Division Division

President President President President President

FP&A FP&A FP&A FP&A FP&A FP& Senior

Manager Manager Manager Manager Manager Manager

Senior Senior Senior Senior Senior

Analyst Analyst Analyst Analyst Analyst

Analyst Analyst Analyst Analyst

While these examples can highlight
the most typical structures, the
right setup will be the one that best
suits your organization.
FP&A is a dynamic career path

The “Typical” FP&A

Career Trajectory Financial Management
3 of the Company or
• Responsibilities change and Segment

grow over time

Revenue and
• Pace of change dependent 2
Capital Projects
on size of organization, skill
level, and interests Operating Expenses
1
and Headcount
The organization size, needs, and resources drive responsibilities

FP&A organization structure influences the specifics of each role

• Smaller organizations - more overlap, may support multiple areas at the

same time

• Larger organizations - more specialized (e.g., might have a Sr Manager of

Infrastructure R&D)

• Industry-specific - Oil & Gas companies might have entire Finance teams
specializing in analyzing value of oil reserves, well development expenses
& production capacity
 The “Typical” FP&A Career Trajectory

Senior Senior Director SVP of

Financial Finance
Financial Finance of FP&A/ Finance/
Analyst Manager
Analyst Manager VP Finance CFO

• Entry-Level • 2-4 years as a • 2-4 years as a • 8-12 years in • 12-15 years in • 15+ years in
Financial Senior Financial FP&A, or 3-5 FP&A, or 3-5 FP&A,
Analyst Analyst years as a years as a generally 3-5
Finance Senior Finance years as an
• Typical entry • Typical entry Manager Manager FP&A Director
point for ex- point for
auditors and consultants and
accountants bankers
What is each role responsible for?

Senior
Financial Analyst Finance Manager
Financial Analyst

• Able to work with guidance • Able to work independently • Manages one to two Financial
Responsibilities

• Works closely with Senior on projects Analysts

Financial Analyst or Finance • Limited supervisory
Manager responsibilities

• Operating Expenses and • Complex expense forecasting • Direct business partner

Areas of Focus

Headcount • Revenue volume and • Ownership over an income

profitability statement area
• Special project responsibilities
• Consolidations and roll-ups
What do Senior FP&A Professionals focus on?

Senior Director of FP&A / SVP of Finance /

Finance Manager VP of Finance Chief Financial Officer

• Manages up to several • Manages the entire FP&A • Manages the FP&A

Responsibilities

Finance Managers or Senior team Organization, Treasury,

Analysts Accounting, Tax, etc…
• Handful of Senior Managers
or Managers as direct reports

• Full responsibility for product line, • Ensures forecasts completed on • Partners with/supports the CEO
Areas of Focus

division, or full area of the Income time and budget is followed and other executive leaders
Statement
• Develops and presents financial • Manages relations with external
• Ex. Consolidated Segment Revenues,
plan/strategy to executive investors, shareholders,
Operating Expenses, Infrastructure
& R&D, etc…
leadership financiers, etc.
 How do responsibilities change with the role?

0% 20% 40% 60% 80% 100%

Long-Term
Analyst / Annual Plan &
Recurring Reports Projects & Ad Hoc
Sr. Analyst Budget
Strategy

Long-Term
Manager / Ad
Recurring Reports Annual Plan & Budget Projects &
Sr. Manager Hoc
Strategy

Director /
Long-Term Projects & Ad
Vice Recurring Reports Annual Plan & Budget
President Strategy Hoc

22
The ability to execute is incredibly
important early in an FP&A career;
as time goes on the ability to
explain, persuade, and influence
other leaders in the business
becomes increasingly critical
 FP&A sits at the intersection of
financial and operational data,
providing the business with critical
data and insights to make the right
decision.
What is FP&A? The CEO and CFO have a few questions about the
business and need answers fast to the following:
• How are sales volumes and margins comparing to the forecast?
(Recurring Reporting)

• How many new employees can we afford to hire and how much
will it cost us? (Annual Plan & Budgeting)

• How much can we invest in expanding production capacity given

our cash flow and profit goals? (Long-Term Projects and
Strategy)

• Product A has seen declining margins over the past quarter. Can
we dig into what is causing that? (Ad Hoc Analyses)
What do we do in FP&A?

Long-Term
Recurring Annual Plan & Ad Hoc
Projects &
Reports Budget Analyses
Strategy
Recurring Regular and recurring FP&A responsibilities
Reports
• Recurring Reports – Weekly or monthly reports created to
answer questions such as:

• How do sales and margins compare to the forecast?

• What is the marketing spend run-rate for each channel?

• Quarterly Forecasts – Financial Statement projections, typically

done quarterly, to get a view on what financial results might look
like

• Business Support – Weekly or monthly reports to the heads of

functional divisions or teams to track current expenses vs
budget, progress on hiring goals, and anything else to support
the busines.
Recurring Responsibilities

Business Pacing & OKR/KPI

Monthly Close
Forecasting Partner Performance Tracking &
Support
Support Reporting Reporting

Work with Accounting Tie operational Provide business Project near-term Identify and track
to ensure entries are metrics to financial partners with business performance, Key Performance
correct, and reserves projections, forecast monthly monitor results Indicators of
and accruals are future revenues and operational and against budget and company operational
reasonable expenses, headcount, financial reports, forecast, and track and strategic
and capital deep-dive analysis progress toward performance
expenditures where needed financial goals in real-
time
Monthly Close Support

• Work with Accounting monthly to ensure records and accruals are accurate, reasonable, and
recorded properly in financial statements

Accuracy Reasonableness Irregularities

• Accounting processes • During Close, Accounting or • Known irregular or non-

transaction entries; FP&A FP&A develops estimates of recurring items categorized
reviews for correctness Accrued Expenses, Sales Return separately
Allowances, etc.
• Comparing actual results to • Allows for easy normalization
forecast and budget to identify of performance
misallocated or missing entries
Forecasting • The most widely-known and universally-applicable FP&A responsibility

• Everyone in FP&A is involved to some degree, and in the best

organizations, this is a full company exercise

• 1st (and most detailed) forecast of the year is called the Plan Forecast

What do we believe is going to happen?

• Generally, forecasts show monthly results, and are done once a quarter
• Best practice covers a rolling 12-18 month period (Rolling Forecast)
• Detailed forecasts, may not affect every individual account level but should
cover all major driver variables and accounts (Pareto)
• Should avoid simply extrapolating near-term trends over the forecast period
Forecasting is an exercise for the
entire business to target operating
drivers and estimate impact on
financial results. Forecasting
should NEVER be considered a
finance-only exercise (though it
often is).
Business Partner Support

• Partner with business leaders at product or Key Responsibilities

departmental levels
• In a Business Partner capacity, it is FP&A’s
• Provide regular reports on business responsibility to be a trusted financial advisor
partner’s operational and financial metrics to the department or function

• Engage in ad hoc or deep-dive reporting of • This often involves both advocating for, as well
specific queries from the business partner as pushing back on business partner
assumptions, budget and headcount requests,
• Examples include monthly reports of etc. in accordance with the needs of the overall
expense and headcount vs budget, deep- business
dive on product-level unit economics,
• Actual responsibilities will vary a lot
marketing spend and efficiency reports, etc.
depending on which business function you
support (Marketing vs. R&D vs. Product)
Pacing, Performance, and Operational Reporting

Pacing & Projections Performance Reports Operational Reports

• Progress against forecast • Monthly or quarterly • Reports on non-financial

and projections based on reports to top management metrics, such as customer
current trends on financial performance conversion metrics, sales
• Shorter-term view • Summary financial view of pipeline updates, clinical
business performance trial progress, etc.
• Used to identify risks or
opportunities to forecast in
real-time
KPI & OKR • Key Performance Indicators (KPIs) are quantifiable measurements
Tracking & used to gauge a company’s overall long-term performance
Reporting • Objectives and Key Results (OKRs) is a collaborative goal-setting tool
used by teams and individuals to set challenging, ambitious goals with
measurable results

KPIs OKRs

• Determine company’s • Used to track progress

strategic, financial, and • Create alignment
operational achievements
• Encourage engagement
• Often based on comparisons around measurable goals
to competing businesses as a
form of benchmarking
Building efficiency and “slack” in
recurring work is increasingly
important. Without continual focus
on improvement, you won’t have
time to get to more interesting and
impactful analyses.
Areas for Increasing Efficiency

• Look for duplicative or overlapping reports

• Reduce or eliminate non-essential recurring

reports

• Build easily-updated financial models to answer

frequently-asked questions

• Build a portfolio of financial models for

frequently used projects, to share among team
members and save time

• Incorporate lean startup feedback loop to build

products, measure impact, and learn to improve
and streamline
What do we do in FP&A?

Long-Term
Recurring Annual Plan & Ad Hoc
Projects &
Reports Budget Analyses
Strategy
Annual Plan & Annual Plan & Budgeting Responsibilities
Budget
• Plan – Typically the first, and most detailed forecast of a fiscal
year, which sets goals and expectations for overall company
performance

• Headcount – Headcount requirements for the business are set

at the function and department level

• Budget – A specialized forecast used to set expectations for

spend, not just at the company level, but at the individual
function and department levels as well
Putting Together the Annual Plan and Budget

• September/October • Start with high level, • Context then informs

get started with Plan, top-down view of the assumptions
due near end of business FP&A uses in
November. Internal performance and building up the
FP&A kick-off, and momentum, while detailed forecast;
setup meetings with individual Junior team
functional leaders in assumptions are members dig into
the business to go explored and account details for
over assumptions sensitized with insights and prepare
and updates functional leaders new assumptions
Putting Together the Annual Plan and Budget

• More Senior FP&A • After any needed • Final version is

folks get involved in adjustments and approved and
aggregating and initiatives are added, becomes the basis
synthesizing initial the new view is for the annual
Plan results, and reviewed by senior operating expense
push challenge business leaders and and headcount
functions as needed Board of Directors budgets, while
to align with and/or Investors for operating and
Strategic and alignment financial metrics
Operating plans become targets for
compensation, etc.
Headcount

• Partner with Human Resources and Insider Note

Business Leaders to determine Headcount
needs • Particularly important in early-stage
companies that are growing quickly
• New Hire / Termination tracker
• Likelihood to hire is important
• Estimate headcount costs (salary, health • Tracking employee type (full-time employee,
benefits, meals, travel & entertainment, contractor, vendor) is important
etc.)
• Beware! Internal hiring needs between
• Monitor departmental hiring progress different departments can get heated when
versus budget trade-offs need to be made
Budgeting

• Formal process to set acceptable levels of Insider Note

spend
• Can be one of the most challenging tasks for an
• Expected performance of the business FP&A professional
drives allowable expenditures
• It is critical to develop strong relationships
• Can be done annually (most common) or with budget leaders throughout the process to
quarterly smooth the process
• Important to keep a skeptical mindset when
• Different approaches to budgeting:
determining reasonableness and necessity of
• Incremental budgetary requests

• Activity-based budgeting

• Zero-based budgeting
Budgeting Techniques - Incremental

• Easily the most common method due to its

simplicity

• Starting point is the prior annual or

quarterly budget

• Additions/Subtractions are made based on

manager input to arrive at the current
budget

• Appropriate when cost drivers do not

change often

• Leads to budgetary slack

Budgeting Techniques – Activity Based

• Important in organizations who are subject

to high volatility, such as early-stage
startups or cyclical companies

• Top-down approach

• Looks at organizational goals and derives

the level of activity necessary to support
that

• Budget is a relationship to expected level of

activity

• If results fall short, budget declines as well

Budgeting Techniques – Zero Based

• Incredibly useful when the company may

have bloated expenses.

• Each budget cycle, budget starts at $0 for

all departments

• Budget leaders required to justify every

requested expense

• Bottoms-up approach

• Extremely time-consuming, but works well

at containing discretionary costs
The approach to budgeting can
have a huge impact on where the
final budget lands. The budgeting
approach that was right for the
organization in the past is not
necessarily the right approach
today. Use your judgement!
What do we do in FP&A?

Long-Term
Recurring Annual Plan & Ad Hoc
Projects &
Reports Budget Analyses
Strategy
Long-Term As you advance towards the FP&A Manager role,
Projects & you’ll likely start to take on more:
Strategy
• Project Analysis – Involves building out financial analysis and
models to support specific business decisions

• Includes tasks such as whether to buy or build a new plant, NPV

analysis of launching a new product, creating a new dashboard
for a business line, or implementing a new reporting system

• Strategic Analysis – Typically consists of longer-term (3-5 year)

forecasts and scenario building, as well as competitor and peer
benchmarking

• Includes analysis of both financial (units, price) and operational

metrics (sales conversion ratios, product development progress,
etc)
Project Analysis

Implementation Support Projects Capital Projects Biz/Corp Dev

• Building new • Data analysis • NPV and IRR • Joint collaboration

reports or updating • Dashboard creation analysis agreements
old ones • Ex. R&D, • Contract
• Finance and
• Accounting system strategy support infrastructure negotiations
implementation investments, plant • Sales go-to-market
• Competitor
work and review expansions support
benchmarking
• Addressed in later
chapter
Strategic Analysis • Strategic analysis covers all analysis performed to
develop and monitor the company’s forward-looking
strategy along two dimensions:

Financial Operational

• Centers around comparison of • Comparison of operational

company financial ratios to ratios to peers and internal
peers goals
• Profitability (ex. Gross • Customer conversion, % of
margin) women in leadership roles,
• Returns (ex. Return on assets) R&D project status, etc.

• Efficiency (ex. A/R turnover)

ratios
Financial

Focus is on understanding: Insider Note

• Is our profitability changing over time, and • For public companies, use publicly-filed
why? financial statement disclosures (10-K, 10-Q,
etc.)
• How profitable are we and how do our
• For private companies, obtaining the data can
returns (on assets, on invested capital, and
be much trickier
on equity) compare to our competitors?
• If your business is aligned with your strategy,
• How much debt and equity are we using it should be noticeable during these
compared to peer firms? comparisons
• Compare efficiency ratios such as working • Ex. Low cost producer likely to have lower
capital levels, asset turnover ratios, etc. return on assets but greater asset turnover
Operational

Focus is on understanding: Insider Note

• How do our customer service levels • More difficult to measure and compare as data
compare to that of our competitors isn’t reported publicly

• What are our levels of discount compared • Needs to be inferred based on what
to those of peer firms information we can find
• Ex. early mentions of new products through
• Speed to market of new product launches
new product launch as an estimate of speed to
• Customer aided and unaided brand market
awareness • Oftentimes, Business Operations, Strategy, or
Analytics teams are responsible for this
process
What do we do in FP&A?

Long-Term
Recurring Annual Plan & Ad Hoc
Projects &
Reports Budget Analyses
Strategy
Ad Hoc Analysis

All other analysis to support the business

• Generally short-term and one-off analysis

• Individual work-effort

• Usually just a week or two to turnaround,

sometimes in a day or two

• Typically not planned or prioritized, but

addressed as time allows
Where do they come from?

• Business partners who have a question about

their function – Product team wants to know
how sensitive revenues are to changes in website
conversion

• Follow-up to a takeaway in our report or

dashboard – Marketing efficiency for our Paid
Search channel has increased over time; has
spend increased or unit profitability declined?

• Request from FP&A Director or CFO for why

we’re seeing current transactions dip – “Noticed
during our forecast update that hotel daily rates
increased. Can we see if this is just us or are other
brands seeing the same thing?”
Evolution of an Ad Hoc Request

1 2 3
• Increase in Hotel • Answer points to • Forecast comes around –
daily rates. Is this differences between incorporate learnings
just us or are other brands, so we create from the dashboard into
brands seeing the a dashboard to track our forecast for Hotel
same thing? (Ad Hoc) and analyze daily rates (Annual Plan,
differences (Project) quarterly updates)
Be Smart About Ad Hoc Requests

Ad hoc requests are inevitable in • Understand impact and

FP&A, and in any functional area urgency, and don’t be afraid to
for that matter turn down or defer requests

• Keep a log of Ad Hoc requests;

• Track how much time is for common threads of
being spent answering Ad questions, spend time
Hoc questions vs other work developing a report or
template to answer these
• Prioritize requests up front
questions
Let’s Look at Our First Request Together

It’s January 2021, you’re a Financial Analyst

supporting Operating Expenses

• Your manager has asked you to estimate what

salary expenses are going to be for the next few
months as part of the upcoming forecast update

• They also gave you the context that salaries are

expected to rise in February

• How do we go about answering this question?

Hypothetical Let’s break down this typical request:
Example Part I
1. For a given level of company headcount, what do we
anticipate salary expense to be each month?

2. Average salaries are expected to increase in

February. How does this impact our expectations?
Salary Expense Forecast Example

The first request is to forecast

salary expenses. We need to:
Driver Ratio Result
• Understand critical drivers of the expense
(headcount in this case) and ensure we have a
reliable forecast for it, or make one ourselves

• Determine the appropriate salary expense to

use, including any expectations for growth

• Apply expected salary per person to expected

headcount to forecast Salary Expenses
Quick Note on Financial Modeling Exercise

Inputs have been colored in blue font with a light Formulas are shown with black font, with no
yellow background to identify which variables are background color fill. Both are standard best-
hard-coded practices for financial modeling

• Blanks to be filled in have been surrounded

by a black border Headcount Summary (FTE) Jan Feb Mar Q1
Employees 100 105 110
Contractors 20 20 25
• We will cover more financial modeling best Vendors 10 10 10

practices in a later section and throughout the Total Headcount

course Average Salary (USD)

Employees $65,000 $68,250
Contractors $45,000 $46,350
Vendors $35,000 $35,000
Forecasting Salary Expenses Exercise

Headcount Summary (FTE) Jan Feb Mar Q1

Understand the Relationship Employees 100 105 110
Contractors 20 20 25
The most important lesson when Vendors 10 10 10
Total Headcount
forecasting anything is to understand the
Average Salary (USD)
driver. Here, the main driver is: Employees $65,000
Contractors $45,000
Vendors $35,000
• Number of employees
Salary Growth Rates (monthly )
Employees - 5.0% -
And the main ratio is: Contractors - 3.0% -
Vendors - - -

• Average salary per employee Salary Expense (thousands )

Employees
Contractors
Vendors
Total Salary Expense
Forecasting Salary Expenses

Headcount Summary (FTE) Jan Feb Mar Q1

Incorporate expectations for
monthly growth in salary in Employees 100 105 110
our equation Contractors 20 20 25
Vendors 10 10 10
Total Headcount Headcount at the end of
the quarter is NOT a
sum formula
Open File: ‘02_Intro Ex.xlsx Average Salary (USD)
(Tab: p1_blank) Employees $65,000
Contractors $45,000
Directions: Calculate the Vendors $35,000
correct average salary, salary
Salary Growth Rates (monthly )
expenses for each employee
Employees - 5.0% -
grouping, and totals for each Contractors - 3.0% -
month and Q1 Vendors - - -

Salary Expense (thousands )

Multiply Headcount by Annual Employees
Salary / 12 (monthly), and total Contractors
results for each month and for the
Vendors
quarter
Total Salary Expense
Forecasting Salary Expenses Answer

Headcount Summary (FTE) Jan Feb Mar Q1

Headcount and Average Salary Drives the Employees 100 105 110 110

Forecast Contractors
Vendors
20
10
20
10
25
10
25
10
Total Headcount 130 135 145 145
Changes in headcount levels, salary growth rates,
Average Salary (USD)
or average salaries will lead to variances versus Employees $65,000 $68,250 $68,250
Contractors $45,000 $46,350 $46,350
our forecast Vendors $35,000 $35,000 $35,000

Salary Growth Rates (monthly )

Employees - 5.0% -
Contractors - 3.0% -
Vendors - - -
In our example, greater total salaries are the
result of: Salary Expense (thousands )
Employees 541.7 597.2 625.6 1,764.5
Contractors 75.0 77.3 96.6 248.8
1) Employee and contractor salary growth rates Vendors 29.2 29.2 29.2 87.5
Total Salary Expense 645.8 703.6 751.4 2,100.8

2) Partially greater headcount

 Understanding the key drivers of
each forecast item is CRITICAL to
accurate and insightful forecasts,
and highlights the most important
operating metrics for the business
to focus on
Key Takeaway

• Too many times FP&A professionals end up

forecasting based on guidance, a template,
or “trend” without understanding the
underlying drivers Forecasting
• Too often the business will expect financial without
results, without focusing on impacting the
critical value drivers to get there
understanding
the true drivers
is just GUESSING
Hypothetical Coming back to our earlier request, but this time
Example Part II after the period has passed…

1. At the end of Q1, our Manager comes to us and

wants to know how much was spent on salary
expenses compared to our estimate, and what
caused the variance?
Checking our Forecast with Actual Expenses

After February is over and accounting has

closed the books, we check to see how close
our forecast was to the actual results. We need
to:
Drivers
• Compare actual salary expenses to our forecast
to determine the variance

• Compare the forecast drivers to see which

input/assumption is causing the variance

• Highlight the source of the variance through

rate-volume analysis and waterfall charts
Variance Highlight
Step 1 - Analyzing Forecast Variances Exercise

Actual vs Actual vs
Understand the Relationship Headcount Summary (FTE) Actual Forecast Forecast $ Forecast %

It is customary to look at Employees

Contractors
101
19
105
20
variances both in terms of dollars Vendors
Total Headcount
9 10

and percentages. Once these

Average Salary (USD)
variance drivers are identified, Employees $75,000 $68,250
Contractors $46,350 $46,350
we can deep dive to determine Vendors $35,000 $35,000

the cause. Total Average Salary

Salary Growth Rates (monthly )

Employees
Contractors
Vendors

Salary Expense (thousands )

Employees
Contractors
Vendors
Total Salary Expense
Step 1 - Analyzing Variances
in Results vs Forecast

Actual vs Actual vs
Variances are shown as Actual – Forecast.
In this way, if Actual results are short of Headcount Summary (FTE) Actual Forecast Forecast $ Forecast %
expectations, we see a negative variance Employees 101 105
Contractors 19 20
Vendors 9 10
Total Headcount
File: ‘02_Intro Ex.xlsx (Tab: p2_blank)
Likewise, % is shown as
Average Salary (USD) (Actual/Forecast – 1)
Directions: Calculate the actual and Employees $75,000 $68,250
forecasted salary, $ variance, and % variance Contractors $46,350 $46,350
Vendors $35,000 $35,000
columns. What is driving the variance?
Total Average Salary

Salary Growth Rates (monthly )

In order to determine total monthly average Employees
salary, we’ll need to calculate: Contractors
Vendors
(Total Salary Expense * 12 / Total Headcount)
Salary Expense (thousands )
Employees
As in our forecast, Salary Expense is Contractors
determined by the critical drivers Total Vendors
Headcount and Average Salary/12 Total Salary Expense
Step 1 - Analyzing Variances in Results vs Forecast Answer

Headcount and Average Salary Drives Actual Actual vs Actual vs

Results Headcount Summary (FTE) Actual Forecast Forecast $ Forecast %
Employees 101 105 (4) (3.8%)
Contractors 19 20 (1) (5.0%)
Vendors 9 10 (1) (10.0%)
Total Headcount 129 135 (6) (4.4%)
In our example, lower Employee Headcount
Average Salary (USD)
only partially offsets higher Employee Average Employees $75,000 $68,250
Salaries during the period, leading actual Contractors
Vendors
$46,350
$35,000
$46,350
$35,000
expenses to be $27.3K greater than our Total Average Salary $67,990 $62,543

forecasts. Salary Growth Rates (monthly )

Employees 15.4% 5.0%
Contractors 3.0% 3.0%
Vendors - -

Salary Expense (thousands )

Employees 631.3 597.2 34.1 5.7%
Contractors 73.4 77.3 (3.9) (5.0%)
Vendors 26.3 29.2 (2.9) (10.0%)
Total Salary Expense 730.9 703.6 27.3 3.9%
Step 2 - Rate – Volume Variance Analysis

A Rate-Volume Variance Analysis helps break out how much of

a variance is due to a change in volume (think units sold) The variance in Salary Expense caused by
versus a change in rate (think pricing) Headcount is calculated as:
Headcount Variance * Forecasted Average Salary

We can set up this analysis to change the

month or the scenario (Actual vs Forecast) and
automatically update the selected view (Actual – Forecast) here,
(Reusability & Ease of Update) same as in Step 1

Actual vs Contribution
Feb Actual Forecast Forecast Variance
How much of the total variance in
Salary Expense is due to variance in Headcount
Headcount versus Average Salary? Average Salary
Total

File: ‘02_Intro Ex.xlsx Check our work!

(Tab: p2_blank) The variance in Salary Expense caused
Total Actual vs Forecast should equal
Total Contribution Variance by Average Salary is calculated as:
Directions: Calculate the items
Actual Headcount * Average Salary
here and let’s see the results Variance
Step 2 - Rate – Volume Variance Analysis Answer

Actual vs Contribution
Variances in each driver have their Feb Actual Forecast Forecast Variance
own impacts on the forecasted item Headcount 129 135 (6) ($31,271)
Average Salary $67,990 $62,543 $5,447 $58,555
Net expenses higher by $27K, due to: Total $730,888 $703,604 $27,283 $27,283

• Savings of $31.3K by paying fewer

Employees, Contractors, and
Vendors

• Higher Average Salary cost us

$58.5K

By understanding the drivers of

results, we can analyze the causes of
the variance.
Step 3 - Waterfall Analysis (Covered Later)
Here we add a dummy data
set to align the data labels
These inputs are already linked in at the top of the bars
your problem file, but we will go over
A waterfall analysis provides how to build this out in a later section
a visual display of the
changes, walking from one
Feb Actual vs Forecast Waterfall Invisible Starting Plus Minus Ending Label Calc
result (Forecast) to another Forecast $0 $703,604 $0 $703.6
(Actual). Allows for quick Headcount $672,333 $0 $31,271 $0 ($31.3)
relative sizing of variance Average Salary $672,333 $58,555 $0 $0 $58.6
Actual $730,888 $0 $730.9
drivers
Feb Actual vs Forecast Waterfall
$0.8 $58.6 $730.9
We use a formula for the Chart

Millions
$703.6 ($31.3)
Title so that as our comparison $0.7 Here we utilize
changes, so does the Chart Title $0.6 Excel’s formatting
to set data labels
$0.5
to ‘Use Values
$0.4 from Cells” to
Using the data from Step 2, easily customize
$0.3
we’re able to visualize which display
$0.2
drivers are impacting our formatting
$0.1
results, and how large the
$0.0
impact is relative to our total Forecast Headcount Average Salary Actual
forecast.
Key Takeaways

• Understanding critical forecast drivers

makes it much easier to analyze the
(causes of) inevitable variances with actual “Plans are
results worthless,
• Creating reusable and easily-updated but planning
reports, and incorporating lessons from is everything”
the past into future forecasts are key to
Dwight Eisenhower
improving the accuracy and insight of
forecasting
Introduction to Systems & Tools

Stan in HR provided us the aggregate

headcount and salary information

• But what if we wanted the more

granular data and needed to pull it
directly from the source?

• Or what if we wanted to take the

estimate we developed and visually
compare it to the last few years of
results?

76
Introduction to Systems & Tools

FP&A professionals use several

different systems on a daily basis

• Some systems are ubiquitous Data Data

Reporting
Analysis Visualization
across companies (Excel,
PowerPoint), while others vary by
organization (Tableau, Hyperion,
Adaptive Insights, etc.) Other Skills
Presentation
& Systems
• We focus on the most commonly-
used systems Excel and PowerPoint
Size and Stage of Organization Matters

• Both the size and the life cycle stage of the company will determine what
systems are used

Small & Early-Stage Growth & Mid-Stage Large & Mature Companies

• Formal systems likely minimal • Formal Accounting, ERP, and • Formal systems already
Financial Planning Systems implemented
• Majority of analysis and
being implemented
visualization likely in Excel • Advanced automation features

• Presentations in Microsoft • Analysis in Excel or automated supported by specialized teams

PowerPoint or Google Slides dashboards, emailed PDF to handle data transformation

reports, etc. • Automated reporting, Tableau
• Some manual processing
• Ongoing automation of data dashboards and self-serve
and reporting projects reporting developed
Common Systems
While most of these systems are used in the typical FP&A role, over 80% of
time is spent between Excel & PowerPoint. To get the most out of the
time we have, we will focus on these two systems.

Our focus in PowerPoint / Data Sources

Excel Tableau
the course Google Sheets SQL & Python

Data Extraction

Data Analysis

Reporting

Data Visualization

Presentations

Other
 It is always useful to invest in
developing your Excel skillset. I still
have not met an organization that
doesn’t rely heavily on Excel, even
with other systems in place.
Topics in Excel

• Wall Street Prep Excel Course

• Standard Excel Settings

• Modeling Best Practices

• Introduction to VBA

• Introduction to Lambda

• Common Excel Add-ins

• Alternatives to Excel
81
Why Excel?

We use Excel to:

• Build and sensitize forecast models from historical data

• Analyze variances between actual results and forecast

• Build and update dashboards and recurring reports

• Run preliminary data analysis & exploration to gain insights

into real-time performance

• Create self-serve reporting tools for business partners

What formulas or features should you be familiar with?

• Xlookup or Index/Match

• Indirect

• Offset

• Sumproduct

• Named Ranges

• Data Validated Ranges

• GetPivotData

• Two-way Data Tables

• Radio Buttons
Wall Street Prep Excel Crash Course

• Touch on many features of Excel

relevant to the role

• Assumes an intermediate level of

familiarity with Excel

If you need to ramp up with the basic

and intermediate features of Excel, see
Wall Street Prep’s Excel Crash Course
Topics in Excel

• Wall Street Prep Excel Course

• Standard Excel Settings

• Modeling Best Practices

• Introduction to VBA

• Introduction to Lambda

• Common Excel Add-ins

• Alternatives to Excel
85
Excel Settings
(File –> Options,
Alt+F+T) 2

Formulas Tab

1. Workbook Calculation –
Set to ‘Automatic except
for data tables.’ In larger
files, especially ones
with data tables, this
prevents the file from
slowing down

2. ‘Enable Iterative
calculation’ set to ‘On’
with ‘Maximum
Iterations’ set to ‘100’
Excel Settings
1

Advanced Tab 2

1. Optional – ‘After
pressing Enter, move
selection’ turned to ‘off’

2. Optional - ‘Automatically
insert a decimal point’
set to ‘Off’
Excel Settings

Advanced Tab
1
1. Optional - ‘Disable
hardware graphics
acceleration’ selected to
‘On’. This helps to
prevent some display
lags/issues that pop up
in Excel from time to
time
Customize
Ribbon

Customize Ribbon Tab

1. ‘Developer’ box selected.

This enables you to
access the VBA menu,
allowing you to ‘record’ 1

Macros, or add certain

buttons to your
spreadsheets to aid in
scenario building
Quick Access
Toolbar

Quick Access Toolbar

Tab

1. ‘Import/Export’ – select
‘Import Customization
File’ and select the Excel
UI file from the
downloaded course files.
The Quick Access
Toolbar is an incredibly
powerful, time-saving
tool in all Office products
where you can add your
1
most utilized features
for easy access.
Topics in Excel

• Wall Street Prep Excel Course

• Standard Excel Settings

• Modeling Best Practices

• Introduction to VBA

• Introduction to Lambda

• Common Excel Add-ins

• Alternatives to Excel
91
Excel Best Practices

• Consistent across organizations, but may vary

• Ensures easy-to-follow and easy-to-audit

models

• Reduces errors Building good

• SAVES TIME!!!
modeling habits
from the start will
• Always try to learn Excel using hotkeys and not
your mouse, especially for commonly-used make you more
features successful
Inputs, Calculations, and Outputs

• Separate Inputs, Calculations, and Outputs Input

whenever possible Calculations
Output
• Add descriptions and sources of inputs and
assumptions used

• If using the same input multiple times, always

link to the source input (no daisy-chaining)

• Provide a description of calculation process, or a

calculation flow chart, to aid in use

• Setup Output summary page to highlight

important model outputs
Color-Coding Cells

• Color-code inputs, calculations, links to other Example Description

1,000.0 Inputs
cells, and links to other sheets differently
1,000.0 Calculations or links in same sheet
• Most common in Investment Banking, but is a 1,000.0 Calculations or links to cell in different sheet
1,000.0 References to external files
universal best practice of financial modeling

• Cell styles can ease implementation

Know Your Audience

Always build a model with the audience in

mind

• Summary vs detailed
Robustness Flexibility
• Self-serve analysis vs strict presentation

• Numerical results vs visual displays

• Robustness vs flexibility

• When building a new model, it is often easier to

build to spec from the beginning than to adjust
the model for new features later (ex. adding
monthly views to a quarterly model)
Plan the Model

• Sketch the model out on paper

• Determine how data will enter the model

• What calculations or formulas are needed?

• What will outputs look like?

• What summary charts or graphs will be helpful

• What is the frequency of the model? Weekly, monthly,

quarterly, or annually?

• How often will this need to be updated?

Planning your model up front will
save countless hours on the
backend of developing the model
Matrix Integrity

• When dealing with multiple worksheets, it’s

important to ensure similar rows and columns
are aligned

• Where multiple products or segments will be

consolidated, it is important that the individual
accounts line up (Row Integrity)

• When looking at multiple time periods, time

periods should line up across worksheets
(Column Integrity)
Build Model & Calculation Flow

• Name and organize the worksheets in the model

according to the plan

• Create a general outline of each worksheet

• Build the order of calculations in the workbook

• Create a flowchart to describe any complex

calculations to be included in the model
Highlight Key Assumptions

For each key input & assumption, provide:

• Description, frequency, what it applies to, etc.

• Details of the source of the input, last update

dates

• Any other notes on plausible ranges of values

Keep It Simple (KISS)

• Only make the model as complex as it

absolutely needs to be

• More complexity leads to more errors and more

time

• If planned correctly with the right audience in

mind, you won’t need to add additional features

• Break complex formulas into multi-step

calculations to ease auditing and reduce errors
Totals and Summations

• Set summations, especially for quarterly and annual summaries, after all monthly data

• Eases formula copy and prevents matrix integrity breakdowns

• Use Excel’s Subtotal function where possible to avoid summing up other Sum function results
Always Build in Checks

• Setup a Check Worksheet that links to all Check

cells through the model

• Use Conditional Formatting to quickly highlight

any Check errors

• Setup checks on logical relationships, examples:

• Change in Retained Earnings = Net Income

– Dividends

• Change in Cash on Balance Sheet = Net

Cash Flows

• Sum of Allocated Expenses = Total

Expenses to be Allocated
Protect the Model

• Use Excel’s built-in protection features to

make sure the model isn’t accidentally
changed

• Can restrict entry lines to only input cells

• Especially when non-sophisticated Excel

users provide data into the model directly
Test the Model

• Once completed, test the model with dummy

inputs

• Keep certain inputs unchanged while adding or

updating others, to test error checks,
reasonableness of results, etc.

• Make sure all signs in the formulas and results

make sense
Build Summary Output Sheets

• Determine what output graphs, tables, or

summaries would be most useful to the end user

• If different perspectives or views are needed,

make the output page dynamic

• Add flexibility using data validation drop-downs

and dynamic data lookups to automatically
update charts
Topics in Excel

• Wall Street Prep Excel Course

• Standard Excel Settings

• Modeling Best Practices

• Introduction to VBA

• Introduction to Lambda

• Common Excel Add-ins

• Alternatives to Excel
107
Introduction to Excel has a feature under the ‘Developer’ Ribbon
VBA tab called Visual Basic for Applications (VBA)

• Powerful programming
language built into Excel

• Used to create custom

calculations and
automate a wide variety
of repetitive tasks
VBA Resources

• Can save massive amounts of time when

used to automate large aspects of
recurring reports

• Can be used to load and execute

customized formatting in Excel models,
consolidate multiple files quickly, and run
advanced, multi-step calculations
If you’re interested in getting started with
• Also very complicated to learn VBA Wall Street Prep’s Ultimate Excel VBA
Course is designed for beginners or those
• We won’t discuss VBA in this course, looking for an in-depth refresher.

except where it pertains to other

functions or features we might add
Topics in Excel

• Wall Street Prep Excel Course

• Standard Excel Settings

• Modeling Best Practices

• Introduction to VBA

• Introduction to Lambda

• Common Excel Add-ins

• Alternatives to Excel
110
Introduction to Microsoft released Lambda for Excel in 2020
Lambda
• Lambda allows Excel users to create their own custom functions

• Allows user to specify inputs, calculation logic, and save as a

custom function to be used throughout the model

• Might be surprising, but this is a VERY EXCITING development

for Excel
Lambda Resources

• A long-awaited feature in Excel that allows the Wall Street Prep has some great videos
user to create custom functions introducing Lambda and some interactive
examples of how to use it here:
• Suppose you consistently use a complicated
multi-step formula, such as a nested XLookup
function

• Lambda allows you to create the complicated

formula just once, and name it for reuse

• Type in your new formula and specify the

inputs and Excel will run your multi-step
formula without needing to rewrite it!
Topics in Excel

• Wall Street Prep Excel Course

• Standard Excel Settings

• Modeling Best Practices

• Introduction to VBA

• Introduction to Lambda

• Common Excel Add-ins

• Alternatives to Excel
113
Excel Add-Ins

Add-ins

1. ‘Excel Add-ins’ select ‘Go’

2. ‘Analysis ToolPak’,
‘Analysis ToolPak – VBA’,
and ‘Solver Add-in’
selected.
2
Analysis ToolPak allows
you to perform
calculations and analysis
such as Correlations,
Regressions, and Moving 1

Averages.

Solver enables Excel to

run ‘what-if’ analyses
Other Excel Add-Ins

• Crystal Ball Crystal Ball Excel Add-In

• Statistics Add-Ins

• Company-specific formatting and

tools

• Macabacus / other formatting add-

ins

• Add-ins from other software

programs (upstream – ease of data
imports, downstream – ease of
export for charting / reporting /
etc.)
Topics in Excel

• Wall Street Prep Excel Course

• Standard Excel Settings

• Modeling Best Practices

• Introduction to VBA

• Introduction to Lambda

• Common Excel Add-ins

• Alternatives to Excel
116
Excel Alternatives

Google Sheets Anaplan Tableau

• Typically used in earlier stage • Typically used in medium to • Typically used in medium to
companies large companies large companies
• Easy to collaborate with • More capable of handling • Data discovery and
colleagues in real-time large-scale, real-time planning Automation
• Free, widely-available • Scenario modeling and • Data visualization and
software consolidation of inputs easier reporting
• Nowhere near as feature-rich • Implementation and added • Implementation and learning
as Excel learning curve curve
• Often used in conjunction
with Excel
Topics in PowerPoint

• Wall Street Prep PowerPoint Course

• Standard PowerPoint Settings

• Presentation Best Practices

• Alternatives to PowerPoint

118
Why PowerPoint?

We use PowerPoint to:

• Build monthly and quarterly reports to highlight

performance

• Report actual results, performance forecasts,

and strategic plans to managers, creditors, and
investors

• Distribute progress and performance reports to

business partners

• Communicate status and key takeaways of

project and ad hoc analysis
Wall Street Prep PowerPoint Mastery Course

• This course briefly touches on features of

PowerPoint relevant to the role, but assumes an
intermediate level of familiarity

• In order to get comfortable with the basic and

intermediate features of PowerPoint, Wall Street
Prep has an amazing course to quickly ramp you
up to the level of expert

• I highly recommend becoming familiar with Wall Street Prep's PowerPoint Crash Course
PowerPoint, both to save time and to make your teaches finance professionals and
consultants the strategies and techniques
presentations look clean and professional they need to build better decks faster.
Topics in PowerPoint

• Wall Street Prep PowerPoint Course

• Standard PowerPoint Settings

• Presentation Best Practices

• Alternatives to PowerPoint

121
Quick Access
Toolbar
(File -> Options,
Alt+F+T)
Quick Access Toolbar
Tab

1. ‘Import/Export’ – select
drop-down ‘Import
Customization File’ and
select the PowerPoint UI
file from the
downloaded the course
materials. Allows you to
set your most
frequently-used features
in an easy-to-access 1
menu to save time
Topics in PowerPoint

• Wall Street Prep PowerPoint Course

• Standard PowerPoint Settings

• Presentation Best Practices

• Alternatives to PowerPoint

123
PowerPoint Best Practices

• Will likely vary from one organization to the

next, but basic principles still apply

• Ensures clean, standardized, and professional-

looking presentations
Like good
• Always learn PowerPoint hotkeys and
modeling habits,
Shortcuts to SAVE TIME!!! good presentation
habits will make
you more
successful
Screen and Slide Sizing

• Depending on whether the presentation is to be viewed on a computer screen or projector, or to be

printed out, the ideal screen size setting will change

• 4:3 screen size for standard projectors, and most typical for printed materials

• 16:9 for widescreen TVs, Laptops, or Projectors

Outline Your Presentation

• Focuses on the overall story, flow, and

supporting points

• Edit main points directly in the slide without

clicking through each individual shape or text
box

• See more than one slide at a time

• Particularly important when designing new

presentations
Per Slide Limits

• Keep your slides uncluttered

• Varies depending on whether presentation or a

slide-document

• Slide-documents more densely-packed with

information and charts

• Presentations should be sparse

• One theme per slide

• Max of 6 bullets per slide with only a few words

each
Colors

• Try not to use more than 5 colors

• Select color scheme ahead of time

and stick with it

• Be aware of color-blindness when

selecting colors to use

• Respect color contrast when

selecting colors. Light colors can be
difficult to see

• Color palette can help standardize

presentation coloring
Color Palette

• Save your desired Color Palette by creating a

New Color Theme

• Saves time by enabling your colors in all shapes,

charts, and boxes throughout the presentation

• Changing a color in the theme will automatically

update wherever that color was applied
throughout the presentation
Slide Master

• Create a slide master for reusable

presentations

• Ensures consistent slide formatting,

spacing, and layout

• Provides the basis for building slide layouts

(next)
Utilize Slide Layouts

• Customized templates for commonly-used

slide formats

• Consistent, reusable templates to quickly

populate new slides

• Can also reset a slide to the default layout

for quick cleanup
Charts

• Clean, simple, with only relevant data

points highlighted

• Avoid slides full of charts, and focus any

associated wording on drawing attention to
the conclusion

• When copying from Excel, paste the chart

and link data (to keep it updated) or paste
as picture (to keep chart static)
Create a PowerPoint Template to Share

• Save your color palette,

slide master, and slide
layouts to reuse in other
slides

• Save your template as

“PowerPoint Template”
format to reuse or share
with others
Topics in PowerPoint

• Wall Street Prep PowerPoint Course

• Standard PowerPoint Settings

• Presentation Best Practices

• Alternatives to PowerPoint

134
Google Slides

• Commonly-used, especially at startups and

early-stage companies

• Easy collaboration with colleagues in real-

time

• Not as feature-rich or easy to edit as

PowerPoint
Topics in Data - SQL & Python

• Data Analysis Basics

• What is SQL and how is it used in FP&A?

• What is Python and how is it used in FP&A?

136
Data Analysis But FP&A only deals with financial data, right?
Basics
• While FP&A spends much of its time looking at financial data,
operational data is what drives the financial data

• Oftentimes the only department with access to BOTH the

financial AND the operational data

• Crucial to understand how operational data drives financial

performance

• Operational data is rarely available from the same systems as

financial data, and is often much more detailed

• Typically requires use of Standard Query Language (SQL) and a

DataBase Administrator (DBA) or visual query builder to obtain
Topics in Data - SQL & Python

• Data Analysis Basics

• What is SQL and how is it used in FP&A?

• What is Python and how is it used in FP&A?

138
 Your manager comes to you and
says “I can see in our financial
report that unit sales are down this
month, but in which geography? …
 … SQL is a tool that allows you to
create customized data pulls to help
answer more nuanced questions on
performance
Standard Query Language (SQL)

• Standard Query Language (SQL) is a basic SQL Resources

computer programming language used to
interact with Databases • “Head First SQL” by Lynn Beighly is my top
recommendation
• Directly obtain detailed operational
• “Sam’s Teach Yourself SQL in 10 Minutes” by
information from Databases
Ben Forta
• Specify the order, formatting, and • W3schools.com, khanacademy.org, and edx.org
filtering of data relevant to your all have free tutorial courses
request
• Mysql.com has downloadable SQL software to
• Straightforward to learn, and incredibly build and query your own databases
helpful • Notepad++ is my favorite notebook program,
with SQL recognition that makes writing and
• Not covered here, but absolutely worth
understanding SQL queries much easier
learning once you have the basics covered
SQL

• Example: Financial reporting systems are

Product #
great at generating data on how much
revenue was generated

• To generate meaningful insights, this

Operational
Data financial revenue data needs to be
combined with operational data such as
customer size, geography, industry, etc. to
understand what is driving changes
Financial
Data • Using SQL you can directly pull the
relevant information you think is relevant
to your analysis to review in Excel
Revenue
Topics in Data - SQL & Python

• Data Analysis Basics

• What is SQL and how is it used in FP&A?

• What is Python and how is it used in FP&A?

143
 As an FP&A professional, you have
three weekly reports to create,
requiring you to pull data, update
your report and charts, and email to
the responsible managers. Python
can automate this process, saving
time you can use elsewhere
Python

• Python is an incredibly powerful Python Resources

programming language that is more
difficult to learn than SQL, but still very • Learnpython.org has everything you need to
manageable get started
• W3schools.com has free introduction courses,
• Automate repetitive tasks, setup
while Coursera and Udemy provide courses for
automated data updates, dashboard
a fee
refreshes, etc. using Python
• “Python Crash Course” by Eric Matthes
• Indispensable in certain organizations and
• “Automate the Boring Stuff with Python” by Al
roles, but not necessary for all FP&A
Sweigart
professionals… YET
• “Learning Python” by Mark Lutz
• Not covered in this course, but keep it on
your radar
Python

• Python, especially paired with the Pandas

library, is useful for automating recurring
reports

• Recurring data retrieval, spreadsheet

updates, and chart/dashboard refreshes
that used to take 2 hours per week can
be completed in several minutes
 While certainly not necessary
for entry-level positions,
learning these skills will make
you a much better FP&A
professional in the long-term
Core Concepts

• Basic Accounting & Financial Reporting

• Financial Modeling

• Foundations of Corporate Finance

• Process & System Flows

• Common Statistical Concepts

• Data Analysis

148
Accounting in FP&A

• FP&A uses the output of the • Accounting data are the raw
Accounting function as the INPUT materials of our financial models,
to our own work – think of and is also typically how we define
Forecasts, Budget comparisons, and categorize the output of our
Dashboards tracking financial analyses, as financial statement
performance impacts (revenue growth, EBIT
margins, etc.)

149
Accounting in FP&A

• To review month-end
and quarter-end entries,
If accounting proposes a
need to understand change to how they account
what each of your for something, how might
accounts contain and
how that can impact the
that impact our forecast?
financial statements

150
 But before we dive in, let’s talk
briefly about how in depth we’re
getting
The emphasis is on core concepts

• We will cover the basics of each of these

topics, and dig in further where useful and
frequently used

• I will provide links to additional resources Don’t be afraid

to dig deeper to talk with your
• How deep you need to go will depend on supervisor to
your role and responsibilities, as well as understand
your own background and experience
where to focus
And while you don’t need to be an expert in everything…

…you DO need to
5 2
be comfortable
enough to
understand and
speak the
language

4 3
Accounting & Topics covered:
Financial
Reporting • Definitions of assets, liabilities, and owner’s Equity
Overview
• Tricks for remembering debits & credits

• Financial Statements & presentation

• Matching principle

• Revenue and expense recognition

• Interrelationship of the three financial statements

Assets, Liabilities, and Equity

• Assets – A resource with economic value Key

and/or future benefit to the company
• Assets = Liabilities + Equity
• Liabilities – A financial obligation of the
• Assets and liabilities can be either short-term
company that leads to the future sacrifice
(<12 months) or long-term (>12 months)
of economic benefits to another
• Equity, by its nature, is perpetual
• Equity – Represents the shareholder’s
stake in the company, measured at book
value
But what does that actually mean?

• Assets – Anything that provides either a Key Takeaway

current or future value to shareholders
• Another way to think of the balance sheet
• Liabilities – Anything owed by the firm, equation, is that Assets – Liabilities = Equity
whether in cash or in future services due
• Assets can be financed with:
• Equity – The value of all assets owned that • Payables and debt
aren’t financed with liabilities, i.e., the net
• Equity invested in the firm (i.e., common
value of the assets of the firm
shares and paid-in-capital)
• Earnings reinvested in the firm (i.e.,
retained earnings)
If you’re unsure of what an account
represents, try to translate it into
one of the simplified definitions
Double-Entry • In accounting, every transaction consists of both a
Accounting debit and a credit, think of this as two sides to the
same coin

• Total debits = total credits, just as total assets will

always equal total liabilities and total equity

Debits Credits

• Debits increase the value of • Credits increase the value of

Asset accounts liability and equity accounts
• Debits increase the expenses • Credits increase the revenues
recognized recognized
Double Entry Example

Dr Acct Cr Acct Assets = Liabilities + Equity Check

• Collect $100 from customer sales
Collect A/R in
on credit (Accounts Receivable) Cash 100
Cash
in cash? A/R (100)
0 0 0 TRUE

• Prepaying $50 of expenses?

Prepay
Prepaid Expenses 50
Expenses
• Paying a $50 invoice (Accounts Cash (50)
0 0 0 TRUE
Payable) with cash?

• Assets = Liabilities + Equity, Pay down A/P

A/P (50)
with Cash
ALWAYS Cash (50)
(50) (50) 0 TRUE
• How do we know that debiting
cash increases its value, while
debiting A/P decreases it?
Tricks for Debits and Credits

• Each account either has a NORMAL

Debit or Credit balance

Debits
Assets Expenses
• If an account has a normal Debit
balance and a transaction debits the
account, the account’s value increases

• If an account has a normal Debit

balance and a transaction credits the
account, the account value will Liability Equity

Credits
decrease

Revenue
Debit and Credit Exercise Exercise

1 Debit Account
1) Highlight each account with either Debit or Credit Account

Credit. Then find ending balances for each Account Starting Debit Credit Ending
A/R 100
transaction: 2
Cash 0

2) Collect $50 of A/R in Cash 3 Cash 0

A/P 50
3) Pay $50 of A/P with Cash
4 Cash 0
Revenue 0
4) Receive $100 in Cash from Sales
5 Expense 0
A/P 0
5) Incur $50 Expenses on Credit
6 Revenue
6) Calculate Net Income Expense
Net Income
7) Reduce Net Income to $0 and move the
7 Net Income 0
balance to Retained Earnings Retained Earnings 0
Debit and Credit Solutions Answer

Debit Account
Credit Account
• Debit Accounts include Assets (A/R and Cash),
as well as Expenses Account Starting Debit Credit Ending
A/R 100 50 50
Cash 0 50 50
• Credit Accounts include Liabilities (A/P) and
Equity (Retained Earnings) accounts, along Cash 50 50 0
A/P 50 50 0
with Revenues
Cash 0 100 100
• Debit Accounts increase with Debits, so Revenue 0 100 100
Ending = Starting + Debit – Credit Expense 0 50 50
A/P 0 50 50
• Credit Accounts increase with Credits, so
Revenue 100
Ending = Starting – Debit + Credit Expense 50
Net Income 50

Net Income 50 50 0
Retained Earnings 0 50 50
Debit and Credit Solutions Answer

Debit Account
Credit Account
• Net Income is calculated as Revenues –
Expenses, and because Revenue (a credit Account Starting Debit Credit Ending
A/R 100 50 50
account) is greater than Expenses (a debit Cash 0 50 50
account), Net Income has a credit balance of $50
Cash 50 50 0
A/P 50 50 0
• Net Income with a credit balance of $50 is
reduced with a debit of $50, bringing its balance Cash 0 100 100
Revenue 0 100 100
at the end of the period to $0
Expense 0 50 50
• The $50 credit entry that closes Net Income A/P 0 50 50

then hits Retained Earnings (a credit balance) to Revenue 100

increases it by the same $50 Expense 50
Net Income 50

Net Income 50 50 0
Retained Earnings 0 50 50
 If you ever get confused, take the
time to build a simple illustration in
Excel to clarify
Critical Concept 1 – Accrual Accounting

• Revenues and Expenses are recorded when Accounting Methods

a transaction occurs, rather than when cash
is received or paid • Accrual Accounting is the most common
method of accounting, especially amongst
• Follows the Matching Principle, which publicly-traded companies
states that revenues and related expenses
• Illustrates the steady-state earnings power of
must be recognized in the same period
the firm by smoothing lumpy one-time cash
• Portrays a more accurate view of the receipts and payments
company’s health over time • Contrasts to the Cash Basis, which is much
simpler but can be distorted by large, lump-
• Smooths out earnings over time
sum receipts and payments
Revenues & • Revenue is value coming into the company, while an Expense is value
Expenses leaving the company

• Revenues can be earned before or after cash is received, just as

Expenses can be incurred before or after cash is paid out

• Timing of cash receipt/payment does not necessarily align with timing

of revenue and expense recognition

Revenues Expenses

• Anytime a product or service • Anytime a company receives

is sold and delivered, the the benefit of a good or
company earns Revenue, service, the company incurs an
regardless of when the cash is expense regardless of when
expected to be paid the cash is expected to be paid
Critical Concept 2 - Revenue Recognition

• Revenue must meet several criteria to be Revenue Recognition Standards

recognized (that is, to be recorded as
Revenue on the financial statements) • FASB ASC 606 – Revenue from contracts with
customers
• Ensures sales are consistently recognized
• IFRS 15 – Revenue from contracts with
across organizations and reporting
customers
standards (both GAAP and IFRS)
• FASB issued Accounting Standards Update
No. 2014-09 Revenue from Contracts with
Customers (Topic 606)
 The 5-Step Revenue Recognition Process (ASC 606)

1 2 3 4 5
Identify the contract Identify contractual Determine the Allocate the Recognize revenue
with the customer performance amount of determined amount when the performing
obligations consideration/ price of consideration/ party satisfies the
for the transaction price to the performance
contractual obligation
obligations
Identifying the Contract & Customer

• First step is to identify the Customer of the Important Definition

contract
• Customer is “A party that has contracted with a
• Does not apply to lease or insurance company to obtain a good or service that is an
contracts, or to financial instruments output of the company’s ordinary activities in
exchange for consideration”
• Does not include guarantees or non-
monetary exchanges with companies in
same line of business

• If a contract is partially in scope of both

other guidance and Revenue Recognition,
apply the other guidance

• Applies to transfers of non-financial assets

Contractual Performance Obligations

• Next, determine the unit of account, i.e. the Definitions

Performance Obligation
• Performance Obligation – Promise to
• Organization will evaluate ALL of the transfer a distinct good or service, or a series
promised goods and services in a contract, of distinct goods or services that are
and apply guidance to determine which are substantially the same and have the same
Distinct pattern of transfer to the customer

• If distinct, it is a performance • Distinct – Good or service alone economically

obligation benefits the customer, and is also distinct
within the context of the contract, avoiding:
• If not distinct, combine goods or
services until the bundle of goods that • Significant integration service
is distinct • Significant modification or customization
• Highly interdependent or interrelated
Determine the transaction price(s) and allocate

• Determine the transaction price, and Definitions

allocate to the performance obligations
• Variable Consideration – Anything that
• Adjust for Variable Consideration causes the amount of consideration to vary,
including:
• Estimate the variable consideration and the
extent it is probable that a significant • Discounts
revenue reversal in the amount of • Rebates
cumulative revenue recognized will not
• Refunds
occur
• Bonuses
• Consider guidance on identifying
• Penalties
significant financing components,
consideration payable to a customer, and • Rights of Return
non-cash consideration
Recognize revenue when obligation is satisfied

• Revenue is recognized when control of the Definition of Control

good or service transfers to the customer
• Control – the ability to direct use of, and
• Control indicators include: obtain substantially all benefits from, the asset

• Present right to payment • Can transfer over time (if guidance criteria are
met) or at a point in time
• Legal title
• If over time, revenue will also be recognized
• Physical possession over time

• Significant risks and rewards of

ownership

• Acceptance
Revenue disclosures

• Should enable users to understand the: Disclosures Notes

• Nature • Added information meant to help users
understand the makeup of revenues
• Amount
• Includes additional requirements to
• Timing disaggregate revenue into categories such as:
• Uncertainty • Product Lines
• Geographical Region
• Includes information about:
• Market or Type of Customer
• Contracts with Customers
• Type of contract
• Contract Asset Balances • Includes some added backlog disclosures
• Significant judgements & changes in
judgements
Revenue Recognition Example Exercise

On April 2, 2021, a customer visits Expedia.com and reserves a week-long hotel stay in
Orlando, FL beginning July 4, 2021, for $1,000. The reservation is cancellable at any time up
to 24 hours before the reservation date.

When should Expedia recognize revenues?

❑ On April 2, 2021 – the sale date

❑ On July 3, 2021 – the date the reservation is no longer cancellable

❑ On July 4, 2021 – the reservation date

❑ On July 11, 2021 – Once the reservation is complete

Revenue Recognition Example Answer

On April 2, 2021, a customer visits Expedia.com and reserves a week-long hotel stay in
Orlando, FL beginning July 4, 2021, for $1,000. The reservation is cancellable at any time up
to 24 hours before the reservation date.

When should Expedia recognize revenues?

❑ On April 2, 2021 – the sale date

❑ On July 3, 2021 – the date the reservation is no longer cancellable

❑ On July 4, 2021 – the reservation date

❑ On July 11, 2021 – Once the reservation is complete

Revenue Recognition Example Exercise

On April 2, 2021, a customer visits Expedia.com and reserves a week-long hotel stay in
Orlando, FL beginning July 4, 2021, for $1,000. This time the customer can cancel at any time
and can even decide to cancel the remaining days once the stay has already begun.

When should Expedia recognize revenues?

❑ On April 2, 2021 – the sale date

❑ On July 4, 2021 – the reservation date

❑ On July 11, 2021 – Once the reservation is complete

❑ Recognize the daily amounts for each day of the reservation as they occur
Revenue Recognition Example Exercise
Answer

On April 2, 2021, a customer visits Expedia.com and reserves a week-long hotel stay in
Orlando, FL beginning July 4, 2021, for $1,000. This time the customer can cancel at any time
and can even decide to cancel the remaining days once the stay has already begun.

When should Expedia recognize revenues?

❑ On April 2, 2021 – the sale date

❑ On July 4, 2021 – the reservation date

❑ On July 11, 2021 – Once the reservation is complete

❑ Recognize the daily amounts for each day of the reservation as they occur
Revenue Recognition Summary & Codification

• Rules affecting Revenue Recognition will

determine timing and amount of revenue
we can recognize each period (highly
relevant to FP&A) Contract issues
are particularly
• Setup of revenue and sales agreements can
relevant when
have large impacts on revenue recognition
launching new
• Accounting Codification reference: products or
https://asc.fasb.org/home and select ‘Basic entering into new
View’ to gain access
partnerships
The last thing you want is to close
sales but be unable to recognize
the revenue promptly because of
problematic language in the
contract
Critical Concept 3 - Matching Principle

• Accounting rules state that expenses Matching Principle

should be recognized at the same time as
the revenues that generate those expenses • Expenses must be reported in the period in
are recognized which the related revenues are earned
• If an expense is not directly tied to revenues,
• Examples include Inventory and COGS,
expense it in the same period it is incurred
Capital Expenditures and Depreciation, etc.
• If the future benefit of the cost cannot be
determined, expense it immediately
Matching Principle Example Exercise

• In order to display all available hotel inventory on their site, Expedia spent a lot of money to purchase
servers, build integrations with hotel supplier inventory systems, and design and maintain the
website

• While Expedia may have purchased a large block of servers at one time in the past, the company
expects to receive benefits from these investments for many future periods

• The matching principle is what guides accountants to recognize the expense of purchasing assets
over time as depreciation, instead of as one big lump sum expense

• Without this principle, Expedia would look highly unprofitable in its early development when the
large upfront expenses are recognized, and highly profitable after as they receive the benefit over
time without purchasing additional servers

• By matching costs with revenues, the accrual concepts strives to more accurately depict a
company’s operating results
Four Statements

Income Statement Balance Sheet

Summary of the resource inflows and Summary of all Assets, Liabilities, and
outflows to the company during a Equity in the business as of a particular
specified period (typically 1 year) point in time (typically at the end of the
fiscal year)

Statement of Cash Flows Statement of Shareholder’s Equity

Summary of how actual cash flows into Summary of all changes to the Equity
and out of the business during the same accounts during the same period as the
period as the Income Statement Income Statement
Footnotes provide the details

• Presented after the four financial statements

• Contains the details of which accounting

elections were selected

• Provides detailed information on select account

balances, disclosures on significant estimates
made and assumptions used, etc.

• Can also provide alternate reporting views, such

as by geography, segment, product, etc., though
at more of a summary level than the rest of the
financial statements
Example Expedia 10-K Footnotes
Expedia 10-K Revenue Recognition Footnote
Income
Statement

Expedia’s 2019 10-K

1. Also known as the

‘Consolidated Statement
of Operations’

2. Shows Revenue to Net

Income, and includes
disclosures on Earnings
Per Share (EPS)
Balance Sheet

3. Shows all Assets,

Liabilities, and Equity in
the company as of the
end of the period.

4. Note that the Total

Assets = Total Liabilities
and Stockholders’ Equity
each year
Statement of Cash
Flows

Converts accrual Net Income

to cash inflows and outflows

5. Begins with Net Income,

6. Adjusts non-cash items,

the cash impacts of
changes in balance sheet
accounts, as well as
investment and
financing transactions
that are not included in
Net Income.

7. Ends with ‘Net increase

(decrease) in Cash
Statement of
Shareholder’s
Equity
8. Shows all of the changes
affecting equity accounts
from one year to the
next, including both (#)
shares and ($) amount
 Interrelationships summary

Income Statement Cash Flow Statement Balance Sheet

Current_Year Current_Year Prior_Year Current_Year
Revenue $ 100,000 Net Income $ 15,000 Cash $ 10,000 $ 40,000
Cost of Revenues 50,000 Add back: Non-cash Depreciation 5,000 A/R 15,000 20,000
Gross Profit 50,000 Adjustments due to: Inventory 35,000 25,000
(Incr.) decr. in A/R (5,000) Current Assets 60,000 85,000
Sales 10,000 (Incr.) decr. in Inventory 10,000 4
2
G&A 15,000 Decr. (incr.) in A/P 5,000 PP&E, net 50,000 50,000
R&D 3,500 Operating Cash Flows 30,000 Total Assets 110,000 135,000
Operating Profit 21,500
Purchase of PP&E (5,000) 3 A/P 30,000 35,000
Income Expense 1,750 Investing Cash Flows (5,000) Long-Term Debt 20,000 25,000
Interest Income 250 Total Liabilities 50,000 60,000
Pre-tax Income 20,000 Issu. of Long-Term Debt 5,000
Financing Cash Flows 5,000 Common Stock 30,000 30,000
Tax Expense 5,000 Net Cash Flows $ 30,000 Retained Earnings 30,000 45,000
Net Income $ 15,000 Total Liabilities & Equity $ 110,000 $ 135,000
1

Net Income = r in Ret. Earnings TRUE Net Cash Flows = r in Cash TRUE Assets = Liabilities + Equity TRUE TRUE

1) Net Income from the IS drives the change in Retained 3) Changes in BS accounts drive adjustments the Net Cash
Earnings on the BS Flows on the CFS
2) Net Income from the IS is the starting point for 4) Net Cash Flow from CFS drives the ending balance of Cash
calculating Net Cash Flow on the CFS on the BS 190
Core Concepts

• Basic Accounting & Financial Reporting

• Financial Modeling

• Foundations of Corporate Finance

• Process & System Flows

• Common Statistical Concepts

• Data Analysis

191
Modeling Best Practices - Review

Separate Inputs, Calculations,

and Outputs
Keep it Simple
Color-Coding Cells
Totals and Summations
Know Your Audience
Build in Checks
Plan the Model
Protect the Model
Matrix Integrity
Test the Model
Build Model & Calculation
Flow
Build Summary
Output Sheets
Highlight Key Assumptions
 I know we just covered best
practices, but they are so important
we did it twice
 Business Drivers

Business Driver Revenue As discussed before, understanding

drivers is critically important!
Price Units Sold
• Revenue is the financial metric we see
Discounts or Competitor Customer Sales
in our results, which = Price x Quantity
Promotions Pricing Visits Conversion
• But Price is determined by market
pricing and any discounts or
promotions we offer
Personnel
Expense
• And Units Sold depends on how many
customers visit our site, and what % of
Cost / Person Headcount
visitors purchase our product

Salary / Person
Benefits /
New Hires Attrition
• These are our real Business Drivers
Person
 Business Drivers Example

Revenue As discussed before, understanding

+5% drivers is critically important!

• Take this example, where Revenues are

up 5% y/y
Price Units Sold
+10% (5%) • Driven by higher Prices, offsetting
decline in Units

• Digging deeper, Price increases are

market-driven
Discounts or Competitor Customer Sales
Promotions Pricing Visits Conversion • Unit decline is due to less customers
N/A +10% (10%) +5% visiting the website
Core Concepts

• Basic Accounting & Financial Reporting

• Financial Modeling

• Foundations of Corporate Finance

• Process & System Flows

• Common Statistical Concepts

• Data Analysis

196
Corporate Finance in FP&A

Corporate Finance consists of the rules and relationships

between accounting items, and growth in these items,
that we use to understand our business and its drivers
Corporate
• Mathematical tools that are used to help us objectively Finance
decide whether projects are good to invest in or not, and
include discussions around the right way to calculate and
project “growth”

• Helps us understand how the value of money changes over

time, as this becomes an important concept to us when
comparing between different projects with different timing
of cash flows

197
Corporate Topics covered:
Finance
Foundations • Time value of money

• Net Present Value (NPV) / Internal Rate of Return

(IRR)

• Growth Drivers and Year on Year Calculations

• Corporate Finance – Intermediate & Advanced

Concepts (covered in Appendix)

• Optimal Debt Ratios

• Fundamental Growth Drivers

• Etc…
Time Value of Money

• Money today is worth more than

the same amount in the future,
due to its potential earning
capacity today

• Money invested can earn interest,

which makes money received now
worth more than money received
later
Time Value of Money

• Ex. You can get $100 today, or

$100 one year from now.
Interest rates on risk-free
Treasury Bonds are 5%
$100 $100 * 5% = $5 $105
• If you receive the $100 today,
buy Treasury Bonds, you’ll T=0 T=1
receive $105 back in one year,
so the $100 today is “worth”
more than $100 in one year
Future Value

• We can express this

formulaically Future Value t = (Present Value t=0) × (1 + 𝑟)𝑡
(we denote the interest
rate as r and time t)

• Example: You’re promised Future Value5 = 1,000 × (1 + 0.10)5

$1,000 this year or $2,000
in 5 years. If r = 10%,
which would you choose?
Yes?

No?
TVM Example 1.0 Exercise

• By plugging each variable into

Future Value Formula
the formula, we can
determine how much $1,000
invested today, earning 10% Future Value t = (Present Value t=0) × (1 + 𝑟)𝑡
for 5 Years will be worth at
the end of the period
Future Value Example

Present Value of Cash $1,000

1. Open Number of Years (t) 5
problems_and_solutions.xlsx and
navigate to tab ‘TVM1_prob’ to
Interest Rate (r) 10%
work through example TVM1.0 Future Value of $1,000 in 5 Years
TVM Example 1.0 Answer

• If we invest $1,000 today at

Future Value Formula
10% for 5 years, it’ll be worth
$1,611 at the end of that period
Future Value t = (Present Value t=0) × (1 + 𝑟)𝑡
• If we set these options at the
same point in time (5 years
from now), we can directly Future Value Example
compare them
Present Value of Cash $1,000
• Our real options are either Number of Years (t) 5
$1,611 or $2,000 Interest Rate (r) 10%
Future Value of $1,000 in 5 Years $1,611
TVM Example 1.1 Exercise

• What if instead of earning

Future Value Formula
10% each year, you had an
investment idea that would
generate 20% returns each Future Value t = (Present Value t=0) × (1 + 𝑟)𝑡
year?

• What would this be worth and Future Value Example

would it change your choice?
Present Value of Cash $1,000
Number of Years (t) 5
1. Open
Interest Rate (r) 20%
problems_and_solutions.xlsx and
navigate to tab ‘TVM1_prob’ to Future Value of $1,000 in 5 Years
work through example TVM1.1
TVM example 1.1 Answer

• Solving for Future Value in

Future Value Formula
year 5, we see the same
$1,000 today is worth $2,488
if we can earn 20% each year Future Value t = (Present Value t=0) × (1 + 𝑟)𝑡
during the period

Future Value Example

Present Value of Cash $1,000

Number of Years (t) 5
Interest Rate (r) 20%
Future Value of $1,000 in 5 Years $2,488
As the interest rate increases, the
future value of money will get
exponentially larger due to the
compounding of interest
TVM example 1.2 Exercise

What is really happening here?

If we take $1,000 and invest it earning 20% each year, then in Year 1 we will have 20%
more of $1,000, or $1,200

In Year 2, we’ll have 20% more of $1,200, or $1,440, and so on until we reach Year 5

Calculate the What is really happening to our $1,000 over the

5 year period?
value of the
Period (t) 0 1 2 3 4 5
$1,000 in each
Investment Value 1,000 1,200 1,440
period to Year 5
Interest Rate (r) 20% 20% 20% 20% 20% 20%
TVM example 1.2 Answer

What is really happening here?

By reinvesting our earnings each year, the 20% return is compounded annually, so that
our investment gains are also able to earn us 20% each year

As we can see, at the end of the period, we have the same $2,488 we got using our
formula for Future Value

Calculate the What is really happening to our $1,000 over the

5 year period?
value of the
Period (t) 0 1 2 3 4 5
$1,000 in each
Investment Value 1,000 1,200 1,440 1728 2074 2488
period to Year 5
Interest Rate (r) 20% 20% 20% 20% 20% 20%
 But what if we want to see how
much the $2,000 in 5 years is worth
to us today? Use the Present Value
equation instead!
Present Value

• Starting with our Future Value

equation, we can rearrange Future Value t = (Present Value t=0) × (1 + 𝑟)𝑡
variables to solve for the Present
Value, our previous equation…

• Becomes this… Future Value 𝑡

Present Value t=0 = 1+𝑟 𝑡

• So, going back to our last example,

how much is $2,000 in 5 years
worth to us TODAY, if we can earn
10% a year? 2,000
Present Value0 = 1+0.10 5
• Let’s try it out!
TVM Example 2.0 Exercise

• By plugging each variable into

Present Value Formula
the formula, we can
determine how much $2,000
Future Value 𝑡
received 5 years from now is Present Value t=0 = 1+𝑟 𝑡

worth to us today, assuming

we can earn 10% each year
Present Value Example

Future Value of Cash $2,000

1. Open
Number of Years (t) 5
problems_and_solutions.xlsx and
navigate to tab ‘TVM2_prob’ to Interest Rate (r) 10%
work through example TVM2.0
Present Value of $2,000 5 Years from today
TVM Example 2.0 Answer

• If we received $2,000 in 5 years,

Present Value Formula
and could earn 10% on the
money if we had it now, that
Future Value 𝑡
would be worth $1,242 to us Present Value t=0 = 1+𝑟 𝑡

today

• Just as before, by calculating Present Value Example

these options at the same point
Future Value of Cash $2,000
in time (Today) to compare
them directly Number of Years (t) 5
Interest Rate (r) 10%
• So our options are really $1,242 Present Value of $2,000 5 Years from today $1,242
or $1,000
TVM example 2.1 Exercise

• What if instead of earning

Present Value Formula
10% each year, you had an
investment idea that would
Future Value 𝑡
generate 20% returns each Present Value t=0 = 1+𝑟 𝑡

year?

• What would this be worth and Present Value Example

would it change your choice?
Future Value of Cash $2,000
Number of Years (t) 5

1. Open
Interest Rate (r) 20%
problems_and_solutions.xlsx and Present Value of $2,000 5 Years from today
navigate to tab ‘TVM2_prob’ to
work through example TVM2.1
TVM example 2.1 Answer

• Solving again for the Present

Present Value Formula
Value, the same $2,000 in 5
years is worth only $804 to us if
Future Value 𝑡
we can earn 20% each year Present Value t=0 = 1+𝑟 𝑡

during the period

• In this case, we’d rather take the Present Value Example

$1,000 today and invest it
Future Value of Cash $2,000
earning 20%
Number of Years (t) 5
Interest Rate (r) 20%
Present Value of $2,000 5 Years from today $804
TVM example 2.2 Exercise

What is really happening here?

If we take $2,000 in 5 years and bring it back to today’s value (called ‘discounting’)
2,000
using our assumed 20% interest rate each year, then in Year 4 we will have (1+0.20), or
$1,667

1,667
In Year 3, we’ll have (1+0.20), or $1,389, and so on until we reach Year 0 (Today)

Calculate the What is happening to our $2,000 in year 5?

value of the Period (t) 0 1 2 3 4 5

Investment Value 1,389 1,667 2,000
$2,000 in each
Interest Rate (r) 20% 20% 20% 20% 20% 20%
year, back to
Year 0 (today)
TVM example 2.2 Answer

What is really happening here?

By discounting our earnings each year, the 20% discount is compounded annually, so
that our investment gains will also show 20% earnings each year

As we can see, at the end of the period, we have the same $2,488 we got using our
formula for Future Value

Calculate the What is happening to our $2,000 in year 5?

value of the Period (t) 0 1 2 3 4 5

Investment Value 804 965 1,157 1,389 1,667 2,000
$2,000 in each
Interest Rate (r) 20% 20% 20% 20% 20% 20%
year, back to
Year 0 (today)
Net Present Value

• Net Present Value (NPV) = Sum of the Present

Values of all Future cash flows

• Net amount of investment return expected from

the project, after subtracting the cost of the
investment

• Example: We spend $500 on a project that will

generate cash flows worth $2,000 to us today,
then the NPV is $2,000 - $500 = $1,500
How does Time Value of Money relate to NPV?

• Net Present Value compares the cost of an

investment with the present value of all future
cash flows, discounted back to today at an
assumed rate of return

• Rate is the “discount” or “hurdle” rate and

represents the expected rate of return

• Reflects the riskiness of the future cash flows

• Oftentimes the company’s cost of capital is used

Converting from PV to NPV

• In our PV examples we compared $1,000 today

Future Cash to $2,000 in 5 years to see which was worth
Present Value r%
Flow more to us, and picked that option

- • We could also take the PV of the future cash

flows and subtract the money we were offered
Required today
Investment
If it’s positive, take the future option

=
•

• If negative, take the money today

Net Present
Value

Time
Comparing to our previous examples

• We looked at the present value of one cash flow

in the future

• If Cash Flows > Investment then NPV > 0

• If Cash Flows < Investment then NPV <0

 NPV Example 1.0 Exercise

Previously, in Corporate Finance… NPV Positive or Negative?

We looked at the present value of one cash flow When NPV > 0, we should take the project
in the future, at r = 10%
When NPV < 0, we should not take the project

Calculate the PV Net present value/Internal rate of return

of all Cash Period (t) 0 1 2 3 4 5

Cash flows (1,000) 0 0 0 0 2,000
Flows, and sum
Discount rate (r) 10% 10% 10% 10% 10% 10%
them together
Discounted cash flow

Net present value

1. Open problems_and_solutions.xlsx and navigate to tab

‘NPV_IRR_prob’ to work through example NPV1.0
NPV Example 1.0 Answer

Previously, in Corporate Finance… NPV Positive or Negative?

We determined that at 10%, it was worth it to When NPV > 0, we should take the project
take the $2,000 5 years from now, i.e. to execute
Since here NPV > 0, this aligns with our earlier
the deal/project
decision to take the deal/project. What about at
20%?
Calculate the PV Net present value/Internal rate of return

of all Cash Period (t) 0 1 2 3 4 5

Cash flows (1,000) 0 0 0 0 2,000
Flows, and sum
Discount rate (r) 10% 10% 10% 10% 10% 10%
them together
Discounted cash flow (1,000) 0 0 0 0 1,242

Net present value 242

 NPV Example 1.1 Exercise

Previously, in Corporate Finance… NPV Positive or Negative?

We looked at the present value of one cash flow When NPV > 0, we should take the project
in the future, at r = 20% this time
When NPV < 0, we should not take the project

Calculate the PV Net present value/Internal rate of return

of all Cash Period (t) 0 1 2 3 4 5

Cash flows (1,000) 0 0 0 0 2,000
Flows, and sum
Discount rate (r) 20% 20% 20% 20% 20% 20%
them together
Discounted cash flow

Net present value

1. Open problems_and_solutions.xlsx and navigate to tab

‘NPV_IRR_prob’ to work through example NPV1.0
NPV Example 1.1 Answer

Previously, in Corporate Finance… NPV Positive or Negative?

We determined that at 10%, it was worth it to When NPV < 0, we should NOT take the project
take the $2,000 5 years from now, i.e. to execute
This too aligns with our earlier decision to NOT
the deal/project
take the deal/project, and to take (or keep) the
$1,000 today
Calculate the PV Net present value/Internal rate of return

of all Cash Period (t) 0 1 2 3 4 5

Cash flows (1,000) 0 0 0 0 2,000
Flows, and sum
Discount rate (r) 20% 20% 20% 20% 20% 20%
them together
Discounted cash flow (1,000) 0 0 0 0 804

Net present value (196)

Comparing to our previous examples

• But what if instead of just one cash flow in year

5, there were multiple future cash flows?

• We take each future cash flow and discount it

back to today’s value, to get the present value of
each cash flow

• Add the PV cash flows and subtract the cost of

the investment to determine its NPV
 NPV Example 1.2 Exercise

What about multiple cash flows? NPV Positive or Negative?

We looked at the present value of one cash flow When NPV > 0, we should take the project
in the future, at r = 20% this time
When NPV < 0, we should not take the project

Calculate the PV Net present value/Internal rate of return

of all Cash Period (t) 0 1 2 3 4 5

Cash flows (1,000) 200 400 600 800 1000
Flows, and sum
Discount rate (r) 20% 20% 20% 20% 20% 20%
them together
Discounted cash flow

Net present value

1. Open problems_and_solutions.xlsx and navigate to tab

‘NPV_IRR_prob’ to work through example NPV1.2
NPV Example 1.2 Answer

What about them? NPV Positive or Negative?

The approach remains exactly the same, just When NPV > 0, we should take the project
with a few extra calculations

Calculate the PV Net present value/Internal rate of return

of all Cash Period (t) 0 1 2 3 4 5

Cash flows (1,000) 200 400 600 800 100
Flows, and sum
Discount rate (r) 20% 20% 20% 20% 20% 20%
them together
Discounted cash flow (1,000) 167 278 347 386 402

Net present value 579

 At r = 10% we invest in the project
but at 20% we don’t? At what rate of
r are we indifferent? That is exactly
what the IRR provides!
Internal Rate of Return

• Rate of return at which the Cost is equivalent to

the Present Value of all Future cash flows

• If we spend $1,000 today, to earn cash flows of

$2,000 5 years from now, what is the rate of
return we’re earning?

• Also called the “Hurdle Rate”, the minimum rate

that new investments are expected to earn
How does NPV relate to IRR?

• IRR is the rate of return that sets the NPV of the

project to $0

• Recall that in our example when r = 10%, the

NPV > 0 and we took the project

• At r = 20%, the NPV < 0 and we rejected the

project

• Therefore, the point where NPV = 0 must be

somewhere between r = 10% and r = 20%
 Net present value/Internal rate of return Exercise

Let’s start with r = 15% Internal Rate of Return (IRR) Note:

Set the discount rate at the midway between Here, the cash flows are spaced evenly apart, so
10% and 20% to start. How close to NPV = $0 using Excel’s IRR() function is completely fine.
does that get us?
If the cash flows occurred at different intervals,
XIRR() would be necessary
Calculate the Net present value/Internal rate of return

NPV and IRR of Period (t) 0 1 2 3 4 5

Cash flows (1,000) 0 0 0 0 2,000
this stream of
Discount rate (r) 15% 15% 15% 15% 15% 15%
cash flows.
Discounted cash flow

Net present value

1. Open
problems_and_solutions.xlsx Internal rate of return
and navigate to tab
‘NPV_IRR_prob’ to work
through example IRR1.0
Net present value/Internal rate of return Answer

Get’s us pretty darn close! Internal Rate of Return (IRR)

Considering our NPV < 0, it means our guessed r Using the IRR function, we see that the actual r
= 15% is still a little bit too high, but we’re very that sets the NPV = 0 is 14.87%
close

Calculate the Net present value/Internal rate of return

NPV and IRR of Period (t) 0 1 2 3 4 5

Cash flows (1,000) 0 0 0 0 2,000
this stream of
Discount rate (r) 15% 15% 15% 15% 15% 15%
cash flows.
Discounted cash flow (1,000) 0 0 0 0 994

Net present value (6)

Internal rate of return 14.87%
 Check
Net present value/Internal rate of return Your Work

Net present value/Internal rate of return

Period (t) 0 1 2 3 4 5
Cash flows (1,000) 0 0 0 0 2,000
Discount rate (r) 15% 15% 15% 15% 15% 15%
Discounted cash flow (1,000) 0 0 0 0 994

Net present value (6)

Internal rate of return 10.9%

Net present value/Internal rate of return

Period (t) 0 2 3 4 5 6
Cash flows (1,000) 0 0 0 0 2,000
Discount rate (r) 14.87% 14.87% 14.87% 14.87% 14.87% 14.87%
Discounted cash flow (1,000) 0 0 0 0 1,000

Net present value 0

Cost of Capital

• A company’s cost of financing

• Could be in the form of equity raised, or

debt issued

• For a company to have positive returns

over time, its returns on capital need to
exceed its cost of capital

• Cost of Capital often drives the project

Hurdle Rate (Discount Rate) used in the
NPV formula for new projects
Historical Growth • Oftentimes in forecasting, the first place we look for clues to future
performance is to past performance

• Simply put, if we have grown revenues 5% a year in the past, we expect

to grow them 5% a year in the future

• However, blindly using past results can be dangerous

Non-recurring items Use logic

• Look at past data and remove • If the business or competitive

the impact of one-off or non- environment is significantly
recurring events that may different than it was in the
skew historical results past, projecting historical
• Ex. Non-recurring promotions trends won’t work
Historical and CAGR formulas

• Historical Growth Rate Formula Value𝑡

Growth Rate % = Value −1
𝑡−1

• However, if we want to look at

growth over multiple periods, we 1
Value𝑡+𝑛 𝑛
calculate the Compound Annual CAGR % = −1
Value𝑡
Growth Rate (CAGR) formula

• CAGR accounts for the growth 1

between years, and is used to look 2,500 5
5-Year CAGR % = 1,0005 −1
at longer-term growth trends (last 0

3, 5 or 10 years, for example)

 CAGR Example 1.0 Exercise

• Revenues at time t were

CAGR Formula
$1,000 and by time t+5, they
have grown to $2,500 1
Value𝑡+𝑛 𝑛
CAGR % = Value𝑡
−1
• Calculate the simple average
growth rate (total growth % /
# of years) CAGR Example

• Calculate the 5-year revenue Revenues at period t +5 2,500

CAGR Revenues at period t 1,000
5-Year Average (Total)
• Why are they different?
5-Year CAGR

1. Open problems_and_solutions.xlsx and

navigate to tab ‘CAGR_prob’ to work
through example CAGR1.0
CAGR Example 1.0 Answer

• Total growth of 150%

CAGR Formula
(2,500/1,000-1)
1
• Over 5 years, average of 30% CAGR % =
Value𝑡+𝑛 𝑛
−1
per year Value𝑡

• But that would assume no

CAGR Example
compounding between years
1 and 5 Revenues at period t +5 2,500
Revenues at period t 1,000
• CAGR includes compounding,
5-Year Average (Total) 30.00%
calculates growth at 20.11%
per year 5-Year CAGR 20.11%
 CAGR Example 1.1 Exercise

How do we handle multiple data points? Note on Averages and Percents:

Because we’re looking at aggregate revenue Averaging the annual growth rates does not
growth over the period, we only use the first and properly weight the size or compounding of
last year’s revenue figures revenues

Total Growth / # of Years does not take

compounding into effect
Calculate the 5- Average and CAGR Revenue Growth

Year Average Period (t) 0 1 2 3 4 5

Revenues 1,000 1,100 1,100 1,100 1,550 2,000
and CAGR
Annual Growth Rate
Revenue growth
rates
1. Open 5-Year Average (Percent)
problems_and_solutions.xl
5-Year Average (Total)
sx and navigate to tab
‘CAGR_prob’ to work 5-Year CAGR
through example CAGR1.1
CAGR Example 1.1 Answer

How do we handle multiple data points? Note on Averages and Percents:

The middle years do not affect the 5-Year CAGR Averaging the Annual Growth rates
overestimates the revenue growth
This is often why CAGRs are used; to ignore
short-term fluctuations in favor of the longer- Total Growth / # of Years greatly overestimates
term trend growth as it does not take compounding into
effect
Calculate the 5- Average and CAGR Revenue Growth

Year Average Period (t) 0 1 2 3 4 5

Revenues 1,000 1,100 1,100 1,100 1,550 2,000
and CAGR
Annual Growth Rate 10.0% 0.0% 0.0% 40.9% 29.0%
Revenue growth
rates
5-Year Average (Percent) 15.99%
5-Year Average (Total) 20.00%
5-Year CAGR 14.87%
 Check
CAGR Example 1.1 Your Work

Average and CAGR Revenue Growth

Period (t) 0 1 2 3 4 5
Revenues 1,000 1,100 1,100 1,100 1,550 2,000
Annual Growth Rate 10.0% 0.0% 0.0% 40.9% 29.0%

5-Year Average (Percent) 15.99%

5-Year Average (Total) 20.00%
5-Year CAGR 14.87%

Using our Future Value formula with r = 14.87%, Revenue in Year 5 = $2,000

Period (t) 0 1 2 3 4 5
Revenues 1,000 2,000

5-Year CAGR 14.87%

How can we avoid blindly using past
data to understand the future?
Use Regression
Regression

• What if we don’t want to rely just on historical

data?

• Find meaningful connections between our

revenue growth and other known or forecasted
variables (such as GDP growth, Net Interest Rate
spreads, etc…)

• Regress the data to find a strength of fit and a

ratio (coefficient) for the variable you have

• Apply the ratio to the forecasted variable, to

estimate our revenue growth

• Covered more in Income Statement chapter

Core Concepts

• Basic Accounting & Financial Reporting

• Financial Modeling

• Foundations of Corporate Finance

• Process & System Flows

• Common Statistical Concepts

• Data Analysis

244
Process & System Flows in FP&A

We need to understand • Sometimes we need more data, more

the data we’re using, granularity
where it comes from,
• Sometimes we have to piece together
how it’s processed, and
financial and operational data from multiple
how we can access it
places

• To do this, we need to be able to visualize

where our data comes from and what
happens to it before it gets to us

245
What is a flow chart?

• Details the flow of a transaction through the

data and financial record system

• Used to understand how a process works, locate

bottlenecks, and find opportunities to improve
the accuracy or speed of processing

• Track the flow of data from one system to

another, and any changing, merging, or deletion
of data along the way

• We will look at an example of each next

Simple Order to
Cash Flowchart Simple Order to Cash Flowchart. Can
also show transfers from department,
anticipated duration of each step,
responsible individual/department, etc…
Simple Data Flowchart

Represents a step in
the process, or a
display or results page

Represents a database,
either a source of
information or a database
where information is stored
Core Concepts

• Basic Accounting & Financial Reporting

• Financial Modeling

• Foundations of Corporate Finance

• Process & System Flows

• Common Statistical Concepts

• Data Analysis

249
Statistics in FP&A

Basic understanding of • Builds understanding of the relationship

statistics helps as we’re in our data in order to improve our
constantly working with forecasts
quantitative data
• Increases focus on the most impactful
• Identifying and items
normalizing outliers in our
• Know the right way to calculate “growth”
data
and “average values” depending on our
• Knowing when to use data
averages vs point estimates

250
Common Statistical Concepts

Arithmetic Mean (Average) Median

1 32
The most common average, calculated Arranging all numbers in ascending order,
by summing all numbers and dividing this is the number that is in the center
by the count of numbers
Useful when outlier data points could
distort the Arithmetic Mean

Mode Geometric Mean

3 44
The most frequently- Used when averaging growth
occurring number in a series rates over time

1
= [ 1 + 𝑟1 × 1 + 𝑟2 × ⋯ × 1 + 𝑟𝑛 ]𝑛 −1
Common Statistical Concepts

Quartiles Pareto Analysis

5 6
Sorting all numbers in order, and then 3 Pareto Principle states that 80% of the
separating into top 25% (Upper Quartile), impact comes from 20% of the causes
50%-75% (3rd Quartile or Median), 25%-
For FP&A, focus on the top 20% of accounts
50% (2nd Quartile), and 0%-25% (Bottom
that drive 80% of revenues, 20% of
or 1st Quartile)
accounts that drive 80% of expenses, etc…

Standard Deviation Expected Value

7 8
The standard difference between a set of The anticipated value of an outcome, calculated
4
data points and their average value. A by multiplying all possible outcomes by the
measure of spread in the data likelihood each outcome will occur

σ(𝑥𝑖 − 𝜇)2 𝐸 𝑋 = ෍ 𝑥𝑖 𝑓( 𝑥𝑖 )
𝜎=
𝑁 𝑖
Correlation

Positive Correlation
• Measures the mutual relationship or connection
between two or more things or measures

• Whether and how closely two different items

move together, irrespective of one another, or in
opposite of one another No Correlation

Negative Correlation
Regression

• A measure of the relation between the mean Revenue Growth % Regressed on GDP Growth %
value of one variable (e.g. Revenue growth) 20% y = 2.7723x + 4E-05
R² = 0.9653
and corresponding values of other variables
(e.g. GDP growth) 10%

• Estimates a best-fit line with a slope that can

be used to project the unknown variable 0%
(12%) (10%) (8%) (6%) (4%) (2%) 0% 2% 4% 6% 8%
(Revenue growth), based on a value for the
known variable (GDP growth) (10%)

• Here, GDP growth and Revenue growth are • R2 measures how well GDP growth
plotted, and a linear equation estimates that explains Revenue
(20%)

revenue growth will be ~2.77x GDP growth • A R2 of 0.0 means GDP does not
explain Revenue growth, while a R2
rate of 1.0 means that GDP growth
(30%)
perfectly explains Revenue growth
• If we forecast GDP growth of 1%, we would
expect our Revenue growth to be 2.77% (40%)
Additional References

Websites Books
• Statisticshowto.com – great resource for • “Statistical Analysis: Microsoft Excel 2016” by
many aspects of statistics Conrad Carlberg

• NYU Professor of Finance Aswath • “Regression Analysis: Microsoft Excel 2016” by

Damodaran’s “A Primer on Statistics” - Conrad Carlberg
http://pages.stern.nyu.edu/~adamodar/Ne
• “Predictive Analytics: Microsoft Excel 2016” by
w_Home_Page/StatFile/statistics.htm
Conrad Carlberg
• Khan Academy – Statistics and Probability
(https://www.khanacademy.org/math/statis
tics-probability)
Core Concepts

• Basic Accounting & Financial Reporting

• Financial Modeling

• Foundations of Corporate Finance

• Process & System Flows

• Common Statistical Concepts

• Data Analysis

256
Data Analysis in FP&A

FP&A is about both the Narrative AND the Numbers

• We don’t answer questions with what we “think” or “feel” is going on

• Instead, we must find and capture the data, analyze it objectively, and learn
what the data is trying to tell us

• Happens as part of recurring reporting, the annual and long-range planning

process, and one-off requests we often receive

• Suppose we want to break total revenue out by month, and to see how much
each product is contributing to total revenue…that’s Data Analysis!

257
Data Analysis Topics covered:

• Cleaning data & setting up easy-to-update data

dumps

• Pivot Table Basics

• GetPivotData, grouping fields, and custom

calculations

• Pivot Charts and Slicers

Data Cleaning and Prep

First things first, the data you receive will rarely be Learning how to clean up your data, as well as how to
formatted in a way that is ready for you to start your make your data easy to update in the future is the
analysis starting point for any data analysis

• Formatting errors

• Duplicate data

• Comma-Separated Values (CSV) formatting

• Merged columns

• Etc…
Text to Columns 1) Highlight
(Alt+A+E) Data, then push
Alt-A-E for ‘Text
to Column’

3) Select what indicator

your data uses. In our
example it’s a ‘Comma’

2) Tell Excel whether your data

has an indicator between data
points (delimited) or a known
amount of characters (fixed width)
 2

Remove
Duplicates (Alt-A-
M)
1. Transaction_id 20 shows
3
up in our data twice

2. Highlight the entire data

set, and use Remove
Duplicates by hitting Alt-
A-M

3. Dialog box asks where to

1
look for duplicates. As
transaction_id should be
unique, let’s select that

4. Confirmation duplicates
were found and removed

4
 1

Cell Formatting –
Dates (Ctrl+1)
2

1. Next, transaction_date is
formatted as a number

2. Let’s use Excel’s cell

formatting. Select all
dates and hit ‘Ctrl+1’ to
open the Cell Format
dialog box. Select ‘Date’
and the desired display

3. Excel updated the

3
formatting as desired.

Alternatively, we can use

Excel’s =Text() function
 1

Cell Formatting -
Dates
2

1. In a blank column
adjacent to the data, use
Excel’s =Text() function,
which has two
arguments. ‘Value’ is the
data to be formatted

2. ‘Format_text’ tells Excel

3
how you want the data
formatted.

3. Excel updated the

formatting as desired
Easy Update Data Dump

To analyze our data, Pivot Tables (& Pivot Charts) Name Manager allows you to name cells or arrays,
can be incredibly helpful for finding patterns and then recall the selected data in formulas
elsewhere in the workbook by typing the name

• If analysis is regular or recurring, we should

structure our analysis to be updated easily

• This saves time ensuring we don’t rebuild the

analysis from scratch each time

• One way to do that is to use Excel’s Name

Manager feature
 Name Manager
(Alt-F-N)

When adding a new name,

set a name that describes the
data well, and ensure no
spaces are used (Use “_” to
space words out instead)

This is the Name Manager screen.

Here you can add New names, edit
existing ones, or Delete unused Set the data you want to reference in the ‘Refers to:’
ones. section. Here we’ve selected the cells that contain our
data

However, this selection area also accepts formulas,

which allows us to make dynamic data ranges using
Excel’s OFFSET() function

=OFFSET(Reference, Row, Column, [Height], [Width])

 Offset Function

=OFFSET(Reference, Row, Column, [Height], [Width])

1) To use this trick, set the name to “pivot_data_offset)
and set the Reference to the top left-most data point,
B2 in our case
This is the Name Manager screen. 2) Row and Column tells OFFSET how many rows to
Here you can add New names, edit
existing ones, or Delete unused move down (up) and how many columns to move
ones. right (left), respectively, from the reference point. In
our case, we want to keep the reference point where
it is, so we set both to 0
3) Height and Width tell OFFSET, from the adjusted
reference point, how many rows and columns to
include in the result. We want to use COUNTA() on
the entire Column B, and on the entire header
Row 2. Now if we add more rows or new columns
Here we use COUNTA() to count the to our data, OFFSET will automatically expand to
number of all non-blank rows and
columns. If we used COUNT() instead,
capture the new data.
text would not be included in the count
Pivot Table (Alt-N-V)

Let’s insert our Pivot Table and start exploring our data. We’ll cover how to setup a pivot table, and a few of the key
features that are instrumental in quickly building useful analysis

• Quickly organize, sort, filter, and add

mathematical operations to our data

• Create groupings within data to generate useful

subtotals, and custom calculations to look at
relationships in our data

• Use a special Pivot Table equation to easily

create dynamic charts
Insert Pivot Table 1
2
(Alt-N-V)

Insert a New PivotTable

Note: You can also link directly to
1. Alt-N-V or certain supported data sources, such
Insert\PivotTable to as an Access Database, which can be
incredibly useful
open dialog box

2. Enter in the named

range ‘pivot_table_offset’

Update Existing
PivotTable 2

3. Select the existing

3
PivotTable, navigate
to ‘PivotTable
Analyze’ and select
‘Change Data Source’
Pivot Table List of all available data fields
based on the data you’ve linked

Drop-down buttons
indicate there is the
option to sort or
filter the data

Click and Drag Data Fields down

Subtotals and Totals are here to display the sum of ‘Total’,
automatically calculated with rows for Region and Product,
depending on how you and results displayed monthly
group your data across the columns
Grouping Pivot
Table Fields Part I

Select one of the months in

the row header, and then hit
‘Group Selection’

Excel Recognizes the field as

Dates, and automatically
suggests time-related
groupings such as Months,
Quarters, and Years. Here,
Unselect
let’s select ‘Quarters’ and
‘Transaction_date’
leave ‘Months’ as selected
in ‘Columns’ and
the pivot table
updates to this
Grouping Pivot
Table Fields Part II

You can group other items within the

same data field by selecting the items you
want to group and use the same ‘Group
Selection’ function we just used for time
periods.

In this instance we selected ‘Air’ and ‘Car’

and grouped them. Repeat for
‘Experience’ and ‘Hotel’

From here, we select the text ‘Group1’

anywhere in our PivotTable and type
‘Transport’, and select Group2 and type
‘Local Experience’. The entire PivotTable
will update to show the changes

You’ll now see a new data

field in the Pivot Table under
‘Rows’ called ‘Product2’
Calculated Field

1. Select the PivotTable and

navigate to ‘PivotTable
Analyze’/ ’Fields, Items,
& Sets’/ ’Calculated
Field’

2. Set the Name to ‘Average

Rate’, and in the
‘Formula’ box, either
type the equation, or
2
select from the list of
Fields in the box below,
select Insert, and then
add the ‘/’ to divide
 1

GetPivotData

1. In Cell S6, type ‘=‘ and

then select the
PivotTable cell that
corresponds to the Sum
of Total for APAC Air
sales in Q1, as shown
here

2. Excel automatically
generates a GetPivotData
equation that gives it all
the information it needs
to pull the requested 2
data. However, we can
use this formula to
create our own dynamic
data pulls
GetPivotData One little quirk here, if you
want to reference the
‘data_field’ you need to add
an ampersand and an empty
quote mark as seen here
1. Update the ‘date_field’ 1

formula, as well as the

‘product’, ‘region’, and
‘Quarters’ references to
cells for each

2. Once the formula is 2

updated and the cells

have the appropriate
locks on them ($P6, S$5
for example), drag the
formula down and the
data will automatically
update
 1
Data Validation
(Alt-A-V-V)

1. To prevent accidental
errors, let’s set up Data
Validation for our Inputs
2
2. In a separate space,
Create a list of all the
options to include in
inputs. Can either be
typed manually or use
‘remove duplicates’ on a
copy of your data to
capture a unique list
3
3. Select each set of inputs
(Metric, Region,
Product) and add Data
Validation (Alt-A-V-V)
Data Validation
(Alt-A-V-V)

1. Under Allow, select ‘List’

1
2. In the Source section
below, highlight the
unique list of options
you just created, or
reference a Named
Range if you have one

3. Now, if you select the

input cell and select the
visible drop-down or hit 2
Alt+down arrow, a box
will appear that shows
the only available
options
Pivot Chart

Just as PivotTables allow you to quickly change the You can change the chart type to bars, lines,
orientation of your data, PivotCharts can be used to combination charts, etc. Any type of chart you can
quickly change the visual orientation of your data make in Excel you can make in a Pivot Chart

• Combining the ability to quickly change the

orientation of the data with Excel’s powerful
chart options can drastically reduce the amount
of time to build an analysis

• Switch from a quarterly stacked bar chart of

product revenues (shown right) to a monthly
view of North American Hotel Revenues and
Average Rates in under a minute
Pivot Chart (Alt-
N-SZ) 1

1. Within your existing 2

Pivot Table, select the
‘Analyze’ tab and then
click to add Pivot Chart.
Alternatively, you can
add a Pivot Chart
directly from ‘Insert’ /
‘Pivot Chart’

2. A dialog box will prompt

you to select the chart
type you want to use. For
this example, let’s select
a stacked Column chart
Pivot Charts – Rapid Iterations

In only a few moments, we completely changed the I have seen entire dashboards that are almost
underlying data, as well as the visualization of the completely automated, built in this exact way.
chart, without having to use a single formula

18000 250
• This is the power of Pivot Charts, especially for Sum of total
16000 Sum of Average Rate
performing exploratory analysis of a problem. 14000 200

12000
• Once the problem is better understood, it might 150
10000
make sense to build a more formal model for 8000
100
ongoing reporting, but there is no substitute for 6000

the speed in analyzing the data with Pivot Table 4000 50

and Pivot Chart 2000

0 0
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Pivot Charts – Insert Slicer

But can we make these changes even faster? Pivot Once Slicers are added, all we need to do is click on
Chart Slicer! Add Slicers for any category of data in the combination of Product and Region we want to
your Pivot Chart see, and the data and chart automatically update

• A Slicer allows you to easily click a button to

change the filtered view, instead of clicking the
Product drop down filter to change from Hotel
to Air
Insert Slicer 1

1. Select your Pivot Chart

and go to ‘Analyze’ / 2 3
‘Insert Slicer’

2. Select the metrics to

filter. In our case, select
‘Product’ and ‘Region’

3. Two slicers will pop up

next to your chart.
Current setup shows
only Hotel, across all
regions