Get More Strategic with a 10-Year P&L

At an event more than a decade ago, a Berk­shire Hath­away CEO, who had done a major turn-around on one of their busi­ness­es, made a point that I con­tin­ue to think about today.

He said that his orga­ni­za­tions, as part of their strate­gic plan­ning process, think about what their prof­it and loss look like a decade down the road. And I imme­di­ate­ly saw the benefit.

While visions and strate­gies are great, you need to look at what kind of busi­ness you’re build­ing and how they are going to play togeth­er and pay off in the future.

But bud­get­ing process­es are often so cum­ber­some that most com­pa­nies have a hard time get­ting the P&L done for the next year. They go past Jan­u­ary 1 dead­lines and are still final­iz­ing the bud­get in February.

A Change in Thinking

In a recent activ­i­ty with one of the com­pa­nies we work with, we took the time to build out a 10-year P&L. It was fas­ci­nat­ing to see how much it changed our thinking.

Instead of short term, three-year think­ing, the exer­cise allowed us to be more strate­gic in how we thought about the finan­cial side and cre­at­ed new and more strate­gic think­ing as we dis­tanced our­selves from the tac­ti­cal issues of the day.

In many of the com­pa­nies we work with that are very strong finan­cial­ly — par­tic­u­lar­ly those part­nered with pri­vate equi­ty — it’s com­mon to have a three- or five-year eco­nom­ic mod­el, which reflects the usu­al span of their own­er­ship of an organization.

Bet­ter Strategies

The key here is to tie your strate­gic think­ing with finan­cial mod­el­ing so that you can do bet­ter strate­gic thinking.

So, at a min­i­mum, you should have a three- to five-year P&L.

But, if you real­ly want to tap into some inter­est­ing pos­si­bil­i­ties, cre­ate a 10-year mod­el to work towards with these key elements:

• A sim­ple, high lev­el income statement
• Cash flows and CAPEX, and
• A high-lev­el bal­ance sheet.

The Chal­lenge

• If you have a 10-year P&L mod­el, how can you make it more robust and use it to help improve your strate­gic thinking?
• If you don’t, would it be help­ful? Or do you just need to dial in and opti­mize your three- to five- year finan­cial model?

Addi­tion­al Blogs

• Build­ing an Endur­ing Business
• Get Month­ly Busi­ness Reviews Right
• Three Bar­ri­ers to Busi­ness Growth

Old­er Podcasts

• Why You Can’t Save Your Way to Success
• The Most Impor­tant Num­ber CEOs Rarely Measure