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:
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- A simple, high level income statement
- Cash flows and CAPEX, and
- A high-level balance sheet.
The Challenge
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- 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?
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