sample financial report

RE-INVENTING XYZ

Financial Model Report

Finance Team

Prepared for:

XYZ BPE Project

XYZ Division Ministry of Government Services

September, 1994

XYZ BPE Project Financial Model Report

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EXECUTIVE SUMMARY

The Finance Team is responsible for all financial modeling and analyses of the observations and recommendations of the Process, Organization, Technology, and Communications teams in the XYZ BPE Project. Members of the team include representatives from the XYZ Division, Finance and Administration, and Company ABC as follows:

Bob (Finance and Administration) Barry (XYZ Division)

SH Leonard (Company ABC) Brian (XYZ Division)

Bruce (Finance and Administration) The key deliverable of the team is the Cost-Benefit Model, a pro-forma illustrating the estimated financial impact of implementing the recommendations of the project teams. The analysis is not a definitive and/or detailed study of all the costs and all the benefits. It quantifies, at a high level, recommendations having the largest financial impact, their value, and their timing. The objectives of the Financial Model Workshop were several:

• Develop a common understanding of the phases, teams, activities, tools, and deliverables of the XYZ BPE Project; • Identify key drivers of cost and benefit arising from the work of the Process, Organization, Technology, and

Communications teams; • Develop a Financial Model to illustrate the timing and value of the resulting costs and benefits; • Identify the current organization costs that will form the Financial Baseline from which the financial performance of

the project will be measured; • Specify formulae, standard costs, and templates to aid all teams in the development of their financial estimates; and,


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• Schedule activities and interactions with the other project teams to provide financial advice and maximize data collection efficiency.

This report summarizes the results of the workshop.


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KEY DRIVERS OF COST AND BENEFIT

The XYZ BPE Project is based on the principle that maximum organizational effectiveness is best achieved by defining business processes along 4 dimensions:

• Financial; • Organizational; • Technological; and, • Value to customers

As a result, the process re-design phase of the XYZ BPE Project is expected to yield substantial changes in the organizational structure and information technology infrastructure with a corresponding financial impact. The total financial impact will have both an annual component as well as one-time implementation costs as follows:

One-time Impact Periodic or Annual Impact • Severance and Outplacement • Manpower Savings • Information Technology • Supplies and Services Savings

• Acquisition • Information Technology • Custom Software Development • Maintenance Costs • Project Management • Operating Costs

• Communications • Telecommunications Costs • Training • Outsourcing Costs • Consulting

• Human Resources • Implementation Management


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It is important to note that certain recommendations may not impact the operating budget of XYZ directly. However, they do have a cash impact to the whole of the Government and should be quantified where possible. The following have been identified:

• Occupancy Costs

With a large reduction in manpower, a corresponding reduction in total office space required is likely to result. However, occupancy costs are the responsibility of the Public Works Department, not XYZ. In order to capture all benefits of the re-engineered XYZ, these and other non-XYZ savings will be reflected as “Savings External to XYZ”.

• Capital Investments

All Capital Investments are approved and funded by a central agency for the Government. The cost of investment is attributed to the XYZ Division via an amortization schedule reflecting the anticipated life of the asset and essentially an interest free loan. This amortization cost is reflected in XYZ’s operational budgets but the cash impact of the investment is not.


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FINANCIAL MODELS

The Communications team clearly indicated that different stakeholders require different messages and different message formats. To facilitate stakeholder communications, the financial results of the BPE project will be reported using three models as follows:

Budget Cash Flow XYZ Division √ √ XYZ Division & External Divisions √

XYZ Division Budget Model The XYZ Division Budget financial model will illustrate performance against the key objectives of the project:

• “a xx% reduction in the cost base of the XYZ Division from existing levels”; and, • “a yy% reduction in the headcount of the XYZ Division.”

The primary components of the model are:

• Baseline XYZ Budget as per the Ministry of Government Services Business Plan 1994/95 to 1997/98; • Forecasted XYZ Division Budget 1995/96 to 1997/98 based on the results of the XYZ BPE Project; and, • A XYZ Budget Comparison illustrating the net difference and percent difference between the Baseline and the

Forecasted Budgets.

A sample of this model is provided in Exhibit A. Note: The numbers represented in all the Exhibits (A through E) are for illustration purposes only.


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XYZ Division Cash Flow Model

The Cash Flow Model assesses the real cash impact of the project recommendations. This would eliminate artificial accounting procedures such as amortization and permit the calculation of measures like Payback Period and Cumulative Cash Flow that are understandable to both business and financial stakeholders. The format of this model is represented in Exhibit B.

XYZ & External Divisions Cash Flow Model

External Divisions have been included in a separate financial model to reflect the costs and benefits impacting Divisions and Departments other than XYZ such as the Public Works Department (occupancy costs). The model adds up to 3 additional lines to the XYZ Division Budget cash flow for Benefits, Costs, and Capital Investment external to XYZ. The model is illustrated in Exhibit C. Each of the models will draw upon the same supporting data and will share the following characteristics:

• 4 year analysis period, April 1 1994 - March 31 1998, with primary focus on the 3 years April 1 1995 - March 31 1998 • Inflation rate of 0% • Single summary page with line items:

• Benefits (Manpower Savings, Supplies and Services Savings) • Costs (Severance/Outplacement, Technology, Training, Communications, Consulting) • Capital Investment

• Documentation and calculations supporting summary level line items • Sensitivity Analyses illustrating the impact of late implementation and “case-breaking” cost estimates


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USING THE MODELS

There are often two hazards in the collection and presentation of financial numbers in re-engineering projects:

• The numbers will appear to be accurate, precise, and final; and, • An attempt will be made to make the numbers accurate, precise, and final.

In the XYZ BPE project, each of the specialty teams will make estimates of the financial impact of their recommendations. These estimates will contain many assumptions, such as time and cost, and dependencies, such as the final number of FTEs. Given the tight schedule, many of these estimates will be made without detailed research or prototyping. They will not be precise, nor accurate, nor final. The purpose of the Financial Models are to illustrate the estimated financial impact of implementing the recommendations of the project teams. It is not a definitive and/or detailed study of all the costs and all the benefits. The analysis quantifies, at a high level, recommendations having the largest financial impact, their value, and their timing. It is but one more import factor in the decision to implement the recommendations or not. Comfort in the results of the Financial Analyses is achieved by a series of scenarios. Each scenario can alter any number of variables such as time or cost to illustrate the impact of overestimates and underestimates. If the results remain positive within an acceptable and representative set of scenarios, then there should be a high degree of confidence to proceed with implementation. Therefore, it is not important to estimate to the last penny. Re-engineering usually results in radical change and enormous benefits such that the last penny or even the last $100,000 may not influence the business case materially. It is more important to give realistic, rounded estimates and let the risk of imprecision be managed by scenarios.


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WORKING WITH THE OTHER TEAMS

While the Finance Team is responsible for the calculation, consolidation, and presentation of the cost-benefit analysis, the other XYZ BPE Project teams are responsible for many of the calculation inputs. The Finance Team will provide each of the other teams with templates, or “financial considerations” sheets, to help the teams assess the financial impact of their recommendations. As well, the Finance Team will schedule meetings with the other teams to provide process advice from the financial perspective and to help collect the financial data. The following describes how the Finance Team expects to work with the other teams throughout the XYZ BPE Project.

Organizational Design Team

The Organizational Design Team is responsible for determining:

• the total number of FTE’s required in the new organization; • the number of FTE’s displaced; • the severance model; • the education and training requirements; and, • the timing of all major organizational changes during transformation.

Each of these requirements are detailed on the following pages.


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Severance Model The inputs and calculations of the severance model should be provided to the Finance Team during the Baseline Phase so that it may be tested and ready for the Design Phase. The model may include:

• severance pay • outplacement services • counseling • training

Manpower

The Finance Team will calculate average, loaded compensation figures for employees of XYZ according to the following categories:

Category Full Time Super-Wage (Project) Wage Management √ √ √ Professional and Technical √ √ √ Clerical √ √ √ Contract √ √ √

During the Transformation Planning Workshop, the Organizational Design Team is responsible for describing, at each organizational change:

• the timing of the change • the number of each category displaced, hired, and retained • the expected change (%) in compensation for each category

The Finance Team will then multiply the given numbers by the average loaded compensation figures to determine: • manpower costs by category • manpower savings by category • severance costs by category


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Education The Organization Team is responsible for providing the Finance Team with the overall cost of Training for each major training initiative and its timing during the Transformation Planning Workshop. Human Resources Consulting The anticipated cost and timing of any external Human Resources consulting is to be provided by the Organizational Design Team during the Transformation Planning Workshop.


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Technology Team

Information Technology is expected to be one of the greatest contributors of cost in the financial models. During the Transformation Planning Workshop, the Technology Team should provide, for each major Technology Project, estimates of:

• New/Modified Systems • hardware acquisition costs • software acquisition costs • software development costs • annual maintenance costs • annual operations costs • annual telecommunications costs • implementation schedule • financing method • processes affected • amortization schedule • consulting costs

• Eliminated Systems

• hardware/Software salvage value • annual maintenance costs saved • annual operations costs saved • annual telecommunications costs saved • removal costs

If appropriate, the Technology Team could develop standard costs or unit costs and provide them to the Finance Team prior to the Design Phase. At the completion of design, the Technology team would need only provide the number of units and the timing of all technology projects.


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Communications Team

The Communications Team is responsible for the development of communications strategies and programs and for providing estimates of their cost to the Finance Team for review. The following cost elements are anticipated:

• Design Costs • Development/Production Costs • Delivery Costs

• Delivery Schedule • Materials Costs • Travel and Living Costs • Rentals • Food/Refreshments

Process Design Teams

The Process Design workshops develop the new world of work for XYZ. To ensure the best possible design technology and organizational design specialists are full time members of the teams. The Finance Team must understand the principles, options, and conclusions of each process design in order to adequately assess its financial impact. It is recommended that the Finance Team participate as follows:

Participate in the Process Design Session

A representative of the Finance Team should meet with each process team on the fourth morning of the design workshops to permit the following:

• identification of events with significant financial impact; and, • identification of financial information necessary to complete the process design .

Review the Completed Process Design


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At the completion of each stage of process design (Stage 1 = Process Teams 1-3, Stage 2 = Process Teams 4-6), two representatives of each process design team should meet with the Finance Team for a final review of the process. The Finance Team should gain a thorough understanding of the re-designed process and a final estimate of all anticipated events with significant financial impact (>$100,000). Each event must be documented with:

• a description of the event; • its categorization (Manpower, Technology, General Operations, Other); • its impact to current budgets (New, Modification, Disposal); • the estimated value; • the estimated timing; and, • any assumptions and constraints.


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TEMPLATES, FORMS, AND TOOLS

The Finance Team has developed a set of templates and forms to improve financial data collection efficiency. These templates are used by Finance Team members with each of the other project teams to help assess the financial impact of their recommendations. All finance templates will be collected and reviewed by the Finance Team. The templates are provided in Exhibit D. Please note that they are the first versions of the templates and may undergo further revision by the other project teams. The Finance Team has also customized Company ABC’s Pro*FORMA tool, an Excel-based workbook designed to capture the financial data, analyze it, and model it. Each of the three models (see Financial Models) are represented in Pro*FORMA with the common supporting calculations. In addition, Pro*FORMA has been designed to permit sensitivity analysis on the results and generate the financial performance measures of the project. A sample of the model is provided in Exhibit E.


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SCHEDULE OF FINANCE TEAM ACTIVITIES

Over the remainder of the project, the Finance Team anticipates its involvement as follows. Please note that actual dates may change.

Activity Date Format Deliverable Technology Baseline Finance Team Review of

Technology Baseline Report • Baseline Information

Technology Costs Organizational Baseline Representative from Org. Team

to present Severance Model to Finance Team member

• Severance Model

Representative from Org. Team to cross-check FTE counts with Finance Team member

• Baseline FTE Counts

Financial Baseline Thursday, September 29

Finance Team confirmation of 95-96 Budget Figures

• Financial Baseline Report

Process Re-Design 1-3 Thursday, October 6 Finance Team Member to attend each workshop

• Finance Advice for Process Design

• Significant Financial Events - Preliminary Assessment

Friday, October 14 2 Representatives from each Process Team to meet with Finance Team

• Overview of Process Design

• Significant Financial Events - Final Assessment


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Activity Date Format Deliverable

Process Re-Design (P4-6) Tuesday, October 18 Finance Team Member to attend each workshop

• Finance Advice for Process Design

• Preliminary Assessment of Process-specific significant financial events

Friday, October 21 2 Representatives from each Process Team to meet with Finance Team

• Overview of Process Design

• Final Assessment of Process-specific significant financial events

Transformation Planning Workshop

Thursday, October 27 - 29 Finance Team to attend • Timing and value of all Significant Financial Events

Cost-Benefit Analysis Friday, November 4-7 Finance Team to develop • Cost-Benefit Analyses


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Exhibit A


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Forecasted Operating Expenditures

Baseline Forecasted Forecasted Forecasted Forecasted1994/95 1994/95 1995/96 1996/97 1997/98

Category ($000) ($000) ($000) ($000) ($000)

Operating Expenditures

Manpower 25,000.0

Supplies and Services 15,000.0

Implementation Costs 1,000.0

Other (Amortization) 2,000.0

Forecasted Operating Expenditures 43,000.0

Forecasted Capital Investments 4,000.0

Forecasted FTE's 650.0


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Forecasted Operating Expenditures Comparison - 1994/95 BaselineBaseline Forecasted Forecasted Forecasted1994/95 1995/96 1996/97 1997/98

Category ($000) ($000) % Chg ($000) % Chg ($000) % Chg


Manpower 25,000.0 (100%) (100%) (100%)

Supplies and Services 15,000.0 (100%) (100%) (100%)

Implementation Costs 1,000.0 (100%) (100%) (100%)

Other 2,000.0 (100%) (100%) (100%)

Forecasted Operating Expenditures 43,000.0 (100%) (100%) (100%)

Forecasted FTE's 650.0 (100%) (100%) (100%)


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Exhibit B


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Forecasted Cash Flow

Budget Years Category 1994/95 1995/96 1996/97 1997/98 Totals

Benefits:Manpower Reduction SavingsSupplies and Services Savings

Total BenefitsCosts:

SeveranceInformation Technology OperatingTrainingConsultingCommunicationsOutsourcing

Total CostsCapital Investments:

Information TechnologyTotal Capital Investments

Total Forecasted Cash Flow

Cumulative Cash FlowPayback Period


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Exhibit C


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Forecasted Cash Flow (Including External Divisions)


Benefits:Manpower Reduction SavingsSupplies and Services SavingsExternal Division Benefits

Total BenefitsCosts:

SeveranceInformation Technology OperatingTrainingConsultingCommunicationsOutsourcingExternal Division Costs

Total CostsCapital Investments:

Information TechnologyExternal Division Capital Investments

Total Capital Investments


Cumulative Cash FlowPayback Period


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Exhibit D


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Organizational Design Team Financial Considerations - Manpower Events

Event Date: Event Description Number of FTE’s Hired

Category Full Time Super-Wage (Project)

Wage

Management Professional Clerical Contract Number of FTE’s Displaced

Category Full Time Super-Wage (Project)

Wage

Management Professional Clerical Contract Comments Approved for Organization Design Team: Approved for Finance Team:


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Organizational Design Team Financial Considerations - Training Events

Event Date: Event Description Number of FTE’s Involved: Course Cost per FTE: Travel and Living Cost per FTE: Total Cost per FTE: Total Training Cost: Comments Approved for Organization Design Team: Approved for Finance Team:


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Communications Team Financial Considerations - Communications Programs

Program Name: Program Description Design Costs: Production Costs: Delivery Costs: Travel & Living: Materials: Rentals: Food/Refreshments: Total Delivery Costs: Delivery Frequency

1994-95 1995-96 1996-97 1997-98 Approved for Communications Team: Approved for Finance Team:


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Organizational Design Team Financial Considerations - Consulting Needs

Consulting Requirement/Project Description Estimated Cost

1994-95 1995-96 1996-97 1997-98 Number Required Cost per Consultant Total Cost Approved for Organization Design Team: Approved for Finance Team:


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Process Design Team Financial Considerations - Significant Events

Page 1 of 2

Event Category Event Subcategory 1994/95 XYZ Budget (for ref)

Manpower 25,000,000 Supplies & Services Travel 400,000 Advertising 5,000 Freight & Postage 1,100,000 Rentals 200,000 Telephone & Comms. 400,000 Repairs & Mainten. 800,000 Memberships 45,000 Data Processing 10,850,000 Services

Forms & Printing 1,200,000 Other Implementation 1,000,000 Capital Investments 4,000,000 Other 2,000,000 External to XYZ


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Process Design Team Financial Considerations - Significant Events

Page 2 of 2 Event Description Event Impact New Change Eliminated Estimated Value

1994-95 1995-96 1996-97 1997-98 Assumptions/Constraints Approved for Process Design Team: Approved for Finance Team:


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Technology Team Financial Considerations - Significant Events

Page 1 of 2 Event Description New/Modified Systems

1994-95 1995-96 1996-97 1997-98 Hardware Acquisition Software Acquisition Software Development Software Licensing Maintenance Operations Telecommunications Consulting Total Cost Disposed Systems

1994-95 1995-96 1996-97 1997-98 Hardware Salvage Software Salvage License Fees Saved Maintenance Costs Saved Operations Costs Saved Telecommunications Saved Total Cost


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Technology Team Financial Considerations - Significant Events

Page 2 of 2 Financing Method Cost to XYZ

1994-95 1995-96 1996-97 1997-98 Capital Investment Amortization Expenditures Total Cost Assumptions/Constraints Approved for Technology Team: Approved for Finance Team:


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Technology Team Financial Considerations - Technology Baseline

System Name: Cost Characteristics

Department 1994-95 1995-96 1996-97 1997-98 Book Value Operations Costs Telecommunications Costs Maintenance Costs Planned Development Costs

Other Costs Total Cost Cost to XYZ Approved for Technology Team:


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Approved for Finance Team:


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Technology Team Financial Considerations - Technology Baseline

Cost Breakdown (%) by Major System

System Name 1994-95 1995-96 1996-97 1997-98 All Others Total 100% 100% 100% 100% Approved for Technology Team: Approved for Finance Team:


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Organizational Design Team Financial Considerations - Severance Model

Manpower Category Management Professional Clerical Contract Employment Type Full Time Super-Wage (Project) Wage Cost per FTE: Average Years of Service: Compensation per Year of Service: Compensation Cost: Outplacement Cost: Training Cost: Counselling Cost: Total Severance Cost: Approved for Communications Team: Approved for Finance Team:


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Exhibit E


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Parameters

Category Value

Financial Variables

Inflation Rate 0.00%

PeriodsPeriod 1 1994/95Period 2 1995/96Period 3 1996/97Period 4 1997/98


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Manpower Reduction Savings


Management Positions Displaced Weighted Average FTE's Displaced Average Cost per FTE 65,000 65,000 65,000 65,000

Subtotal: Manpower Savings

Professional and Technical Positions Displaced Weighted Average FTE's Displaced Average Cost per FTE 50,000 50,000 50,000 50,000


Administrative Support Positions Displaced Weighted Average FTE's Displaced Average Cost per FTE 35,000 35,000 35,000 35,000


Total Manpower Reduction Savings

Net FTE Impact


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Supplies & Services Savings - FTEs

FTEs Budget Years

Category 1994/95 1995/96 1996/97 1997/98 Totals

Manpower Reduction FTE's

Net FTE Displacement Avg. Supplies & Services Cost per FTE 1,500 1,500 1,500 1,500

Total Supplies & Services Savings - FTEs


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Severance Costs


Management Positions Displaced Positions Eligible for Severance Severance Cost per Position 50,000 50,500 51,000 51,500

Subtotal: Severance Cost

Professional and Technical Positions Displaced Positions Eligible for Severance Severance Cost per Position 30,000 30,500 31,000 31,500


Administrative Support Positions Displaced Positions Eligible for Severance Severance Cost per Position 20,000 20,500 20,500 20,500


Total Severance Costs


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Info. Tech. Operating Costs


Common System Infrastructure

Service A

Service B

Service C

Service D

Service E

Office Automation

Total Info. Tech. Operating Costs


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Training Costs

Budget Years

Years Category 1994/95 1995/96 1996/97 1997/98 Totals

Skills Upgrade for Re-designed Processes

Positions requiring Training Average Training cost per Position

Training Cost for Re-designed Processes

General Skills Upgrade Training

Total Training Costs


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Outsourcing Costs

Budget Years


Total Outsourcing Costs


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Consulting Costs

Budget Years


Outplacement Consulting

Total Consulting Costs


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Communications Costs

Budget Years


Total Communications Costs


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Benefits

Budget Years


Manpower Reduction Savings

Supplies & Services Savings

Total Benefits


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Costs

Budget Years


Supplies & Services Costs

Information Technology Operating Costs Outsourcing Costs

Total Supplies & Services Costs

Implementation Costs

Severance Training Consulting Communications

Total Implementation Costs

Total Costs


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Capital Investments

Budget Years




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Amortization

Budget Years


Capital Investments by completion date

Total Completed Capital Investments

Amortization (7 years Straight Line) 14.30% 14.30% 14.30% 14.30% 14.30% 14.30% 14.30%

Total Amortization


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Forecasted Cash Flow

Budget Years

Years

Category 1994/95 1995/96 1996/97 1997/98 Totals

Benefits: Manpower Reduction Savings Supplies and Services Savings

Total Benefits Costs:

Severance Information Technology Operating Training Consulting Communications Outsourcing

Total Costs Capital Investments:

Information Technology Total Capital Investments


Cumulative Cash Flow Payback Period


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Forecasted Cash Flow (Including External Divisions)

Divisions) Budget Years

Years

Category 1994/95 1995/96 1996/97 1997/98 Totals

Benefits: Manpower Reduction Savings Supplies and Services Savings External Division Benefits

Total Benefits Costs:

Severance Information Technology Operating Training Consulting Communications Outsourcing External Division Costs

Total Costs Capital Investments:

Information Technology External Division Capital Investments



Cumulative Cash Flow Payback Period


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Forecasted Operating Expenditures

Baseline Forecasted Forecasted Forecasted Forecasted 1994/95 1994/95 1995/96 1996/97 1997/98

Category ($000) ($000) ($000) ($000) ($000)


Manpower 25,000.0

Supplies and Services 15,000.0

Implementation Costs 1,000.0

Other (Amortization) 2,000.0

Forecasted Operating Expenditures 43,000.0

Forecasted Capital Investments 4,000.0

Forecasted FTE's 650.0


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Forecasted Operating Expenditures Comparison - 1994/95 Baseline

Baseline Forecasted Forecasted

d

Forecasted 1994/95 1995/96 1996/97 1997/98



Manpower 25,000.0 (100%) (100%) (100%)


Implementation Costs 1,000.0 (100%) (100%) (100%)

Other 2,000.0 (100%) (100%) (100%)


Forecasted FTE's 650.0 (100%) (100%) (100%)


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Forecasted Operating Expenditures Comparison - 1994/95 Forecast

Forecasted Forecasted Forecasted

d

Forecasted 1994/95 1995/96 1996/97 1997/98



Manpower 22,000.0 (100%) (100%) (100%)


Implementation Costs 500.0 (100%) (100%) (100%)

Other (Amortization) 2,000.0 (100%) (100%) (100%)


Forecasted FTE's 500.0 (100%) (100%) (100%)


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Summary

Category ($000s)

Parameters Inflation Rate 0.00%

Budget (1997/98) Manpower 0.0 (100%) Supplies & Services 0.0 (100%) Implementation Costs 0.0 (100%) Other Costs (Amortization) 0.0 (100%)

Forecasted Operating Budget 0.0 (100%)

Forecasted Capital Investments 0.0

Forecasted FTE's 0.0 (100%)

Total IT Investment (1994/95-1997/98) 0.0 Severance (1994/95-1997/98) 0.0

Payback Period 0.0

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