Wednesday, October 14, 2015

Sideways Analysis

In our project of transitioning from the D1 pricing scheme to the D2 pricing level we prepared sideways analysis for each of the two project periods and the transition period.  Sideways analysis discovers the variations at work between methods required for project level and scorecard level attributes. 

All of the differences in our sideways reconciliation have to wash out eventually to the reporting method selected.  Different reports turn the cube around and report primarily on some aspect of the cube.  For example, some reports are focused on internal spending.  Our cash balance reflects the 29% internal margin because conversion is based on the spending margin (internal margin.)

The cash reconciliation that we are showing at the top starts with a gross cash balance that we need for our reporting and analysis because the metrics require that we do not distribute payments for taxes or corporate fees, only the usual payments to vendors.  This allows us to measure payback and ROI based on a level basis that makes the plan and actual result comparable.

The changes from one year to the next in our plan are expected changes, part of the transition that we want to measure.  So cash basis needs to be understood on both a gross and after-distributions level for the entire project to date.  The financials are based on the accrual method and the variances need to be understood.

The second part of the sideways analysis compares our Gantt Planning of Spending to the project and eventually the accrual basis and Gantt spending wash as well in the timing of margin conversion.  Where the actual may differ is in variations caused by price or units. 

The third part of the sideways analysis compares the investment with planning that produces earnings through the internal rate of return.  This is caused by the DSO used as a rate.

In the lower part of the report we are reconciling to total equity and taking the sideways values that comprise the change in sales conversion, gains and equity and finding the components of the mix. We also have to measure some cost variances created by EBITDA and cost of capital which play into the mix and which come out in the initial scorecard calculations.

Primarily everything varies according to timing, as long as price and units variances are identified first.  Conversion makes a lot of figures that come in partial combinations and are confusing to look at first off.  But familiarity with the process eventually brings some cohesion to the comprehension of what the figures represent. 

Key figures begin to appear the are carried through from other aspects of reporting.  While conversion is puzzling, the interesting aspect about conversion is that it folds up and down and inside and outside revealing many dimensions of funding of the investment, planning of spending, cash management and project transition.

There are three types of conversion involved:  Sales conversion (includes margin conversion to receivables/payables,)  Cash conversion to net collections and debt and other planned cash outlays, and Equity conversions which include earnings and investment, and also closing out the project.  We use the Cash Reserve Pricing Method which provides for a reserve for taxes and for working capital.

In doing so we generally do not use tax payments except as a distribution.  This is because the project is not concerned with paying taxes or benefit administration (mgmt. fees), which is the responsibility of the corporate or home office, in our scenario.

The Scorecard model calculates and populates all of the reconciling items from the Scorecard metrics and KPI's to the Sideways analysis, and when tuned to the Portfolio and Financials, finds the sideways portions automatically using the format.  Thus the Plan Model can be used and changed to the Actual model and by comparing outcomes the places where problems are occurring become apparent.  Changes in KPI's or metrics during the period are very informative.

Read more about aspects of this project using the Scorecard method.  The blog entries are layered backwards from the inception of the project in the last entry, as the blog was developed from demonstrating the project transition from beginning to end.

Read about: Finalizing the Project

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Brij Consulting

Brij Consulting
Specialty Accounting Software Services

Brij Consulting

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