PM Articles > Kent McDonald > Running the Numbers

Running the Numbers

by Kent McDonald

When I am not writing articles or working on projects, I spend my spare time doing volunteer work with a couple nonprofit groups. Through twists of luck, fate, or odd coincidence, I find myself either helping to organize events or providing advice to others who are organizing events—be they charity fundraisers or industry-focused conferences. Through working with all of these events, I have found that having a model of the finances for the conference helps me to make decisions that ensure the conference delivers the optimal value. I have also discovered that this tool can be applied to projects of all types.

Lately I have been advising two different groups made up of well intentioned but inexperienced people organizing mini conferences. They eagerly leapt into planning their events thinking all they needed to do was pick a hotel, get some compelling speakers, post some announcements, and wait for the attendees to sign up. Unfortunately, it's not that easy. There are numerous costs that someone unfamiliar with event planning wouldn't consider. There are a lot of decisions to be made that tend to be interconnected and require several different pieces of information that quickly become overwhelming to keep in one person's head. They needed a tool to help them keep all the information straight in order to make informed decisions based on impact to the value generated by the conference, much in the same way that project teams need to make decisions about their project.

To help these groups out, I created a rather sophisticated, yet elegantly simple (in my biased opinion) conference financial model to use when planning conferences. I call it a financial model because it does not stay static across the life of the activity like a traditional budget. Instead, it allows me to change various inputs and test certain assumptions and immediately see the expected impact on the money made or lost by the conference. This mindset of change and adaptation can be applied to leading projects as well.

How To Use a Financial Model To Your Advantage

Consider Income

When people hear "project budget," they immediately think about a single number or range of numbers that indicates how much money the team can spend on a project. This reinforces the perception of the project as a cost sink and leads project teams to ignore potential income derived from the project, whether from increased revenue, protection of existing revenue, or cost savings. If you account for the income generated by the project, you are putting yourself in a better position to evaluate the full impact of the project on the organization. This income may be difficult to estimate initially, but if you follow the next piece of advice, you can always revise the model as new information becomes available.

Use Change to Your Advantage

Most project budgets are static, or are at least built to be very difficult to change. This limits the team's ability to quickly test out different scenarios based on different cost or revenue projections, which limits the information available for their decision-making. Knowing your options can be helpful, but not very enlightening if you can't easily see the result of those options on the overall project. I built my financial model in a spreadsheet so I can easily change key input data (additional food and beverage items, detailed audio/visual line items, number of sponsorships, and number of registrants, for example) and quickly see the resulting revenue or loss from the event. Building a similar financial model for your project allows you to revise costs and expected revenues to quickly get an up-to-date picture of how successful (or not) your project will be in terms of value delivery.

Know Your Assumptions

Once you have a model in which you can change various inputs, identify which of those inputs are assumptions. In this case, any number that you do not know with 100% uncertainty is an assumption. Make sure that you can change the assumed number and see the impact of that change on all related parts of the model. For example, in my conference financial model, the number of attendees is an assumption. It has an impact not only on revenue (from registration costs) but also on costs (primarily food and beverage). We won't know the actual attendees until the day of the event, but the model is set up in such a way that we can revise our expected numbers throughout the signup period as more information becomes available.

Another example of an assumption is A/V costs. When starting work on a conference, I put a rough estimate of A/V costs into the model as a placeholder. This assumption is based on previous conferences, and accounts for some costs until I can get a firm idea of costs from the event location. Once I get that information, I can replace the assumption with the actual value, and make sure that the A/V equipment listed is sufficient.

Use the Model to Play "What If"

One of the advantages of a dynamic model is the ability to try different inputs and immediately see the result, which provides information and helps you to make decisions about what actions to take next. For example, the number of attendees is a key number because of its impact on income and costs. Whenever I receive new, concrete information, I update the model and revise the number of attendees to determine a new breakeven point. Changing the number of attendees and watching for the point where the conference gross revenue results in a positive number tells me the minimum number of attendees the conference needs to avoid losing money based on the current costs. The resulting number then leads me to decide whether additional marketing is needed for the conference.

Use the Model as a To Do List

Creating a financial model helps you to approach a project from a different perspective. Instead of trying to think of everything you have to do, think of what costs you could incur on the project. These items may lead to additional tasks or features you might not have identified through other means.

Although every project is different, you can still use a financial model from a previous, similar project as a starting point. The line items included in this financial model template often remind me of things I originally had not thought of when putting the task list together. The basic rule is, if you spend money for something, chances are you have to do something to spend that money.

Take the Emotions Out of Decision-Making

Financial models are an excellent way to spell out all the facts in a way that is hard to dispute. They highlight the true feasibility of a cost structure in plain black and white (or red, in some cases). As I have helped these two groups plan these upcoming conferences, I often ran into cases where they did not believe my advice about how imbalanced the registration fee and cost structures were. They were falling into a normal reaction for anyone involved deeply in an effort. They lost sight of the big picture. I set up the financial model and gave them some suggestions on how to use it, and then let them go at it, figuring they were tired of me telling them they could run into problems. As they began filling in various inputs they began to see several places where cost and revenue were out of balance. The good thing was that the facts plainly stated that some actions needed to be taken to get the financial picture in order, and they were able to try different things to determine the best actions to take.

Leave Your Options Open

If you establish a financial model early and update it as new information comes available, you are giving yourself a powerful tool for making informed decisions and commitments on your project. What's the difference between a decision and commitment in this context? A decision is when you determine a particular course of action that you are going to take, or choose to defer taking any action. A commitment is when you actually take a course of action and will incur consequences if you reverse or substantially change that course of action. Commitments occur either by communicating your decision to a wide audience, thereby establishing expectations, or by actually spending money. Decisions are very easy to revisit. Commitments are more difficult to revise. You want to defer your commitment until it absolutely has to be made in order to avoid a loss in value.

In our conference planning example, we commonly run into a couple of commitments. The first one is usually signing the contract with the facility. Most conference facilities and hotels use standard event-hosting contracts that include various cancellation penalties. Once you sign the contract, you are on the hook. Put another way, you have made a commitment, the value of which is that cancellation penalty. There is a natural tendency to rush to sign the contract to lock up the space, and hotels tend to encourage this behavior. There is almost always time to do some analysis before making that commitment. I now create a financial model to determine if the facility's cost structure will allow you to have a financially successful event before signing any hotel contracts.

Another commitment is choosing and publicizing the registration fee. We can decide on a particular registration fee, but until we publicize it, it's just a decision. The minute we start spreading the word it becomes a commitment. Sure, you can raise the prices, but that will often backfire, especially given that people tend to check out a conference the minute they hear about it and then defer (or procrastinate) signing up for it until the last minute. On the latest event I am helping with, we have decided to resist the urge to set a registration price until we have a better handle on the cost structure of the event. This is a delicate balancing act; we want to set the right registration price, but we want to get the word out soon enough to give people a chance to sign up. Chances are we will still have to make some assumptions when we make our pricing commitment, but at least we will be more informed than had we set the price today.

Financial Models Don't Have to Be Complex

So you would like to try building a financial model for your project, but you are worried that you will have to spend hours staring at a spreadsheet full of arcane equations to do it. Not really. The conference financial model described above uses nothing but simple math. Remember that it is a model, which means that while it approaches reality, it does not have to land squarely on top of it. You need a certain level of detail to make the appropriate decisions, but what you should really focus on is gathering the appropriate financial information and organizing it in a way that is easy to update and understand. Then it is just a matter of having the discipline to keep it updated and play around with it when you need to make a certain decision. It can even be a fun diversion from project planning or chasing down project issues for a couple of hours.







Comments
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Good Article.


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