Alfred Rappaport laid out the method in the Harvard Business Review in 1981: select strategies by the shareholder value they create, and tie the planning process back to the financial statements. Business has sped up since; the responsibility has not changed. What we have found is that making predictability of EBITDA a visible objective for management lifts performance by itself.
This is not adjusted EBITDA, where managers strip out whatever embarrasses them. It is the opposite: earnings that are stable because the risks to them were anticipated and dealt with before the surprise.
Three steps
Make it the objective. Predictable EBITDA over a multi-year horizon, measured and rewarded, not a quarter-to-quarter scramble. Adjust the performance structure to match or nothing else changes.
Make the assumptions visible. Have managers write the assumptions their budgets rest on and graph them against the overall market, three years out if you are unsure how far. There will be resistance; point out the assumptions are already buried in the budget. What illuminates the team is seeing where the graph is sensitive. That is the risk to manage.
Make the decisions in advance. For each sensitivity, what strategic or operational decision will the team take if the market moves? Predictability comes from deciding early, not forecasting better.
The three numbers
EBITDA is the operators' number. Free cash flow is the sponsor's. Earnings per share, or owner earnings in a private company, is the board's. The MOVE® system puts the decisions that move all three on one page and reviews them monthly with root cause on every variance. Predictability is what that review produces over time.
Monday
Ask your CFO for the three assumptions under this year's EBITDA budget, graphed against the market. If they cannot be drawn, they have not been examined.
