Integrated Business Planning: The Role of Financial Forecasts: Part 1
Successful organizations use Integrated Business Planning (IBP) to inform their operational strategies, with financial forecasts playing a crucial role. Due to the desire to enable alignment across supply chain planning, IBP has taken a step further than Sales and Operations Planning (S&OP), including far more robust financial integrations.
As more of the supply chain has become connected through end-to-end applications, like Vanguard Software, there is a drive to align all functions – commercial, product, supply chain, and finance – to an integrated plan that delivers shared value across the planning horizon.
As cross-functional engagement increases, organizations emphasize quantifying operational plans and decisions in financial key performance indicators (KPIs), revenue, cost, and profitability, enabling them to make better trade-off decisions supporting the business strategy. Financial forecasts and their role in IBP are integral to the future planning of an organization’s success.
Financial Forecasts in IBP
Financial forecasts are tightly incorporated into the IBP process, being highly involved in crucial decision-making processes and ensuring the financial impact of those decisions is clearly understood. IBP is an operational planning process consisting of five reviews: product, demand, supply, integrated reconciliation, and management business reviews.
Finance should play two distinct roles depending on the IBP review: an integrator and an orchestrator. Finance’s integrator role builds integrity in the operational forecast and defines gap-to-close actions with financial implications. The integrator role occurs throughout the first three of the five reviews that take place in IBP. The finance orchestrator drives consensus and accountability on gap-to-close actions aligned to business strategy.
This post focuses on the role finance should play as an integrator in the product, demand, and supply reviews.
Budgeting, Planning, and Forecasting
The product review examines the product life cycle strategy (new product introductions or phase-outs) for each product category. Depending on the industry, this review may be less frequent if there is no expected change in the product portfolio from the prior preview.
The financial lead should validate assumptions to project future sales of new products and the cost of manufacturing or discontinuing a product. Past product launch results can provide insight into the validity of existing assumptions. Finance should also validate assumptions on the impact of current product sales when new products are launched.
Finance should compare the product plan to the annual budget to identify if delays in product rollout or retirement impact revenue estimates and potentially impact market share. Once the gap is defined, finance should determine what gap-to-close actions can be taken and estimate the impact on financial KPIs to keep a product beyond its expected life.
The demand and supply planning team uses this review’s output to estimate current and future sales and define each product category’s supply chain strategy.
The demand review creates an unbiased estimate of demand for existing and new products. Finance should partner with the demand planner to define a standard template of the operational inputs needed, including the level of granularity.
The finance lead pressure-tests the operational assumptions for accuracy, validates if prior assumptions are still accurate, and considers additional macroeconomic drivers. Finance should also validate and correct any demand bias in the forecast.
Finance then compares the financial forecast against the annual budget to identify gaps and the drivers behind the gaps. Once the gap is known, compare the “gap to plan” against the last review to see if there were significant changes and identify gaps that may have increased or decreased and what may have caused them.
Finance should work with sales to identify actions to close the gap and its associated ﬁnancial implications. Finance and operations continue to ﬁne-tune the demand forecast and gap-closure measures until a ﬁnal unconstrained forecast arrives. The out of this is can then go through the supply review process.
The supply review develops a supply response plan to meet the unconstrained demand plan. Supply chain planning may include multiple components, such as manufacturing capacity, logistics capabilities, and the supplier’s ability to deliver.
Finance validates if any manufacturing assumptions on existing operations have changed and if changes in assumptions are due to ongoing supply chain problems.
Finance then compares the constrained supply plan with the demand plan to identify how much gap the supply chain team cannot fulfill. Also, finance compares the financial estimate with the annual budget to see if the cost estimates are higher than the annual target.
Once the gaps are identiﬁed, ﬁnance works with operations to identify drivers behind the demand gap, what actions to take to increase the supply chain’s capability to close the gap, and estimate the associated expense, CAPEX, and cash outﬂow.
The central role of finance in IBP enables visibility and accountability for the financial outcome. It becomes part of leading the business, not only in day-to-day activity but also in commercial strategies and solutions that drive better results.
Companies reach peak performance when sales, operations, and financial forecasts work together to plan for their business. Vanguard’s Integrated Business Planning (IBP) and Sales and Operations Planning (S&OP) capabilities help the finance team bring together forecasts and plans from other departments, reconcile gaps between plans, and build consensus.
Next week’s post will focus on the role finance plays as an orchestrator to drive agreements. To learn more about how Vanguard Predictive Planning™ for financial forecasts can bring various organizations seamless collaboration for shared risk and financial management, contact us today.
Cash Flow Forecasting