Financial Forecasting Models: Key to IBP Success

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Who has the best view of a company’s overall health? Finance. Who understands how the various plans of an organization come together? Finance. Ideally, the Finance team is the glue that binds together the various inner workings of an organization. Yet, I see many organizations working in silos, not integrating Financial forecasting models into their IBP process until the very end of the quarter or fiscal year.

Allow me to shed some light on the situation, and explain what happens behind the closed doors of the Finance department. At the end of every quarter, Finance teams get bombarded with requests for: quarter-end results, reports and analyses, revenue numbers, sales results, budget versus actual performance, and more.

Why is this critical? One, because from an organizational planning perspective, the quarter-end numbers that financial accountants record to the books are all that count.

The same is even more true for year-end financial numbers, where in addition to all of the requests listed above, financial teams have the budgeting process for the following year, plus total year-end results and related analyses, all due by deadline.

A neighbor of mine is in the finance department of a “growth” company and recently came home in tears over the stress of end of the year closing, overwhelmed with all of the requests. I wish I could tell you I made this story up. The point here is not to throw a pity party, but to stress the importance of the Finance department in your company. Ask yourself, “Have I been leveraging Finance along the way, or just at deadline crunch time?”

How to integrate Financial Forecasting Models

I realize integrating Finance (and other parts of the business) with the S&OP process is the goal of Integrated Business Planning (IBP), but let’s hold that thought and not worry about labels and technology tools at this moment. Instead, let’s simply look at business processes. Specifically, let’s look at rolling monthly plans and forecasts. There are several benefits but following are two quick hitters:

  1. Rolling plans and forecasts inherently require tighter integration between the Finance team and your S&OP process and leaders, which is what you should strive for. The more integrated your teams are, the more cohesive a unit they will become, leading to aligned goals and objectives for the company as a whole.
  2. The enablement of rolling plans and forecasts is akin to tackling small portions of a large project every day. The end result becomes much easier to accomplish. Moving from an annual budget process to a rolling one breaks down the process to an iterative function that enables the organization to have a much easier time each year for the annual budget.

Finance’s additional value

Finance team members are typically keen with numbers. Generally speaking, they are skilled at creating financial analyses and having unbiased discussions around them. They are not trying to sell a plan or program, or to justify results. Conversely, they typically want to look at the numbers to gain an understanding of how they compare to prior results and benchmarks, or they want an overall bird’s-eye view of the company.

Additionally, getting financial inputs into the S&OP process on a rolling basis enables a better understanding of costs and of the effect of costs changes to profitability. At the end of the day, you’re optimizing S&OP for better net financial outcomes. This is more in line with what many now refer to as Integrated Business Planning (IBP), which integrates Financial Forecasting Models and Supply Chain operations, and helps map S&OP to the overarching financial goals and objectives of the organization.

Executive sponsorship

If you really want to ensure that Finance is engaged and part of your team, get the CFO on board and invested. CFOs are becoming more operational these days; many are wearing multiple hats. I personally know a few CFOs that are also CIOs of some mid-size companies. Many Finance teams are stretched to their limits. It may take their boss, the CFO, to weigh in and help free up some time to be involved with your team. It will be well worth your efforts in gaining support from the CFO.

Without proper executive sponsorship and buy-in, it is highly unlikely that Finance will be involved or of much value to your IBP processes. You will continue to see similar results, repeat similar mistakes and limit your potential.

In closing, I leave you with a quote from Albert Einstein: “The world as we have created it is a process of our thinking. It cannot be changed without changing our thinking.” It is time to change your thinking about your S&OP process and Finance’s involvement!