Integrated Business Planning: The Role of the Financial Forecast: Part 2

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This is part two in our series defining the role the financial forecast plays in Integrated Business Planning (IBP).  In our first post, we reviewed the role financial forecasts play in the product, demand, and supply reviews.  This focuses on how the financial forecast serves as an orchestrator to drive agreement on gap-to-close actions and enable enterprise-wide decision-making. 

Role of Financial Forecast 

In traditional S&OP, the focus of the product, demand, and supply reviews, discussed in part one, is limited to force-matching the operational plan with the financial budget.  Traditionally, finance has been separated from supply and demand, but the major benefit of IBP is bringing together these key business processes.  Rather than working in a process where leadership flows from production down to finance, it can be beneficial for the flow to be reversed.  A process lead by finance considers budgets and financial goals from the beginning, working with sales and operations to reach and meet these goals throughout the supply chain.  

This part of the series is going to walk through the role financial forecasts play as an orchestrator within the Integrated Reconciliation Review and the Management Business Review stages of the IBP process. 

Integrated Reconciliation Review 

This meeting reviews the collective gaps between the consensus forecast and budget, arriving at a set of cross-functional gap-to-close actions and scenarios to present in the management business review meeting. 

With the individual operational forecast and the corresponding actions reviewed, finance now calculates the total financial forecast as discussed in last week’s post.  Once the KPIs are calculated, the forecast is compared against the annual budget targets to arrive at a gap-to-close number per KPI.  Leaders then leverage dashboards to provide business performance throughout the enterprise and drill-down analysis by region or division.  This scorecard provides visibility into the actions agreed upon by individual functional leaders in prior IBP reviews and their impact on the business and financial KPIs. 

By embedding scenario planning into their IBP process, leaders enable an agile decision-making process.  This can be done by identifying the most probable scenarios that impact the organization’s financial plan and operational decisions.  Some examples are competitor actions on price discounts or a new product launch, supply chain disruption, and other scenarios.  Vanguard Predictive Planning™ offers complete support for unlimited what-if scenario planning that can be saved and shared. 

Once these scenarios are defined, each scenario’s risk and the business impact can be estimated and the cross-functional response or action plan defined.  After the scenarios are defined, planners can then develop indicators to alert them when an anticipated scenario begins.  These indicators can be measurable indexes, such as supplier risk rating or qualitative observations/critical events, like a competitor product launch, and should be monitored at every IBP review. 

Management Business Review 

The final stage in IBP is the management business review, with the primary emphasis to drive decisions on actions to close the gap between business, financial, and strategic objectives.  The key functional leaders – supply chain, commercial, product – are expected to drive consensus on their plans and proposals.  Financial forecasts play an orchestrator role in the management business review to enable an enterprise-wide decision-making forum that maximizes the organization’s strategic and financial goals. 

The three main steps of this review include: 

Step One: Make Decisions on Gap-to-Close Actions and Trade-Offs 

First, planners should review the scenarios generated in the financial reconciliation session, obtain cross-functional agreement on the action plan and resolve any outstanding demand or supply risks and opportunities that require executive decisions. 

Planners must be prepared to address any executives’ challenges on why certain actions were prioritized, explain the assumptions behind each action, and present the case that aligns with the company’s long-term strategies.  Executive questions should be answered with insight into the cross-functional trade-off and its implications to the business strategy. 

Once all the stakeholders have understood the implications to their departmental and organizational goals, planners need to drive consensus on the forward action plan. 

Step Two: Review Performance Scorecard: 

Based on the decisions made, planners provide an overview of the company’s performance scorecard:  financial and business KPIs, like revenue, margin, market share, and customer satisfaction. 

Planners are expected to highlight if any of the business KPIs changed from the prior review and the drivers behind the change.  The goal is to provide all leaders a shared view of business performance and outlook to ensure all functions are making decisions to optimize value at the enterprise level. 

After reviewing the overall scorecard, this opportunity should be leveraged to ensure the right actions to maximize the business outcomes are prioritized. 

Step Three: Drive Accountability on Ongoing Actions or Initiatives 

In the last step of the Management Business Review, planners update ongoing initiatives agreed upon in prior IBP reviews.  Each functional leader presents the details to provide visibility into whether the action plans are on track or any potential risk to the financial or business strategy.  For example, if it was agreed upon to increase production capacity to support the new product launch, the supply chain leader should update the risk or additional approval needed to get the initiative back on track.

Over the last two weeks, we’ve talked about how the financial forecast plays a crucial role for successful organizations that use Integrated Business Planning (IBP) to inform their operational strategies and how an end-to-end application, like Vanguard Software, can align all functions, commercial, product, supply chain, and finance to an integrated plan that delivers joint value across the planning horizon. 

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. 

To learn more about how Vanguard Predictive Planning™, contact us today.