Integrating financial projections and non-financial planning: Part 1
Integrating financial plans with the operational and strategic plans remains a challenge for many organisations. Finance departments and operational planning are still failing to work together. They are unable to produce a financial projection created by collaboration and a constant exchange of information. This results in confusion as to where the numbers have been sourced from. This not only necessitates additional work for the Finance Team as various sets of numbers are compared and explained, but can also create distrust between departments and individuals.
There is a recognised and proven framework, Integrated Business Planning (IBP), that addresses this key issue. The evolution of Sales and Operations Planning (S&OP) to IBP is one which has several defining characteristics. One of these characteristics is the integration of financial projections with demand and supply. IBP allows the Senior Executive to plan and manage the entire organisation over a 24-month horizon, aligning tactical and strategic plans each month and allocating critical resources to satisfy customers in the most profitable way.
So, how does an organisation integrate financial projections into its operational planning and start towards a well-defined IBP process?
Let’s have a look step by step:
Step 1: Understand costs associated with changes to your Product or Services Portfolio
The Finance Team generates the base data for their projections by reviewing the operational plans at each stage of the process. Starting from a Management Review, the planned activities around the introduction and deletion of products and services will influence and motivate assumptions around resource requirements and timings, which will then be translated into costs.
Step 2: Understand revenues and costs associated with the demand for your services or products
From the Demand Review, the projected sales volumes and commercial assumptions can be used as the foundation for a financial revenue projection. The associated sales and marketing activity plans can be used as the basis for cost projections for promotions, trade spend, advertising, team headcount etc.
Step 3: Understand the cost of supply
From the Supply Review, the resource, production, operations, purchasing, warehousing, and logistics plans can be used to drive the creation of costed plans, covering both OpEx and CapEx.
Step 4: Understand enabling function and project related costs
Plans associated with enabling functions in the organisation, such as HR, Finance and IT, along with company-wide projects, are evaluated in the Reconciliation Review process. These are used as the basis for projecting costs driven by factors such as headcount, external contracts, project activity and delivery.
If an organisation can fulfil the criteria above and integrate financial projections into the process, it will be able to create a framework for Profit and Loss, cash flow and working capital projections, based on an integrated 24-month forward view – a key component of a strong IBP process. These financial projections are updated monthly, based on changes to the operational plans, in line with the cadence of the process.