The Sales and Operations Planning process has evolved over the years to become what Oliver Wight calls Integrated Business Planning (IBP), providing, among other characteristics, a full integration of financial forecasts for the next 2 to 3 years. However, CFO still not know or use enough this capability, and as they should become an essential advocate of the IBP process.
The big difference from a normal business plan is that these financial forecasts, that I much prefer to call a financial plan, can change every month if necessary. It follows the IBP monthly pace and gives visibility of the financial performances of the company.
How does the process include this financial plan? Does it represent a lot of work every month? Is it precise enough?
These are the questions that CFOs often ask us when we present the financial integration in the IBP process.
In fact, the IBP process is truly a process for the senior leadership team to pilot the company. So the financial dimension is mandatory to allow people to take the right decisions.
If the company has a good IBP process, we have a demand plan in volumes that shows us what will be sold in the next 24 to 36 months with the new products to come and the phase out product that will be stopped. A mature process will also define the sales and marketing activities to support the demand plan and its associated costs.
The supply chain is then in charge to plan for the production. The procurement, the stocks, and the distribution required by the demand plan in a timely way. Supply chain will mainly provide a supply plan in volumes to answer to the demand plan. Again, in a mature process, we expect supply chain to propose alternatives to optimize the supply plan. And one of the optimization criteria could be the cost of goods the company has sold.
Based on these 2 plans we can estimate for the next 24 to 36 months a financial plan in revenue, net sales, gross profit margin and potentially operating and net profit margin.
The amount of work necessary to make the financial plan depends on 2 things:
- the availability of data
- the supporting IT tool available to make the calculation.
QAD DynaSys offers an integrated solution with the capabilities to calculate the financial plan at revenue and margin level. Once the data is in the system (average sales price, cost of goods sold…), the level of effort is minimum.
Is it precise enough?
We are trying to foresee the future, so we want to be roughly right and not precisely wrong. The level of detail will allow CFOs and companies to make the best choice between 2 scenarios for example; based on margin results. It will also show the gaps and the trend of deviation; versus an annual business plan or a 3-year business plan.
So why do we not always see the financial integration as essential?
My first impression is that a lot of companies still see IBP or S&OP as a supply chain process and a way to balance demand and supply with minimum involvement of finance. Until IBP is seen as the process to run the company, finance will not be more involved.
My second impression is that we do not always welcome finance as it is adding transparency of the financial impact. It is a step forward in the company culture to say that every decision has to be reviewed under the light of its financial impact.
My third feeling is that it is also a step change for the finance team to accept to involve themselves in more collaborative work. It requires not only financials skills and knowledge but also a true interest in other areas of the company and a genuine ability to learn. They will actively participate in creating the future business growth, value creation and risk management.
They also will become more open and approachable for the rest of the company.
While no company can predict the future, it should not prevent an organization from planning for it and building scenarios to understand what the best option could be. Doing this in a collaborative way and including CFOs in the Sales and Operations Planning process is a critical success factor.