IBP also addresses one the CFO's big concerns — the reliability of the revenue forecast. Operating plans are updated daily or weekly from a precise forecast based on current market conditions. These updated plans are then made available so that financial analysts are working with data that best represents what is going to happen — not what they projected would happen based on last quarter's data
The integrated business plan starts with the annual planning process, assuring that financial goals for the coming year are reasonable and achievable, and moves to a continuous monitoring of progress toward company goals throughout the year. When linked to a demand management system with good predictive capabilities producing very granular and accurate short- and long-term forecasts, the integrated business plan will identify potential revenue shortfalls far enough in advance to enable managers to take action.
On the operations side, no plan is perfect and, as circumstances change, the plan must be updated to respond to demand or supply upsets. Using IBP, when detailed changes are made to the operations plan, planners can immediately see financial impact of the changes to help decide what operational tactics best support the overall corporate financial goal.
The integrated business planning process is as follows:
- The revenue and profitability targets are established in the top-down annual financial plan and monitored throughout the year with a financial planning system
- The revenue targets become the basis for the sales plan, which is broken down across sales territories, geographies, customers, etc. A baseline sales forecast is generated statistically using a bottom-up detailed demand management capability. The system is aware of the profitability of all products, thus the financial plan is validated by a granular bottom-up "sales unit" forecast. The gaps between the revenue predicted by the bottom-up forecast and top-down financial plan are identified by product, account, customer and geography.
- Using a collaborative planning process, sales and marketing strategies are developed to close any revenue gaps.
- This business plan is translated into a demand plan to provide supply chain planning a forecast to use in developing a supply plan. Sales and operations planning is used to balance supply and demand and ensure that it will achieve revenue targets on an ongoing basis.
- The business plan becomes the operating plan, and IBP monitors actual sales, regenerates forecasts based on updated sales history and identifies any significant deviation from the baseline forecast on which the revenue forecast is based. Updated projections are continuously sent to financial planning to keep management aware of the potential impact of changing market conditions and sales performance.
This process leverages the tremendous amount of data and detail available in modern corporate systems to build financial plans and monitor them based on current reality. Using these tools, CEOs and CFOs can gain increased predictability of their financial forecasts, and better control over the fate of their firms.
What does the future hold for IBP? After finance has been integrated into operations, allowing much better understanding and control of the revenue and cost implications of operational planning, leading companies will add additional tools to refine planning and aid in control. For example, to better shape demand and achieve more predictable revenue, companies should incorporate the impact of new product introductions on the business plan. New products require cash to ramp up production, inventory and marketing, while their revenue impact is delayed. Similarly, other sales and marketing systems should be integrated with IBP to better align promotions and demand generation activities to align to specific financial and operating goals.
The ultimate integrated business planning process will finally take advantage of the different components of the enterprise software ecosystem and wield them into a process providing enough financial visibility to identify future problems and the operational tools to allow the firm to respond.
About the Author: Paul Homchick is senior director of marketing for Oracle's Value Chain Planning products. He has 30 years of experience in supply chain management systems. In his current role, he designs and implements marketing initiatives for Oracle's suite of advanced planning applications. More information at www.oracle.com.