Improve Reliability of Financial Forecasts with Integrated Business Planning

How to bridge gaps in corporate planning processes by integrating strategic planning and financial budgeting with operations planning

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By Paul Homchick

Over the last 30 years companies have invested great sums of money in enterprise systems chasing a vision of unified data, goals and execution. CEOs expected that installing these systems would lead to a calm and stately progression towards their revenue and earnings goals. But, though billions of dollars have been spent on large corporate data centers filled with hardware supporting data warehouses and large complex systems, there has been little progress in really improving the predictability and reliability of business plans.

The realities of globalization have turned today's business environment volatile, with unstable demand and extended supply chains, while, at the same time, regulatory mandates such as Sarbanes-Oxley demand improvements in the accuracy and predictability of corporate earnings forecasts. However, most managers, lacking the tools to discern the feasibility or ensure accuracy of their strategic and earnings planning, set very conservative goals, thus limiting the performance of their organizations.

Manufacturing resource planning (MRP) systems were originally seen as tools for improving manufacturing efficiency, allowing the examination and manipulation of material requirements and capacity to produce a manufacturing plan that would deliver products without delay and at minimum cost. Unfortunately, early MRP systems were cumbersome and failed to deliver on their promises because they regarded material balancing and capacity balancing as separate, when the problems were actually tightly intertwined. MRP installations only became really successful upon the adoption of advanced supply chain planning systems that allowed the generation of plans with simultaneous material and capacity feasibility.

The development of sales and operations planning (S&OP) was driven by a similar insight, the need for simultaneous and concerted tactical planning connecting sales, manufacturing and distribution. Managers and supply chain professionals realized that it wasn't sufficient to match supply with demand; you needed a unified plan, based on consensus, with all functions (Marketing, Sales, Product Development, Manufacturing and Logistics) executing sub-plans driving towards a commonly agreed goal.

While a good S&OP process insures that operations are synchronized and proceeding smoothly, this is of limited value to senior managers unless those operations are achieving the strategic and financial goals of the enterprise. Additionally, firms still see a lack of predictability and accuracy in their strategic and financial forecasting. This experience is driving a move to the next level of corporate planning: "integrated business planning" (IBP), which is sometimes referred to as "profitable business planning."

In most corporations, while S&OP now provides coordination between Sales, Manufacturing and Distribution, there are still disconnects and gaps between Finance, Strategy and Operations. Corporate Finance sets revenue and profit goals with minimum validation from Manufacturing that the company has the resources, material or capacity to meet these goals. On the operations side, Manufacturing is developing plans to balance demand and supply within capacity constraints, assuming that demand is a given, and seldom knows if the resulting plan will meet cost and revenue budgets that support the company's profit goals. The Sales department agrees to quotas that meet Finance's revenue goals without a complete understanding of the profitability of different product mixes or what manufacturing can deliver.

Integrated business planning bridges these gaps in corporate planning processes by integrating strategic planning, as well as financial budgeting and forecasting systems, with operations planning from the S&OP processes. This marriage of planning processes insures that revenue goals and budgets developed by Finance are validated against a detailed, bottom-up operating plan, and that the operating plan is reconciled against financial goals.

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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