Improving the reliability of forecasting

THE realities of globalisation 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.

THE realities of globalisa tion have turned today’s business environment volatile with unstable demand and extended supply chains, while at the same time, regulato ry mandates such as Sarbanes- Oxley demand improvements in the accuracy and predictability of corporate earnings forecasts.

Over the last thirty years com panies have invested great sums of money in enterprise systems chasing a vision of unified data, goals, and execution.

One such process example is the development of Sales and Operations Planning (S&OP), which has helped organisations insure operations are synchro nised and proceeding smoothly.

However, 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 pre dictability and accuracy in their strategic and financial forecasting.

This experience is driving a move to the next level of corpo rate planning: Integrated Business Planning (IBP), which is sometimes referred to as Profitable Business Planning.

IBP bridges the gaps in corpo rate planning processes by inte grating strategic planning, as well as financial budgeting and forecasting systems with opera tions planning from the S&OP processes. This marriage of plan ning processes insures that rev enue goals and budgets devel oped by Finance are validated against a detailed, bottom-up operating plan, and that the operating plan is reconciled against financial goals.

IBP also addresses one the CFO’s big concerns — the reliabil ity 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 IBP starts with the annual planning process assuring that financial goals for the coming year are reasonable and achiev able, moves to a continuous mon itoring of progress toward com pany goals throughout the year.

When linked to a demand man agement system with good pre dictive capabilities producing very granular and accurate short and long-term forecasts, the IBP will identify potential revenue short falls 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 updat ed to respond to demand or sup ply 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 IBP process

The IBP 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, customer, etc.

Using a collaborative planning process, sales and marketing strategies are developed to close any revenue gaps.

This business plan is translat ed 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 and regenerates forecasts based on updated sales history and identifies any signifi cant deviation from the baseline forecast on which the revenue forecast is based.

Updated projections are con tinuously sent to financial plan ning 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 corpo rate systems to build financial plans and monitor them based on current reality.

Using these tools, CEOs and CIOs can gain increased pre dictability of thei financial fore casts, and better control over the fate of their firms.

What does the future hold for IBP? After finance has been inte grated into operations, allowing much better understanding and control of the revenue and cost implications of operational plan ning, leading companies will add additional tools to refine plan ning and aid in control.

For example, to better shape demand and achieve more pre dictable 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 rev enue impact is delayed.

Similarly, other sales and mar keting systems should be inte grated with IBP to better align promotions and demand genera tion activities so these can align to specific financial and operating goals.

The ultimate IBP 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.

Scott Dawes is vice president, Applications Business Unit, with Oracle Australia & NZ.