“I’m going to need those TPS reports ASAP.” — Bill Lumbergh, Office Space
TPS reports are an actual “thing.” But, since the movie Office Space became a cult hit, the term has become the codeword for any meaningless or antiquated reporting exercise.
Budgeting is, of course, no TPS report. Instead, it’s the centerpiece of annual enterprise planning. CFOs serve as the principal architect of that exercise and the re-forecasting process that follows it.
Sophisticated CFOs know that it’s time to change that budgeting and forecasting paradigm fundamentally. These CFOs understand that ongoing economic uncertainty requires a process that does more than passively plan and report after the fact. As a result, some have tweaked the process (shortening forecasting cycles from quarterly, to monthly, to weekly) to ensure more accuracy in addressing lagging indicators.
However, these “tweaks” have served mainly as the real-life equivalent to the TPS cover page. In other words, they’ve been a much-discussed design change to a somewhat antiquated process that has not meaningfully changed the foundational paradigm.
The new normal for enterprises demands real changes to budgeting and planning’s foundational paradigm. It requires a process beyond lagging indicators and prepares for supply-side variances — a planning paradigm at the intersection of FP&A (financial planning and analysis) and S&OP (sales and operations planning).
FP&A vs. S&OP
While FP&A may be Finance 101, S&OP is a term that’s less broadly understood, even in sophisticated finance circles. It is a business management process that empowers leaders to understand and align the financial impact of key variables and drivers. including:
- Demand (in terms of sales revenue)
- Supply (in terms of the cost of goods sold)
- Inventory (in terms of cash flow)
FP&A and S&OP both focus on planning, but through different strategic lenses: the former focuses on revenue, capital, sales and marketing, and product, while the latter accounts for demand, inventory, production, and supply.
So the question becomes: Is there a planning exercise that assimilates the two? One that can harmonize, balance, and account for both leading and lagging indicators?
Integrated business planning (IBP) is a CFO-led process that draws inputs from sales and operational leaders. Those inputs help predict demand, determine supply needs, and balance constraints to achieve cost, revenue, and cash optimization.
The inputs to IBP help predict demand, determine supply needs, and balance constraints to achieve cost, revenue, and cash optimization.
More specifically, IBP is a planning exercise that helps CFOs translate sales forecasts into a corresponding projection of the number of units sold, identifying the most probable revenue scenario. The IBP process pulls inputs from a (usually) optimistic sales team and a (usually) conservative operations team, with the finance function serving as the (just right) input moderator, balancing the inputs to develop plans that are right for the business.
These inputs are translated into a projected need for product/services and cost of products (including resources to deliver product). But IBP goes further, leveraging inputs to determine potential constraints and solutions to mitigate those constraints (along with their projected costs). Constraint planning is a critical variable as CFOs seek a budgeting and planning exercise to help them navigate the still-occurring disruptions from COVID-19.
The Role of the CFO
IBP has found favor with progressive CFOs as their new planning and budgeting paradigm. But, it can, and should, be more than a planning type for a small pocket of finance leaders. IBP should be the default planning exercise for all CFOs. Now, more than ever, all finance leaders must track lagging indicators and understand leading indicators to effectively stay ahead of the trends, report on variances, identify the root causes of those variances, and consider contingency plans to address business disruptions.
But for IBP to be effective, the CFO must play an active, strategic role projecting instead of a passive role reporting. While the process relies on the inputs from both the sales and operations teams, it is the CFO’s job to ensure the accuracy of those projections and solve for any incompatibilities.
IBP demands that CFOs use their seat to conduct sensitivity analysis on both sides of the demand and supply equation (revenue and cost). Finance must use this analysis to understand then how the supply team is hedging against demand variability. Those learnings help the F&A team identify the business drivers and empower CFOs to develop better forecasts, with adequate provisions to address unanticipated variances in demand, supply chain, and customer expectations.
Identifying Transformation Projects
IBP can help CFOs more accurately plan and budget in uncertain times. The most respected CFOs take IBP one step further, though, using learnings from the integrated planning process to identify and proactively tackle transformation projects that drive superior financial outcomes aligned to cash, revenue, and cost strategies.
These initiatives, which vary in complexity and impact, are generally cross-functional and share in the objective of achieving strategic enterprise goals. Examples of IBP-informed, CFO-sponsored transformation projects include:
- Enhancing inventory management and customer fill rate
- Reengineering the SG&A process and optimizing the operating model
- Optimizing accounts receivable, warehouse, and distribution networks
- Automating with technology
As the post-Labor-Day annual planning process gets underway, amid a volatile economic environment, there are some CFOs who will set themselves apart from their peers. It will be those CFOs that recognize this new normal requires a new planning paradigm.
Sanjeev Parlikar and Udit Sharma are managing directors with Accordion, the private equity-focused financial consulting and technology firm.