FP&A Business Partnering

by Antony Parker,  AECOM

Introduction

One important skill finance professionals are never taught during their formal education is the power of personal engagement with operations and using these relationships to deliver bottom line value. There is too much focus on models, processes, procedures and systems without regard to the fact that all these have to be developed, operated and interpreted by people.

I never cease to be amazed by the number of job ads that contain the title “Business Partner” without the candidate or employer knowing what the term means or understanding the behaviors and competencies  associated with effective business partnering. Many organizations also fail to understand the powerful linkage between partnering and organization performance.  They simply see business partnering as an attempt to convince themselves that by  following latest trends the organization will achieve success.

What is Business Partnering?

Getting beyond the clichés , Finance business partnering can be broadly defined as  “the alignment of the finance function with business operations in order to acquire business knowledge and influence decision making”. It recognizes that the true value of a finance professional has shifted away from the “what happened in the business” to “what should happen” and “how to execute change”.

In its most pure form, the finance business partner will have a dual reporting relationship, directly in to the finance function and indirectly to the business .  In a more general sense business partnering is about real-time information gathering and decision-making that crosses formal organizational structures.

A typical partnering function has two high level objectives:

  1. Providing commercial finance support to the activities of the business  -  this aspect calls on predominately “operational  disciplines”  of a finance professional such as forecasting, analysis and modeling.
  2. Challenging the status quo of the business with an emphasis on shaping the future strategic direction. In particular challenging those charged with decision-making within the business.

The latter objective emphasizes the personal qualities required of the finance professional.  This includes the power to influence ,  their gravitas and command amongst members of the business,  and  the ability to carefully manage multiple stakeholders.

How to be a great  Business Partner

There are a number of aspects to being a great business partner.  From my experience they include the following:

  1. Sell the benefits to yourself first. If you believe in them, then others will too.
  2. Identify key people drivers. Every business has a core group of people who are a key source of business knowledge or are at the heart of business decision-making. If you are new to an organization and can’t readily identify them, seek the counsel of a long term employee who does.
  3. Build acceptance for partnering within business operations. If the business and their leader understand your intentions then they are more likely to grant you a seat at their table.
  4. Form well developed relationships with the business and nurture them– partnering is all about people and if the relationships are there, then insight and influence will follow.
  5. Focus on one-to-ones with the business. A group can be an intimidating environment for people to make decisions or to be challenged by someone from outside the group. One-to-ones allow relationships to develop and insight to flow.
  6. Don’t be afraid to be challenged back from the business. It is all about getting the right outcomes, and often the business  will know best.
  7. Be Future Focused. Over interpreting the past adds little value.  Your role is to help the business move to a perfect future rather than dwell on an imperfect past
  8. Don’t allow yourself to go native – you are finance professional after all. Getting close to the business does not mean you should allow your judgment to be clouded or influenced in the wrong way.
  9. Don’t be their administration clerk. Partnering is about providing high value insight and challenge to the business. The moment it becomes just about updating bespoke spreadsheets kept by the business indicates that something has gone wrong and the reason for the partnership needs to be overhauled.


Business Partnering and the link to Corporate Performance

Business partnering is not an end in itself, but a means to driving improved financial performance. The main benefits of a well designed and executed business partnering function include:

More accurate and timely decision-making:

  • The finance professional is better able to identify business performance defects at an earlier stage.
  • Alternative solutions from those at the “coal face” of the business are easier to discover
  • Agreeing and implementing corrective action can occur more promptly

Breaking down the line management silos of a business that often cause dysfunctional decision-making and sub optimal financial performance:

  • A culture of trust and working together is established  that maximizes information flows
  • It is easier to influence the business where rich partnering relationships are in place

Business Partnering in Practice

A few years ago, I joined an organization that had a globalized client base, but was local in its approach to business finance /engagement.  It could be described as being “old school” where the business produced a profit & loss, and made all the decisions.

Timesheets were regularly submitted late; the quality of business analysis poor, but most of all the interaction between the finance department and the business was virtually non existent. As one business leader remarked to me on my first day, finance was the “dark side” of the company.

The first observation about this silo structure was the profound and obvious impact these behaviors were having on business performance.

In order to change things, I formalized a business partnering program that involved:

  1. Obtaining business backing for the need for business partnering. This was done through a series of one-to-one presentations that highlighted the benefits of aligned decision-making.
  2. Creating decision useful analysis tools including a data warehouse and sales pipeline that aggregated data from disparate systems in the organization. These tools created future oriented resource planning that drove profitability improvement.
  3. Weekly partnering meetings, that shifted the focus away from month-end to discussing future sales pipelines and supporting resource plans.
  4. Hosting regular feedback sessions where the business and finance could honestly appraise the relationship

These factors forced the business to clean up their data quality issues and drive accountability in updating systems in real-time. The weekly meetings shifted the focus to the future and drove reciprocal accountability between business and finance. The “them and us”  had become “we”, which is what business partnering is all about.

Best practices in Rolling Forecasts

By Elena Kiristova, CFO Russia and CIS at Groupon

Everyone wants a crystal ball to be able to peer into the future. For businesses, that desire becomes a necessity because having a vision of the future allows for better and more strategic decision-making in the present.

A rolling forecast simply means that each quarter or month, a company projects four to six quarters or twelve to eighteen months ahead.

This allows executives and key decision makers to see both a financial and operational vision of the future. It also helps them assess next steps in their execution of their plan, understand critical pivot points in the plan and better judge the impact the economy may have on their plan.

I have seen rolling forecasts replace annual planning cycles with a continual planning process that results in more regular business reviews that look to the future. These reviews enable managers to understand problems, challenges and trends sooner and improve their proactive approach to those problems, challenges and trends.

You need a system and Excel is not a system (it’s a personal productivity tool). In the next nine best practices there will be an outline of functionality and practices that will outstrip the capability of Excel spreadsheets. The challenge I have seen arises when companies start rolling forecasts in Excel and then can’t keep them up to date because it isn’t just a single forecast. Once a baseline forecast is created, additional analysis/versions will be required to:

  • Understand the impact of major and minor alterations to the plan
  • Run the plan against different drivers
  • Copy the plan as a baseline for other plans
  • Perform variance and sensitivity analysis

To get the most out of rolling forecasts you need a system that can provide the necessary functionality to accommodate your budget, forecasting, planning, strategic management and measurement needs. Excel will be too labor intensive, prone to error, and too difficult to provide the reporting.

Understand your objectives of creating a rolling forecast. This will drive all of the other best practices related to rolling forecasts. While the overall objective of planning is to a) create a financial view of the vision for the future and to know the decisions you need to make and b) understand the financial impact of those decisions before you need to make them, your objectives and focus for the rolling forecast will dictate the areas of the plan that need more detail.

As an example:

  • If cash is tight you will want to focus on the timing of events around cash i.e. payables and receivables policies, cash borrowings, line of credit.
  • If your strategic plan calls for acquisitions you may consider building the plan with a high-level summary input of drivers that help plan for acquisitions.
  • If you want to better manage finished goods inventory you may focus more on customer/product forecasts and inventory management.

The challenge is, there isn’t one overriding holistic model format that allows you to account for all of these in a first pass rolling forecast implementation.

Identify the rolling forecast duration. The challenge with rolling forecast duration is it sounds easy until you put pen to paper and begin to implement it. There are a number of questions:

  • Will you re-forecast every month or every quarter? (many companies re-forecast monthly)
  • Will you add a new month to every forecast or just add a new quarter at quarter end? (companies either add new periods quarterly or start planning for a two-year time frame)
  • How long should the rolling forecast be – 12 months, 15 months, 18 months – or should you start by forecasting out two years and at the end of the first year tack on another year?
  • How will the mechanics work of rolling in actual?

As a starting point, make sure your forecasting time frames are consistent with your business cycle and business needs. If sales 15 months from now are dependent on capital expenditures today, it is important to create rolling forecasts out past 15 months. It is also important to have a minimum of quarterly bias to the rolling forecast.

That is, don’t tack on an additional month to a rolling forecast at the end of every month, wait until quarter end and then add a new quarter, otherwise each month you are making preparers think about a new forecast period. I saw the companies that try the approach of monthly re-forecast where each month, one month of actual falls off and another month adds to the back end and there was considerable pushback by the forecast preparers.

The more accuracy is applied to the current year and close in months, it gives management on “how what we change this year will affect next year”.

The second scenario is adding an additional quarter at the end of each quarter and the plan may have 15 – 18 months rolling forecast data.  This has the benefit of potentially better precision because the later months aren’t as far out so more attention can be given to them and as quarters are added on it requires the planners to apply more rigor and accuracy to the plan.

Identify the rolling forecast comparison periods. While this sounds relatively straightforward, it gets tricky when you consider the need for comparison columns in reporting. It is tricky because you need to compare to multiple periods/combinations of actual and forecast. With annual plans, we compare the combination current year actual for closed periods and forecast for remaining periods to last year actual. We think in terms of annual sales and annualized expenses. With rolling forecasts we need to also roll in the actual and shift the comparison periods. We must be able to not only provide annual comparisons, (i.e. How will this year compare to last year?, Where will we end up for this year?) but we also need to provide how this 12/15/18 month rolling plan compares to the 12/15/18 actual results. This requires access to roll the forecast periods but also roll the comparison periods, for not just actual, but also for prior year actual.

Understand/analyze the dynamics of revenue and expense in your business and their related drivers. Rolling forecasts won’t work if you create them from a bottom-up forecast every quarter – they need to be driver based. This provides flexibility in the planning process and agility when you re-plan or create alternate plans. It also helps managers focus on what is really important. Over time, some of the drivers will be replaced if they are found as an inconsistent predictor of results and the stronger drivers will evolve to KPIs and used for goal setting. In addition, over time forecasts will also start to use consistent models and model drivers.

As an example, sales units should drive production volumes. Price increases could drive (or be driven by) material and labor cost increases.

To help understand what drives your business you can ask these questions:

  • How does this line item affect our bottom line?
  • Will $1 (pick an appropriate unit of measure – thousands, millions, billions) in sales affect this account?
  • How does this number change our bottom line?

To be successful doing rolling forecasts it is important to use drivers to eliminate detail while creating a realistic expectation about the future.

Plan capital and strategic projects separately from the rolling forecast.

Capital and strategic projects should be layered separately into the plan.

These projects have two unique characteristics that require:

  • That they are time independent of a typical rolling forecast. Projects can last months to years and treating them with the same duration as a forecast doesn’t provide the complete story around the projects.
  • That they typically have a lot of dependencies which means project expenditures can be moved out or in a plan for a variety of reasons.

Examples:

- Sales units drive production volumes

- Price increases could drive (or be driven by) material and labor cost increases

Projects should be treated as separate entity/profit centers and have the ability to be the move in and out of rolling forecasts. In addition, they should have the ability to move time frames and adjust for changes in project scope.

Start with a small select group of key department/operations managers, plan on increasing the scope over time and plan on continual improvement over time.

While conventional wisdom is to involve as many participants as possible, companies have found it easier to start with a small group that cuts across the major departments and gradually involve more executives, lines of business managers and operational managers as processes/methods are refined. Let the small group get some practice with the process. It will help flush out the process and the more practice they have at preparing forecasts, the better they will become and the more mentoring they can provide as you add additional participants. Typically there is a risk (including career risk) if you roll something out that isn’t totally baked or based on theory, which could result in confusion, especially if you are doing it with a large group within the company.

As you expand the scope of the plan, and the more people share in the plan, the closer to reality the plan will be and the better the execution.

In addition, you should plan for and build in a process of continual improvement in the process. Managers should learn from their forecast accuracy record by carrying out post-mortems on the forecast. The objective is not to punish the guilty but to better understand how to do better, what changed, what were we surprised about, and what we should do differently to turn out better forecasts. To improve forecast, it is important to understand the cause for variability and learn to reduce them through post-mortems.

Consider the rolling forecast as your baseline plan.

Once you have the completed rolling forecast for the period/month, use it as your baseline plan. From this plan Finance can massage drivers, adjust values, and analyze alternate scenarios, black swan events and potential significant events, to create a picture of alternate futures and be prepared to make decisions if situations arise.

This does require the flexibility in the tool you are using to “mash up” scenarios and compare scenarios from different sources.

Tie your rolling forecast to your strategic plan.

Rolling forecasts, if well-prepared, form the backbone of a new and much more useful information system that connects all the pieces of the organization and gives senior management a continuous picture of both the current position and the short-term outlook.

Analyse/understand how external conditions impact your performance.

Business does not operate in a vacuum. Plan on qualifying the key external drivers of your business and do not confuse rolling forecasts with targets you receive your bonus on. Regarding targets and profitability, is it better to hit your target or gain targeted market share? Leading organizations are placing forecasting at the center of the management process. It becomes the essential tool for business managers to support their decision making, not just another management chore that needs to be done and they are basing targets not on fixed revenue numbers but rather percentages based on external market indicators.

Adaptive organizations focus less on annual budget targets or long-term views/targets, generated from within the company based on incremental sales and income year over year. Instead, they focus more on rolling views and goals based on market conditions, like achieving market share or achieving cost efficiencies over the competition by benchmarking against competitors or similar public companies.

Be prepared.

As you consider implementing rolling forecasts, remember the purpose is to provide a vision for the future and support better decisions. If you try to motivate behavior based on this forecast, the results and plans get skewed and the usefulness of the solution is compromised. Forecasts should not be used by executive management as a tool for questioning or reassessing performance targets. This means forecasts and targets must be independent if you want to obtain both relevant action plans and reliable forecasts that allow risks and opportunities to be identified and corrective action taken in the best interest of the company (which may be in conflict with the target). If you do merge the two, the term “sandbagging” comes to mind.

Conclusion

Many businesses have yet to discover the full benefits of evolving their planning process to include complete and accurate rolling forecasts. With so many external factors that affect the bottom line for these businesses, including the volatility of the economy, creating rolling forecasts is a sound way to ensure strategic decisions are made. Businesses need an accurate picture of a future in order to chart a course towards it.

Why Artificial Intelligence is the Anti-Strategy for FP&A

By Michael J. Huthwaite, Founder and CEO of FinanceSeer LLC 

artificial intelligenceArtificial Intelligence (AI) is everywhere these days. At the time of this post, it is perhaps one of the hottest topics in the entire Tech sector, with venture capital lining up to invest heavily in anything that even sounds like an Artificial Intelligence play. Quite simply, the potential application for AI is so far-reaching that it’s almost difficult to find industries where AI won’t have a significant impact. As a result, it’s clear that AI will be around for a long time.

Despite the recent explosion in Artificial Intelligence it is important to note that this concept is not new.  In fact, AI has been around for quite a longtime, but it’s taking off now due to the proliferation of several key technical factors which include. 

  1. Cloud Computing/PaaS (access to faster computing capabilities)
  2. Big Data (ability to store and comprehend large sets of data)
  3. IoT/Search/Mobile/etc. (ability to collect data at the Source)

In order to get a better understanding for AI, it’s important to realize that although access to faster computers and Big Data technologies was a challenge in the past, it’s widely accessible to most companies today.  As a result, the real foothold into meaningful AI comes down to data collection.  This is something that companies like Google have been doing for years (via Search).

Imagine what unique data a company such as Whirlpool could collect if they know what time of the day you open the refrigerator, what sections of the refrigerator were accessed and how often items were replaced.  This is information that no one else can collect.  Collecting this type of information is what will fuel AI for years to come. 

AI as a Strategy?

Artificial Intelligence is going to have a big impact on FP&A.  But there is one area that I am very concerned about and that is the perception that Artificial Intelligence will have with regards to strategy. 

I’m worried that companies will sit back and begin to rely solely on AI to make short-term automated efficiency choices rather than focusing on making strategic decisions that require upfront investments in order to break down barriers or boundaries so that real progress can be made. 

Over the past 15 years, we've seen a shift of focus from long-term value creation to short-term goals due to advancements in technology and that’s not even largely attributed to AI.  Imagine what lies ahead? 

Of course, I’m not against the benefits of AI, but they largely relate to operational efficiency and this is by definition not a strategy. 

Why AI is an anti-strategy

Current State Algorithms vs Future State Algorithms

Historically, the world has been driven based on static algorithms such as E=MC2, A2+B2 = C2, π=C/d, etc.  At times, these formulas may have required us to operate in a vacuum, but they have undoubtedly served us well.  
Now we are entering the era of Artificial Intelligence/Machine Learning where the “current-state” algorithms that drive the world are constantly evolving enabling us to take advantage of real-world (vacuum-less) issues that constantly adapt based on environmental and social factors.

This new power will undoubtedly create an enormous amount of efficiency, but I don’t believe it directly impacts strategy which is more focused on identifying optimal “future state” algorithms.  

In Financial terms, future state algorithms might mean evaluating various investment/acquisition targets that would fundamentally change the business model in the future.  This is difficult for AI to identify because the AI process relies on current state algorithms.  Sure, AI could play a role in helping guide strategic decision making, but I believe strategy will always remain a largely a human driven exercise.

Strategy is often about relying on less data

Artificial Intelligence, for the most part, relies on large volumes of data to make accurate inferences.  This data is often transactional data and therefore is information that is immediately relevant.    This data can be particularly helpful in making short-term tactical decisions that often focus on efficiency, but it tends to be less suited for Strategic Planning.  

As we start to evaluate longer term time horizons we tend to look at data at more aggregate levels and infer either some sort of trend or simply establish a high-level target.  These trends and targets can be discussed or debated, but the focus is no longer in the realm of big data. 

CEOs, CFOs and other executives may want to leverage AI in their analysis, but in the end, they often make their strategic decisions based on the realistic ability to influence the future based on the understanding of a handful of key assumptions and not on reams of transactional data. 

Competition could result in a fight to the bottom

I find it interesting that the companies that seem to rely on AI the most (Amazon, Google and Apple, for example) all struggle to remain six months ahead of each other in ultra-competitive markets.  Take the Mobile phone market for example where each new release seems to be focused on trying to one-up each other. 

Is this really creating strategic value if your competitive advantage is in jeopardy every few months?

By relying on AI as a primary answer to competition, companies stand a real chance of shortening the life cycle of their products.  This race to the bottom can be avoided if companies continue to focus on maximizing strategy rather than solely optimizing efficiency in competitive markets.

Conclusion

Artificial Intelligence is going to be a highly impactful technology in the coming years.  Yet, like most forms of automation, the major benefits are going to be efficiency related. 

The strategy is a function best suited for the human mind. Of course, technology can play a role, but the only way technology can replace human thinking is if we as humans choose to step aside… and I, for one, am betting on the humans. 

 

 

The article was first published in prevero Blog

How You Can Implement FP&A Business Partnering In Your FP&A Function

By Anders Liu-Lindberg, Head of Global Finance PMO at Maersk Transport & Logistics 

business partneringIn my last blog, we discussed what FP&A Business Partnering is and what you need to focus on to be successful. Now we’ll turn to how to implement the concept in your finance function and more specifically with your FP&A teams. Before we examine some of the implementation options you have it’s important to state that you cannot just send your FP&A team home on a Friday and have them equipped with a new business card on the following Monday with “Business Partner” added to their title. Many finance functions have tried that in the past and none of them — I repeat none of them — have been successful. Being a business partner requires a specific skillset that needs to be added on top of what the FP&A professional is already able to do. Furthermore, specific conditions should be in place to increase the chance of success.

Two main options for implementation

Depending on the current state of your FP&A function you have some choices to make before you start implementing Business Partnering. To simplify, we’ll look at two stages.

  1. Your FP&A function is basic without state of the art system and is frequently challenged on whether the numbers and analyses it delivers are correct or not.
  2. Your FP&A function has already seen quite a bit of transformation and already has a cloud-based BI platform and advanced financial models to predict the future. It’s well-known for its financial savviness but doesn’t get out of the office much except when summoned to meetings.

If you’re in stage #1 you’ll find that trying to implement Business Partnering will be an uphill battle. As a business partner trust is your main currency yet if you keep showing up with wrong numbers in dated Excel graphs no one will trust you. Instead, it’s recommended that you look to transform some of the more basic processes and invest in new systems to bring you up-to-date. If you still want to go ahead and implement Business Partnering you need to be very clear when setting expectations with your business stakeholders and accept that your business partners will do a fair bit of reporting, to begin with while you upgrade the other areas of your FP&A function. In stage #2 your stakeholders have plenty of trust in your FP&A team yet they’re not used to being engaged with your team members on their decision-making. Rather they’re used to just receiving their report and making up their own mind. To change that you need to formulate a value proposition to help them create more value and then positively surprise them with your insights. You’ll likely also need to train your financial analysts and FP&A managers in partnering skills and plan for how they can further build their business knowledge.

A role or a mindset?

Another important choice you need to make is whether you will create specific roles titled “FP&A Business Partners” or it’s simply a mindset you’re implementing. We’ll explore the mindset in a later blog post but if you go for creating a new role you also need to be specific about how the role of FP&A Business Partner is different from that of an FP&A manager or a financial analyst. The main difference is that where your old roles deal with reporting and analysis, a business partner role uses the analysis to deliver insights to business stakeholders to influence their decisions and create an impact. In the case of creating a role you also need to be mindful of what people, you put in the roles. I’ve seen it countless times that new roles were created but they got filled with the same people with no real training provided. Don’t expect something different to happen just because it has a new name. Here’s a quick step by step guide to select and develop your business partner team.

  • Select the most important attributes of the business partner role like problem-solving, communication, etc.
  • Carefully evaluate your people based on the attributes you’ve selected.
  • Categorize them into three buckets: fit for purpose, maybe, and not fit for purpose
  • Create an action plan for the maybes and find other roles or let go of the not fit for purposes
  • Hire new people to fill the holes based on your selected attributes
  • Develop or find externally suitable training to accelerate the performance of your new team

In conclusion, you need to analyze the current state of your FP&A function and whether it falls into state #1 or #2 and if state #2 then whether it’s a specific role you want to create or simply the mindset of a business partner. If you create a specific role, then follow the step by step guide to select the right team.

 

The article was first published in prevero Blog

Integration of Partial Plans

Martin Winkler, Manager at Apliqo

Martin Winkler has many years’ experience in finance and controlling and has already optimized and accompanied many reporting and planning processes for different companies in the course of his career. In his present position as head of business development with Cubewise, he advises companies on the preparation of business management concepts and technical implementation of integrated planning solutions.

LinkedIn profile: www.linkedin.com/in/martin-winkler-3a1701b1/

planningThe corporate planning process is a controversial subject on which opinions differ widely. Some see a well-structured planning process as an opportunity to gain a competitive edge over rivals. Others regard it as an outright waste of time.

Our experience has shown that an effectively implemented planning process brings companies a clear added value in many respects. Enterprises are helped to achieve their set targets or to take corrective action if unforeseen changes occur in the background conditions. True to the mottoSome people plan so as not to fail. Others fail, because they do not plan”.

The Challenge Confronting Businesses

It is an indisputable fact that a majority of enterprises do plan, but have to contend with all kinds of challenges. If a company cannot find the right answers to these challenges, there is a risk that planning will not be taken seriously; this will have a negative impact on the business.

One essential challenge is the integration of partial plans into the overall corporate planning. A self-contained planning model (profit and loss, balance sheet, cash flow and partial operational plans) leads to a substantial improvement of profitability, balance sheet structure, net current assets and cash flow. The resources released in this way can, for instance, be used for product development or for marketing activities.

Many companies fail to implement fully integrated overall and result planning (profit and loss, balance sheet and cash flow) while many others find it hard to integrate their partial operational plans into the overall/result planning.

The reasons for the failure are very complex and would provide enough content for an own blog, so here we introduce you to the essential building blocks of an integrated planning solution and will take a closer look at the benefits of driver-based planning during this blog.

So that companies can effectively implement an integrated planning solution and thus benefit from the resulting competitive advantages, the following points should be noted.

 

Arears

Description

Planning Responsibility

Management must define the plan responsible employees, and they must have business and technical know-how

Planning Concept

Development of professional and business concept

Planning Areas

Definition Planning Areas with the distinction between overall and result plans (income statement, balance sheet and cash flow) and partial plans (sales, employees, marketing, travel, consulting)

Planning Dimensions

Business Dimensions (Drivers) for Reporting and Planning

Planning Drivers and Reference Values

Definition of value drivers and reference values

Planning Integration

Automatic linking of the overall and result plans (income statement, balance sheet and cash flow) to the partial plans (sales, employees, marketing, travel, consulting)

Planning Simulation

 By linking the plans, simulation and scenario analyzes can be performed directly

Planning Tool – Technical Solution

The technical solution must be able to automatically carry out the requirements described above without interrupting the calculation process

 

 

The following graphic illustrates the relationship between the overall and result planning (P & L, balance sheet and cash flow) and the partial plans.

Success factor Value Drivers and Reference Values:

One important contributory factor to better acceptance and greater accuracy of the planning process lies in the definition of value drivers and the use of reference values.

The aim is to significantly accelerate the planning process by means of a driver-based logic and reduce complexity, thus leaving more time for analysis, simulation and scenario modeling. The input of planning values per company, cost center, profit and loss account and month is extremely time-consuming and can be greatly simplified by using value drivers in planning.

The basic idea behind this concept enables the persons responsible for planning to choose the relevant value driver for each account, planning element and business dimension, to enter a value for the planning element and then move on directly to an analysis based on the predefined calculation logic (final planning value and monthly distribution).

The planning model within a company must have the flexibility to leverage existing drivers and easily integrate additional enterprise-specific drivers without abandoning the concept of integrated planning.

Integration of all partial plans with the overall and result planning (profit and loss, balance sheet, cash flow) is essential to enable the management to perform simulations and scenario analyses and, by the same token, determine the impact on important profit and loss, balance sheet and cash flow items. The following examples show which questions, among others, may receive a direct answer.

  • What effect do adjustments of sales and purchasing prices have on volumes, profitability and net current assets?
  • Are the planned marketing activities consistent with the sales and margin plan for different product groups?
  • What impact will there be on the profit and loss, balance sheet and cash flow items if I move X per cent of my staff from site A to site B?
  • The implementation of a strategically important project results in a great deal of travel activity. What is the best and most cost-effective site for various discussions?
  • The uncertain currency situation may have an enormous impact on our business. What effect will +/- percentage variations of the key currency pairs have on our balance sheet, profit and loss and cash flow positions and what form could a possible currency hedging strategy (FX hedging) take?

 

Value Drivers for Profit & Loss Statement

The profit and loss view of the business is an important component. Companies need the opportunity to define their relevant business dimensions with specific reference to customers. These are based on standardized business dimensions (company, version and currency) that are important for meaningful reporting and planning. In addition, companies have the opportunity to define generic business dimensions that give them complete flexibility for reporting and planning. These dimensions can, for example, be fed with information from the cost centers, profit centers, business units, divisions or regions and are then available for various purposes. The table below shows an example of possible business dimensions.

Category

Sales & costs

Staff

Marketing

Travel costs

Profit and loss, balance sheet, cash flow

Basic dimensions

Version

Version

Version

Version

Version

Currency

Currency

Currency

Currency

Currency

Time

Time

Time

Time

Time

Company

Company

Company

Company

Company

Specific dimensions

Customer

Role

Campaigns

Travel

Business unit

Product

Post / person

Activities

Travel routes

Company

Measurement parameters

Quantity, price, sales, M. costs

Salary, social, tax, bonus, adjustments

Various marketing costs

Various travel costs

Account plan

 

The use of reference values is an important basis for the implementation of driver-based planning. Pre-configured drivers and calculation models can refer back to existing reference values and greatly simplify planning. The definition of reference values is individually adjustable and may contain e.g. information about the previous year, the current annual plan, the latest results for the year or the latest forecast for the year.

 

Reference values

Planning driver

Distribution driver

Previous year

Previous year plus X, X%

Uniform

Current year budget

Budget plus X, X%

Last year

Current year latest forecast

Forecast plus X, X%

Current year actual / current year forecast

Monthly average (last x months)

% of sales or % of any other sales or cost drivers

Month x per quarter

 

Transfer values from partial plans

Manual monthly input

 

Business model-specific drivers with customer-specific calculation logic

 

 

Value Drivers for Partial Plans

It is also possible to integrate company-specific partial plans (important profit and loss and balance sheet items for businesses), which are very often already available in uncoordinated Excel data files. If a business manages to integrate all these in a special application, enormous progress will be made with respect to cause and effect relationships as well as scenario and simulation analyses.

The value drivers for partial plans differ widely by company and industry. It is important for each company to first understand the key drivers of their business and make them transparency in an analytical layer. This information allows companies to define drivers for the partial plans of their business. Attached you will find some examples of potential drivers:

Value Drivers for Balance Sheet

For balance sheet planning, companies should again adopt the concept of driver-based planning and the staff members responsible for planning can select pre-configured drivers for each balance sheet item. Based on the existing calculation logic, specific drivers or algorithms can be added at any time.

There are likewise individual planning drivers for all other relevant balance sheet items, enabling a company to model key balance sheet items easily and in a straightforward manner. This provides both a valuable insight into the future economic viability of the business and the opportunity to change parameters at any time and analyze the direct impact on the balance sheet items.

The table below shows an overview of the existing reference values and drivers for the net current asset items and illustrates the resulting opportunities for balance sheet modeling

Reference values

AR (receivables)

INV (inventory)

AP (liabilities)

Previous year

Accounts Receivable ACT LY

Inventory Value ACT LY

Accounts Payable Value ACT LY

Latest annual budget

Days Sales Outstanding ACT

Days In Inventory ACT

Days Payable Outstanding ACT

Latest annual forecast

Days Sales Outstanding ACT LY

Days In Inventory ACT LY

Days Payable Outstanding ACT LY

Monthly average (last x months)

Days Sales Outstanding Input Year Even

Days In Inventory Input Yr Even

Days Payable Outstanding Input Yr Even

 

Accounts Receivable % Revenue

Days In Inventory % Revenue

Accounts Payable % Revenue

 

 

Days In Inventory % COGS

Accounts Payable % COGS

 

Entry per Month

Entry per Month

Entry per Month

 

Cash Flow Statement — Closing the Loop

When dealing with the cash flow statement, many users have difficulty tracing the relevant items. However, with a complete profit and loss account and a constantly updated monthly balance sheet movement per item, the preparation of the cash flow becomes a simple mapping exercise. Once defined, rolling cash flow planning brings a huge competitive advantage for companies. This enables important information to be gained and corrective action taken if developments are moving in the wrong direction (e.g. excess net current assets). This in turn enables companies to optimize all kinds of planning items and so make more liquid resources available.

The following overview illustrates a possible presentation of the mapping of profit and loss and balance sheet items for the cash flow statement.

Conclusion

Our experience has shown that few businesses have described a comprehensive overall and result planning (profit and loss, balance sheet, cash flow) in a central application. Even fewer companies integrate important partial plans into the same application. However, this means that substantial potential is lost; that loss could be avoided by coordinating resources, cooperation between the different business units and an understanding of the dependencies between all the partial plans. Moreover, corporate strategy can be better implemented, monitored and optimized by integrated planning.

Companies must create the conditions needed to deploy integrated planning. The following factors are particularly relevant here:

  • employees responsible for planning
  • preparation of a business concept
  • technical implementation of the business concept
  • using best practice methods such as driver-based planning

The implementation of a concept of this kind enables companies to achieve a competitive edge over their rivals which goes further than a reduction of administrative planning expenditure and creation of more time for analysis. From the business management angle, the added value of integrated planning lies in the opportunity to make important cause and effect relationships transparent so enabling corrective action to be taken and financial items optimized. The cash resources gained in this way can be used, for instance, to achieve the strategic goal (product development, marketing investment, expansion of personnel, reduction of debts).

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