Gone are the days of a single annual planning cycle. Or at least – those days should be gone.
Planning processes have certainly evolved. Previously, many companies started their planning process in September (assuming a December fiscal year-end), and spent a large part of the fourth quarter on planning iterations. Once the plan was approved, there were few adjustments; however, a significant amount of time was spent on explaining plan/actual differences throughout the year.
As changes in the business environment began to accelerate, companies evolved to a rolling forecast. Instead of waiting until the end of the fiscal year to begin a new planning cycle, companies began to plan and adjust their budgets based on actual data that came in during a financial period, giving them a rolling 12-month forecast.
Today we need real-time planning to account for disruptive business models and sudden changes in demand. This requires organizations to act quickly to make changes to the plan, potentially moving funds due to changes in a business model, customer demand, or other factors.
Levels of planning
Every part of the organization, not just finance, must engage in planning:
- Finance: There are many ways to plan financial information. Of course, there are balance sheets and P&L financial planning, but also management accounting planning for cost centers, internal orders, profit centers, projects, and dimensions of profitability, including logistics information such as customers, products, and regions.
- Operations: HR plans for headcount, salary, benefits, and training costs. Sales and marketing departments estimate customer demand, plan for expenses to ensure closed deals, and evaluate product pricing. Meanwhile, manufacturing plans capacity and product mix, as well as any materials they need to procure. In the best case, sales and manufacturing planning complement each other.
- Organizational hierarchies: Especially in large organizations, business units and subsidiaries also plan, and these plans need to roll up to the corporate level. Similar to intercompany reconciliation of actuals, cross-business adjustments may need to be made.
A key challenge has always been the siloed nature of planning, both for financial planning as well as the influence of operational planning on finance. In many companies, the different types of planning are performed in a different system or spreadsheet, requiring manual consolidation. And each time there is a change, the reconciliation starts from scratch.
Enter modern finance solutions.
Instead of relying on different systems and manual processes, these solutions enable a single, consolidated view of all planning and forecasting information across all financial, operational, and organizational levels. This includes a rollup of planning information from subsidiaries into corporate planning, as well as automatically including operational plans in financial plans to measure their impact on both the financial and management controlling plans.
And since the same information is used for transactional processing – analytics as well as planning – there is no lag time, ensuring that the most up-to-date information is available at any time. Simulations, what-if analyses, and predictive capabilities allow for the modeling of all planning options.
Before and after
To see how this works, let’s take a look at the planning processes in two organizations. One company – let’s call it Mary’s Manufacturing – has many disparate planning systems, as discussed above. The other, Stephanie’s Software, has implemented a state-of-the-art finance solution. This team is not only capable of consolidating and updating planning information in real time, but can also use sophisticated dynamic planning tools to evaluate the financial impact of all strategic options available.
Consider a merger and acquisition (M&A) scenario. The finance team at Mary’s Manufacturing spends so much time in manual consolidations that they cannot possibly evaluate each M&A scenario. Instead, they must pre-select only a few options, meaning they’re not considering every scenario. On the other hand, Stephanie’s Software, using dynamic planning and predictive tools, can evaluate each and every option, even tweaking individual parameters in the model to determine the most profitable and sustainable scenario for the organization.
At Mary’s Manufacturing, the finance team spends most of their time doing manual consolidation and reconciliation of planning data. This task repeats every time a source plan changes to ensure that financial planning reflects any changes in sales, operational, and HR planning. However, with dynamic planning and forecasting capabilities, the finance team at Stephanie’s Software can add value to the organization by spending the majority of their time in analysis of all potential scenarios. The finance team thus becomes a valuable member of the executive team that can provide answers to “what if” questions immediately, even in an executive boardroom situation.
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