Challenges

Forecast accuracy, along with margin and working capital management, represent three of the top five internally focused concerns of CFOs, according to a study conducted by Duke University and CFO Magazine in 2011. A host of other research has come to similar conclusions. These challenges remain, despite significant technology investments. Especially in organizations that are larger and more complex. The problem is that organizations are attacking cross functional issues in silos. What’s often required is a holistic approach and integrated approach to addressing the following issues:

  • Rolling Forecasts
  • Cash Flow Forecasting
  • Capital & Portfolio Planning
  • Profit Based S&OP
  • Sustainable Cost Reduction
  • Finance Transformation

High level views about these issues are provided in the pages that follow. Further information is con-tained in the perspectives section.

Recent economic conditions have elevated interest in rolling forecasts as means of coping with increasing uncertainty and volatility. Proponents believe that a faster and more forward looking process enables organizations to more effectively respond market uncertainty and volatility.

For all the advocates of rolling forecasts, there are equal numbers of skeptics. Especially in large and complex organizations that have already invested in technologies to improve how they plan and manage their business. Despite these investments, many still struggle with inaccurate forecasts and long budget processes. Before jumping on the rolling forecast bandwagon, they to understand how new capabilities and approaches that can provide substantive improvements to the ability to:

  • Increase the speed and accuracy of financial forecasting processes
  • Expose risk though financial and operational integration
  • Coordinate resource allocation across functions and entities
  • Provide a suitable replacement to traditional budgeting processes
  • Support operationally realistic scenario planning that accurately predicts profit and cash flow

Complex organizations are finding that EPM tools are not well suited to achieving the above. IBP tools, on the other hand, are well suited to address these issues.

Four out of five of the world’s largest companies are unable to accurately forecast mid-term cash flow, according to research conducted by the National Association of Corporate Treasurers. As complexity rises, most are unable to quickly and accurately quantify how cash flows are affected by changes in:

  • Volume, product mix, price and discounts, in total and by channel and customer
  • Customer mix and terms, including discounts and days in receivables
  • Vendor mix and terms, including unit costs, discounts, days in payables and inventory
  • Capacity constraints and their impact on inventory levels and sourcing strategies
  • The number and timing of new products and customers being introduced to organizations

These complexities are also the same ones that undermine the accuracy of revenue, cost of sales, cost to serve, supply chain, working capital and foreign exchange forecasts. While tools such as EPM may support cash flow forecasting in smaller organizations, they lack the level of sophistication required to cope with these complexities.

What organizations are finding is that, as complexity rises, the models required to support accurate cash flow and working capital forecasting are very similar to the ones that enable operational executives to plan and manage their supply chains. Which is why IBP is highly relevant to more effective cash flow forecasting.

Organizations have made great strides in establishing Enterprise PMOs (project management offices) and Project and Portfolio Management (PPM) capabilities to improve their ability to drive value from investments. Especially in smaller organizations and focused projects. However, these approaches are not always yielding the same results in more complex organizations where projects are larger and often span multiple functions and entities. Immature operational and financial (profit and cash flow) forecasting capabilities leave organizations unable to:

  • Correctly value projects by quantifying how they affect operational cash flows
  • Identify risks by quantifying how outlying operational scenarios affect cash flows
  • Maintain project prioritization by forecasting how changes affect project cash flows and ROI
  • Quantify project value by comparing cash flows driven by old and new process capabilities
  • Forecast how operational capacity constraints affect project execution and product introduction
  • Optimize global capital allocation by quantifying the impact of projects on enterprise cash flows

As with cash flow forecasting, complex organizations require more mature planning and forecasting models and processes to support effective PMO and PPM capabilities. Moreover, they should be an integral part of an integrated rolling forecast.

Integrated Business Planning is an idea that has its roots in Sales and Operations Planning – a process whose purpose is to optimize how resources are employed to meet customer demand. However, organizations have not always been able to achieve this optimization objective. Four factors account for this, in that traditional S&OP approaches do not:

  • Focus on profitability
  • Integrate S&OP with budgets
  • Break down functional silos
  • Engage executives at an enterprise level

As a result, the idea of Integrated Business Planning evolved to address these challenges. However, discussions about the subject are being:

  • Complicated by S&OP software vendors that claim to fully support it
  • Marginalized by a lack of clear definition about what constitutes full integration
  • Dominated by supply chain professionals, with limited input from Finance

Helping supply chain professionals address these challenges is central to the mission of the IBP Collaborative.

According to a research study conducted by the Corporate Executive Board in 2009, 90% of organizations that launch cost reduction efforts fail to maintain them for more than 3 years. Three factors account for this:

  • Lack of shared insight about business economics
  • Slow processes for redistributing resources
  • Functional silos drive suboptimal decisions

Most organizations lack these things, which is why many still rely on special cost reduction studies. Moreover, it also accounts for why across the board cuts remain a common cost reduction approach – one that almost never delivers lasting benefits.

Some have tried to compensate for these capability gaps by using activity-based costing. But most have never been able to incorporate ABC principles into planning, budgeting and forecasting processes. As such, root causes are never really addressed.

Finance Transformation is a term that has been used liberally to describe everything from EPM and shared services implementation, to faster close processes. While organizations have seen benefits from these improvements, they do not always lead to breakthrough performance improvements.

In complex organizations, such improvements are achieved when resources flow quickly between functions and entities to meet needs that optimize performance. Those that have attempted to transform finance don’t always achieve this. The evidence: long and highly political budget processes remain, fueled by the functional silos that finance supports.

What finance executives are finding is that becoming a more effective business partner requires fundamental changes to planning and forecasting processes – Ones that IBP is well equipped to support.