Last week we discussed the operational planning process within an organization, and this week’s post picks up where it left off. We’ll focus on monetizing the operational plan as well as adding other financial items to create a baseline financial plan. These additional financial drivers and costs include things like facilities expense, selling and administrative expense, distribution expense, and human resource expense that are not related to the operations process. However, the bulk of the risk in accuracy resides in monetizing the operational planning areas. The remaining items at operating divisions tend to either be project oriented, or periodic expenses that are manageable to the original budget and require minimal effort to update.
Financial Planning
The diagram below highlights key components/models for a typical financial planning process.
Financial Planning Process Diagram
The boxes represent the models, drivers and assumptions used to forecast the key financial statements and supporting schedules. The items in dark green indicate that the output stems from the Sales and Operational Plan. Product drivers and Sales drivers typically represent production and sales unit volumes broken out at a level of detail needed to plan production operations (or service delivery). These inputs are monetized by the “Gross Sales,” “Direct Labor” and “COGS” models to calculate sales and cost of sales dollars as well as machine time and labor hours.
In addition, other drivers and assumptions provide inputs to calculate Selling and Administrative expense as well as account for timing differences in the business cycle that impact the balance sheet and cash flow. The result is a projected set of financial statements of the future.
For a more detailed look at the templates and models behind this process check out the white paper “Achieving superior financial flexibility through driver-based budgeting and planning”.
Driver Based Planning
Transparency and flexibility are vital to the planning process. This transparency and flexibility is achieved through driver-based plans for both operational and financial plans and the integration between the two. As mentioned above, results from the operational plans (production and sales unit volumes) drive key aspects of the financial plans. When defining driver based plans, it is important to identify the key business drivers of an operation and create the necessary business models that use these drivers to predict future results. Organizations can become more agile and more effectively plan for different economic scenarios by building flexible plans based on key business drivers. These key business drivers will also “bubble up” and help lay the framework for the key metrics in the strategic plan which I’ll discuss in an upcoming blog.
The models above fit in the overall IBP framework of the post on July 25, 2011 (click here to review) as shown in the diagram below:
Financial Planning within Integrated Business Planning
Once the financial planning iteration is complete from integrating in the most current operational plan, Finance will also need to update the plan for any changes in Strategic Expenditures (Stratex), Capital Expenditures (Capex) and key projects which will be covered in next week’s blog.
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