Integrated Business Planning - Finance
This is blog 3 in a series of 9 on the topic Integrated Business Planning (IBP). In these blogs we will detail our IBP Framework, the importance of a proper IBP implementation and the benefits it can bring organisations. Topic of this blog: Finance.
In the previous blog we explained the starting point of a good IBP journey: Strategy. In this blog we will explain the next step in this journey, Finance. This is the translation of the strategy into financial plans for the coming years, like a forecasted Profit & Loss (P&L), Balance Sheet and Cashflow Overview. And the creation of the financial KPI’s to keep track of progress.
As mentioned in my previous blog, most companies that have a strategy do create a financial projection for the coming years. This means that the link Strategy – Finance does exist. The financial projections reflect the strategic direction of the company and provides a monthly checkpoint to see if the company is on track.
Let’s take an example: our company, called Dragon, produces smart phones and has some fierce competition. Each year new models are released with new functionality and upgraded specifications to make sure we have a constant stream of buyers. We’re number 3 in the market based on the generated revenue. C-level of Dragon cerated a new strategy to become the worldwide market leader measured in revenue compared to its direct competitors and be perceived as teh number one company based on quality of the build of the smart phones and the ease of operation by end users. How does that translate into the financial plans for the coming years?
One of the things Dragon probably will do is to step up in its marketing activities. More promotional campaigns and events will take place, so the capital spent on Marketing will increase the coming years. This directly impacts the margin. Another activity Dragon probably will perform is an increased spending in Research & Development (R&D). To win the hearts of future users of the smart phone, you want to outpace competition with new features, new functions and above all, better specifications (faster, more RAM, higher quality cameras). This will increase the investment in the R&D team, materials used for the smart phone as well as the production costs. All directly impacting the margin.
On the other hand, once the first new wave of new smart phones hit the market and it all goes according plan, sales start to pick up. Users of phones of competitors slowly start to switch to Dragon phones, generating more revenue. Also current users of older versions of Dragon’s smart phones replace their models with the latest one. The generated revenue is needed to fund the investments in R&D and Marketing for example. The switch from users using competitor smart phones to Dragon’s, starts to shift revenue (and market share) from the competition to Dragon. This is a slow process, but should be visible in the financials (revenue increases over time).
In the short term, margin will decline due to the additional investments needed to follow the strategy, but in the long term, margin should bounce back to previous levels or even increase. Finance will create monthly and quarterly overviews of the P&L, Balance sheet and other financial reports to track progress according the strategic direction. C-level and Finance will define upfront which KPI’s to monitor and estimated values for these KPI’s over time. On a regular base, projected versus actual comparisons are made to track progress. And to decide if corrective actions are needed to stay on track of the strategic plan. Finance has become the control mechanism to judge, based on crisp & clear numbers, if the actions that have been put in motion, generate the required results. And by that, Finance has become the gate keeper between strategy and operations.
In our next blog, we will dive into the third part of our IBP journey, Operations. Once the strategy has been defined, financial targets have been set, the company can start to take the actions needed to achieve the goals. Marketing, R&D, S&OP, Sales, HR, all aligned with the strategic direction, will have each specific actions, projects and investments to make to achieve Dragons strategy: become world market leader in the sales of smart phones.
Our next blog will cover the topic Operations.