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Companies need to do more to incorporate financial controls into their planning process
A recent survey by the consulting company Oliver Wight Americas indicates that companies are not doing a good enough job incorporating financial controls, such as inventory valuation and disclosure, into their sales and operations planning (S&OP)/integrated business planning (IBP) process.
S&OP is the process of matching manufacturing output to the current planned levels of sales based on a single forecast. IBP is a more sophisticated version of S&OP that takes it beyond balancing supply and demand. It involves aligning company plans throughout the supply chain and should be integrated with financial plans and objectives, according to Oliver Wight.
The survey consisted of 80 responses from S&OP professionals who attended the IE Group S&OP Innovation Summit held in Boston,
Massachusetts, in September. It found that:
- 45 percent of respondents were not adequately taking financial controls into account when they created an IBP program, and
- 28 percent of respondents were using financial controls during S&OP or IBP that "completely aligned" with their companies' overall financial objectives.
This is troubling because, according to Oliver Wight, considering financial controls should be a crucial step in a company's planning process. "In many instances, the implemented S&OP or IBP process is in trouble from the start if it is not being directly tied to specific financial results," says Jim Matthews, principal for Oliver Wight. "A company's target-setting methodology for key metrics needs to be coupled with the S&OP or IBP process, allowing it to make the critical linkages between the company's growth goals and commitments to shareholders."
Financial controls are methods used by a company to ensure the integrity of its financial and accounting information, such as how it tracks financial performance and evaluates results and risks. They may include the tolerances and associated policies and procedures related to budgets, key operating ratios, and critical forward views such as revenue, gross margin, or inventory. This financial information often depends on assumptions, such as the on-time launch of a new product; continued business from a major customer; or access to an important resource, such as manufacturing or transportation capacity.
According to Matthews, a healthy IBP process will link these financial indicators back through the most important of those assumptions and dependencies and also be clear on accountability. "IBP at its core is about aligning and synchronizing the company," he says. "[It is about] aligning who does what, and synchronizing when it is done. When this process is done right, each operational function, including finance, enables informed decision making for company executives and their strategic planning for the organization at large."
When the planning process is not linked to financial indicators, however, companies risk making operational decisions—such as pushing back the launch of a new product or entering a new market—without being fully informed about the level of risk such a decision will expose them to or the possible financial repercussions, says Matthews.
Although the survey had a relatively small sample size and was conducted among a limited group, Matthews says the results are consistent with what he has seen in his consulting work. He also believes that the findings hold particular weight because the survey was conducted specifically among S&OP professionals whose companies were engaged enough in the planning process to send them to a conference.
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