Numbers People in Action: Planning Process
August 24th, 2009
Copyright © 2009 Integrated Profitability TM
Another continuation of the suggestion that came in to
“…include a simple but meaningful scenario which you’d have the three Numbers People work through to posting, reporting and interpretation and planning…”
The first article set up the simple scenario, the second dealt with Accountants & Bookkeepers. And then Finance: basic, financial analysis and financial planning. This article covers a process to do that planning.
The Planning Process
Most “Plans” start with the financial numbers that have been created for and used by the regular (monthly) reporting. Of particular importance is the most current trend within those numbers (e.g., what’s going up? what’s going down?), as well as a good understanding of the underlying business drivers of those trends. Using the trends and the drivers, Finance can model what most likely will happen, assuming those trends continue. This initial set of future numbers then needs to be adjusted based on input from other stakeholders. Each of the main financial sections (e.g., revenues, expenses, assets, liabilities) may be adjusted up or down based on the other stakeholders’ views of the future from their particular areas of expertise:
● Economists: provide information about the high-level business and seasonal cycles (e.g., is the business in the up or down part of a cycle?) and various rates (e.g., interest and foreign exchange rates)
● Marketing: provides input similar to that from the economists, but more detailed in terms of targeted regions, industries, customer segments and product performance metrics (e.g., are different industries or customer segments moving in different directions? Are there any shifts in products being purchased in the market?)
● Sales: provides even more detailed insight, with the focus on what the company’s customers (both current and prospective) might do with the company’s products and services, including what future transactional volumes and realized prices might be (e.g., what is in the sales pipeline? Is the company losing customers or gaining new ones? What kind of pricing will be needed to retain current business; to close new sales?)
● Operations: working with vendor prices (the company’s cost), transactional volume forecasts from the sales function and their own operational productivity goals, the operational function (e.g., factories, processing centers) provides detailed forecasts on total expected operational expenses (e.g., are postage rates increasing? Is minimum wage going up? Based on the sales transaction volume forecasts, are any step functions going to be invoked, either in terms of personnel, equipment or IT capacity?)
Finance takes the initial set of numbers created from the historical financial books and works with (negotiates with?) other stakeholders to fine-tune the company’s future financial plan to make it as realistic as possible. The company’s financial plan is truly a joint effort.
Again, notice how “The Numbers” become so dependent upon non-financial information? And how the menagerie of Numbers People has increased?
Bill
William A. Stong
Email: william.a.stong@gmail.com
SBF&P # 41
Copyright © 2009 Integrated Profitability TM
Numbers People in Action: Finance Planning
August 20th, 2009
Copyright © 2009 Integrated Profitability TM
Another continuation of the suggestion that came in to
“…include a simple but meaningful scenario which you’d have the three Numbers People work through to posting, reporting and interpretation and planning…”
The first article set up the simple scenario, the second dealt with Accountants & Bookkeepers. And then Finance: basic and finance analysis. This article covers Finance Planning: The Basics.
In addition to reporting on the financial numbers after they are posted, Finance also develops and monitors a financial plan to cover what might happen in the future. Assuming a company has an annual plan process, the future numbers that result from such a process is the “financial plan” for the next year. If financial reports are generated monthly, the annual plan is usually a monthly one as well. Most plans also use a summarized level of general ledger accounting lines (e.g., if the general ledger has 10,000 unique accounting lines, the annual plan may only use 2,000 from a higher level in the general ledger accounting hierarchy).
After the approval of the annual plan and the beginning of a new year, actual numbers will begin to be reported. The actual results, of course, may be different than what the plan anticipated. Which may necessitate changes to the future plan to make it more accurate given what has already happen. The results of these “in-year” adjustments to the plan are frequently called “forecasts.”
Finance uses the historical (actual) information already reported to indicate what most likely will be happening in the future. However,
“No man is an island, entire of itself
every man is a piece of the continent, a part of the main…”
John Donne (1572-1631) a Jacobean poet and preacher*
To paraphrase,
“No business function is an island, entire of itself
every function is a piece of the company, a part of the main…”
Planning for a company’s future financial numbers may start with, and be coordinated by, Finance, but the financial function cannot create a fully realistic plan without help from other critical stakeholders in the company and its business.
Numbers People in Action: The Scenario
August 6th, 2009
Copyright © 2009 Integrated Profitability TM
A suggestion came in to
“…include a simple but meaningful scenario which you’d have the three Numbers People work through to posting, reporting and interpretation and planning…”
This is a great idea. It forced me to think about how the Numbers People work, and why they need to work together. This should be fun and, hopefully, enlightening.
First, a simple scenario. In the beginning, before the Numbers People, there are the Business People: those who come up with the ideas that become a business. Without a clear outline of a concept, and details about the transactions that will make the business successful, there is nothing the Numbers People can deal with. If Business People cannot describe what it is that will generate profit, the first wave of the Numbers People, the Accountants, can’t specify what needs to be done with the numbers associated with the business.
If the Accountants can’t set down the rules, the Bookkeepers can’t post the numbers.
If the Bookkeepers can’t post the numbers, the Finance people can’t do any reporting.
Without reporting, there is no analysis or interpretation.
And without conceptual or historical data, there can be no planning.
This initial step, taken by Business People, of describing how they are going to make money, explains why Business Plans precede Financial Plans.
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