The standard S&OP process is a critical collaboration between sales (demand), production (supply) and leadership. However, when you look over the entire organization, key functions are frequently not represented such as Marketing, Finance, and others. While supply and demand are at its functional core, they exist within a greater context that is underpinned by Finance. Having a broader understanding of the financial environment in which S&OP decisions are made is key to an integrated and mature planning process.

The Financial Context

Demand planning and the S&OP process are tightly focused on inputs and outputs. What is increasing or decreasing demand? What factors are impacting supply? How is competition impacting pricing and margins? While these questions are important, sole focus on these fundamental components can obfuscate a larger context in which the business operates. Other business concerns exist that are dependent on the S&OP process including some that are ‘top-of-mind’ items for Finance professionals. The term “voice of the customer” is a common phrase used in business and, for the finance professional, these “voices” are specific to key stakeholders: the owner(s), the bank, and management.

The Owner(s)

The voice of the owner is shaped by three main factors: ownership composition, ownership priorities, and owner involvement.

Ownership Compositions: These vary from a single proprietor to limited partnerships to publicly traded companies with thousands of stockholders. Each of these ownership types present their own unique characteristics and challenges. Levels of access will vary from direct access and communication with a single proprietor to very limited access in the case of a corporate board of directors. Regardless of the challenges presented by limited access and communication, Finance has a responsibility to represent and convey those concerns and interests as they work alongside their functional partners within the company.

Owner Priorities: These take on different forms. Excluding non-financial considerations, owners are looking to increase the return on their investment in different ways. Some owners are very focused on short-term returns such as cash flow to see how quickly they can break even or a positive cashflow to finance their lifestyle or other investments. Other owners are focused on long-term growth of equity and/or overall business valuation. Their strategy is focused on building up a business as a long-term investment or for future acquisition. Finance’s role is to ensure the focus of the owner is reflected in both the presentation of information as well as strategic alignment.

Owner Involvement: This is an outcome of ownership composition. Under sole proprietorship, and even limited partnerships, direct involvement by the owners is extensive as they take an active role in the daily operations of the business. In larger businesses, less direct involvement at all levels of the business by the owner is common. The role of Finance here is to assist the owner in getting the information they need to make decisions in the format and frequency they prefer. The voice of the owner in cases of more direct involvement is very apparent, so Finance is in more of a supporting role.

The Bank

While the voice of the owner permeates all levels and areas of the business, the voice of the bank is isolated to Treasury and/or Finance functions. However, the implications of financing structures touch all parts of the business to some extent. Managing the requirements of financial terms and conditions requires coordination and communication with many functional areas who either contribute to, or are impacted by, these financing facilities. With that in mind, there are three main points that help to better understand the realities and requirements of financing.

Risk: While the business focuses on positive performance measures such as profitability, growth, cost control and equity, the bank uses these measures to determine the degrees of risk to the bank. The responsibility of Finance includes monitoring the cash and assets on which the collateral is based to ensure that the bank is satisfied relative to the financing.

Limited Understanding: Where many businesses only work with one bank, banks serve many clients. The result for the bank is that they have limited time and resources to dedicate to deeply understanding the business of each client. In consideration of this, Finance needs to clearly understand what information is important to them and mirror that focus through our analysis.

Covenants: Most financing facilities include requirements by the bank that the business maintain minimum performance standards. These focus on the business’s ability to maintain sufficient free cash flow and equity, manage the collateral, and other financial measures. These requirements may in some cases constrain the company’s ability to spend cash at certain times, limit the ability of the owner to access equity, and so on.  For businesses that are highly cash sensitive, coordination with production, purchasing and sales to monitor and manage cash flow is critical.

The Management

Finance works within and around management of the business but is uniquely positioned to interact with many, if not all, functional areas of the business. As such we have an opportunity serve as their eyes and ears. While individual managers have concerns specific to them, most in management have two main concerns: “What am I responsible for?” and “What is expected of me?”.

To support their concerns, we look out for situations or developments that will impact their departments that we can bring to their attention. We also look for ways that we can assist management in supporting what they are responsible for and/or expected of. Finally, Finance is presented with opportunities to assist management such as determining financial requirements for new ideas, projects, or initiatives.

These voices are always present and shape the lens through which Finance views the S&OP process. More than just another seat at the table, Finance has the ability and responsibility to inform, advise and contribute to the S&OP planning process beyond what is obvious to those native to S&OP.

How S&OP Can Support Finance

One of the best pieces of advice I received regarding my work in Finance is to “Know your business”.  This means getting beyond the financial statements, models, and ratios to really understand the nature of, and details within, the various functions of the business. To this end, the subject matter experts within S&OP are a tremendous resource to those of us in Finance.

Educating and informing your Finance person in the realities and nuances of your functional area can pay massive dividends. In so doing, you can become a true business partner to those in Finance and other functional areas as well.

How Finance Can Support S&OP

As mentioned before, Finance has the ability and responsibility to inform, advise and contribute to the S&OP planning process. We can accomplish this in several ways.

  • Leveraging our exposure to a wide range of functional areas, we can help facilitate cross-departmental collaboration
  • By bringing a fresh perspective we can ask probing questions to get to the root cause or key concept of a topic or situation
  • We can provide feedback on the financial impact of their business decisions including things like cash flow, margin, and P&L impact as well as implications for financial covenants
  • Incorporate financial constraints to long-term projections or forecasts.
  • Help align to key financial metrics
  • Advise on exploring new opportunities

Nearly every business decision has a financial component or impact and that’s where your local Finance person can add value and support.

Key Learnings From An Integrated Approach

About two years ago my company went through a restructuring of our teams where departments were reorganized, and a new group was created which we call the commercial team. The idea was to bring together the three legs of the stool on which the business operates: Supply, Sales, and Finance. With the managers of Operations, Sales, and Finance, our objective was to more closely align our work to improve controls, functional and market performance, and financial results through continuous improvements. We work and collaborate continuously together instead of just within recurring S&OP process cycles. Together, we do deep dives into each other’s functional areas to discuss issues and gain a better understanding. We are collectively responsible for all commercial operations and performance of the business and this shared responsibility fosters greater levels of teamwork than what you might normally expect from a siloed departmental structure. While not all businesses can replicate this commercial team approach in the same way we have, the principles foundational to this approach can be applied and the benefits can be realized.

The point is that the S&OP process should be just the start of a journey towards a deeper and more collaborative planning process that both digs deeper into each aspect of the business as well as expands beyond the traditional functional areas to incorporate and consider the broader implications. Of those, the financial considerations of the owner(s), the bank, and management are a great place to start.


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