This article is taken from the book, Practical Guide to Sales & Operations Planning (S&OP/IBP). It’s currently available at a special introductory price. Get a copy here before the price increases.
As companies advance in their S&OP journey, the depth and breadth of planning expand, necessitating greater involvement from finance professionals. Finance expertise becomes indispensable as it adds nuanced insights beyond mere numerical analysis to the S&OP framework.
This integration fortifies businesses, enhancing their adaptability in today’s dynamic market landscape. Integrating finance into S&OP transforms the process from an ancillary function to a pivotal component of organizational strategy. Managers gain visibility into real costs, steering decisions towards tangible outcomes rather than theoretical conjectures. From procurement to production scheduling and marketing strategies, finance-informed decisions align with overarching business objectives and financial plans.
“Finance transforms S&OP from an ancillary function to a pivotal component of organizational strategy”
Excluding finance from S&OP, planning is limited to input-output dynamics, overlooking crucial aspects of business operations. Finance’s involvement is essential for a holistic understanding of the business ecosystem, as it ensures that decisions are based on financial realities. Collaboration between S&OP and finance bridges gaps in comprehending interdepartmental synergies, facilitating informed decision-making.
A synchronized approach that seamlessly integrates forward-looking sales and operations plans with financial considerations is essential for effective budgeting. This alignment ensures that planning decisions directly impact financial outcomes, fostering organizational coherence and fiscal responsibility. By fostering collaboration between finance and S&OP stakeholders, businesses cultivate a comprehensive understanding of operations, enabling informed cost management decisions essential for sustained growth and profitability.
Benefits of Integration
It’s important to know how to talk about business in the Executive S&OP step by turning plans for numbers into plans for money. Executives decide what to do based on how the results will affect the organization’s health and its bottom line. They talk about EBITDA, P&L, and cash flow, not estimate error, units, and capacity. When Finance and S&OP work together, you can talk to leaders in their own language and make sure that everyone has a better understanding of the plans.
1.Alignment with Financial Goals: Finance being a part of the S&OP process makes sure that decisions made by the business are in line with its overall financial goals. When financial factors are taken into account in strategic planning, the S&OP process becomes a unified force that drives the company’s goals.
“Finance’s role in S&OP gives it a strategic view”
2. Strategic View: Finance’s role in S&OP gives it a strategic view by consistently predicting key business drivers, using predictive analytics, and incorporating up-to-date sales data. By adding financial information, the organization’s strategic path, risk assessment, and upcoming opportunities can be shown more accurately.
3. Collaboration: S&OP is naturally a process that involves people from different departments, and adding Finance breaks down silos and encourages people to work together. Different departments can make choices that are in line with bigger financial goals if they work together. Finance helps make it easier for people from different departments to work together and takes budget limits into account when making long-term plans.
4. Flexibility: A flexible financial plan is important in today’s fast-paced business world where market conditions, customer tastes, and world events are always changing. Adding Finance to S&OP, which focuses on ongoing planning and rolling forecasts, helps businesses respond quickly to changing conditions by making sure that monthly predictions are in line with financial plans.
“When Finance is added to S&OP, it makes the whole company take the same approach”
5. Unity Across the Enterprise: When Finance is added to the S&OP process, it makes the whole company take the same approach. By making a monthly Profit and Loss (P&L) and rolling forecast, businesses can better understand the factors and drivers that affect different areas. This breaks down barriers and promotes a more unified work culture. Long-term resilience in the face of uncertainty is helped by this unified method.
How to Integrate Finance Into S&OP
- Monetizing S&OP Plans: The first step towards integration is to monetize S&OP plans. This involves translating plans into financial terms and ensuring that all participating S&OP functional leaders have monetized plans to run their respective areas effectively.
- Alignment of S&OP Design with Financial Management: It is very important that the S&OP design is in line with how the business handles and reports its finances. This alignment ensures the easy addition of financial factors to the S&OP structure.
- Speaking the Same Language: The S&OP structure needs to be able to communicate with the finance team. We must change S&OP measures from volumes to values, inventory to working capital, and resource use to return on assets in order to achieve this.
- Finance-Led Variance Discussions: Finance can be very helpful when it comes to leading budget difference conversations, asking important questions, and speaking up when needed. This collaborative approach ensures the consideration of financial concerns during decision-making.
- Joint Objectives for Financial and Operational Departments: Setting shared goals for the finance and operations teams gives them a direction to follow, makes their goals more aligned, and encourages them to work together.
Conclusion
Including Finance in the S&OP process is not only the right thing to do; it is also a must for businesses that want to do well in today’s business world. For organizations striving for excellence, transitioning from understanding how to get finance in S&OP to effectively leveraging this partnership for strategic success is critical. By harnessing the synergies between finance and S&OP, organizations can achieve greater agility, profitability, and long-term resilience. This is an important step on the S&OP maturity journey.
BF’s new book Practical Guide to Sales & Operations Planning is a fantastic resource to learn best practices in S&OP and IBP from world-leading planning experts. You’ll learn how to start an S&OP/IBP process, progress it along the maturity curve, and use it to drive effective decision making that has a direct impact on KPIs like inventory turns, forecast accuracy, cash flow, customer service and more