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Why Integrated business planning isn’t improving cash flow forecasting and what you can do about it

Six years have passed since my cash flow forecasting (CFF) WebChat on CTM file, which can be accessed here.  It described how Integrated Business Planning (IBP) could dramatically improve CFF by embedding it into a single rolling forecast that brings together strategic, financial and operational planning and performance management (P&PM) processes.

In smaller organizations, technology has made such processes commonplace.  However, this isn’t always the case in global organizations.  Long term CFF remains a key challenge for treasurers.  The same is true of related processes, like foreign currency exposure and working capital forecasting.  Especially in manufacturing, the sector from which IBP originated.

The current State of IBP

In global manufacturers (GMs), the persistence of these challenges is indicative of IBP falling short of its potential.  While it may be able to optimize revenue and supply chain costs, it doesn’t effectively optimize profits and cash flow.  Four critical P&PM capability gaps account this, which are shown in Exhibit 1:

Exhibit 1: Critical P&PM Capability Gaps, Along With Complexity Management Capabilities That Address Them

(Exhibits Detail Link, here  )

Without these capabilities, GMs lack formal mechanisms for optimizing enterprise value, a proxy for which is free cash flow.  Their absence explains why IBP remains an operational process that’s done little to improve CFF, rolling forecasts and scenario planning in GMs.  It also explains why GMs have difficulty managing complexity.

What’s not being recognized is the need for mature forms of prescriptive analytics, a description of which can be found in this CTM File article.  More specifically, why such tools are required to address all four capability gaps and how they address challenges that are common to both finance and operations.

The persistence of these gaps is indicative of one reality.  The market continues to view IBP through outdated and siloed lenses.  Especially by mainstream P&PM solution providers.  Neither financial nor operational ones are addressing them.  In other words, these gaps are “falling between the cracks” of solution providers.

Why do these outdated views persist?  A key reason is that there is no universal definition of what comprises fully integrated P&PM / IBP processes.  One that explains the differences and synergies between terms like IBP, Integrated Financial Planning, Integrated Performance Management, Integrated Reporting and a host of others.  This has led to confusion about what fully integrated processes and solutions entail.

What is fully integrated?

When IBP processes are fully integrated, they enable “dynamic cost optimization”.  This means that strategies and cost structures can quickly self-adjust to changing market conditions and priorities, while also balancing and optimizing financial and non-financial outcomes.  What’s more, this is accomplished horizontally across multiple functions, business units and legal entitles.

Strategic IBP is a term referring to such maturity levels.   While software companies may describe IBP solutions as being strategic, they don’t support the “strategic IBP” process described above.  Instead, most support “tactical IBP” processes that lack the capabilities shown in Exhibit 1.

Traditional P&PM maturity models don’t reflect this difference between strategic and tactical forms of IBP.  Instead, they perpetuate siloed views of P&PM / IBP processes.  This is especially true of those used by technology analysts, where separate ones still exist for finance and operations.  Provided below in exhibit 2 is one that incorporates these distinctions.  It describes maturity dimensions, in both short and long forms.  Further details about them are available by clicking on the exhibit.

Exhibit 2: Integrated (Strategic, Financial & Operational) Planning & Performance Management (P&PM) Maturity Model

(Exhibit Detail Link: here )

What’s different about this model is that P&PM / IBP maturity is viewed more holistically.  It brings together maturity models for P&PM methods such as CFF, rolling forecasts, driver-based planning, sales & operations planning, activity-based costing, balanced scorecard, portfolio management and operational excellence.  It recognizes that, as GMs become more complex, meaningful improvements to these P&PM methods can only be achieved by resolving the capability gaps noted in exhibit 1.

This is especially true of CFF.  In complex GMs, the models treasurers require for mature CFF are the same ones that operational executives need to manage supply chains.  In other words, tools like supply chain optimization, which is a form of prescriptive analytics, aren’t just for operations.  They are critical components of CFF, rolling forecast, profitability management and scenario planning processes.

Finance Implications

The technology required to support strategic IBP exists.  But for complex GMs, it’s not likely to come from traditional P&PM solutions that one would expect.  No financial planning, budgeting and forecasting solution support prescriptive analytics, leaving them unable to support CFF models that can cope with the complexities of GMs.  And while supply chain planning solutions may have prescriptive analytics, they don’t always support the needs of finance.

The implication for finance executives is that they must take extra care to ensure that IBP processes meet their needs.  They don’t need to understand the detailed capabilities that comprise such processes.  They just need to point design activities in the right direction.  One way of doing so is to define the characteristics that should be absent from mature IBP processes, as illustrated below in exhibit 3.

Exhibit 3: Characteristics That Should Be Absent From Mature IBP Processes

(Exhibit Detail Link: here )

These characteristics are important to understand because they are not always the focus of tactically-focused IBP projects.  By stipulating their absence as requirements, treasurers and finance leaders avoid missteps that lead to immature IBP processes.

IBP has the potential to dramatically improve CFF, along with other financial and operational P&PM processes.  However, GMs typically require processes that support strategic IBP, not tactical IBP.  By understanding the difference between the two, treasurers and finance executives can ensure that IBP meets their needs, along with those of the enterprise as a whole.

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This item appears in the following sections:
Cash Flow Management & Forecasting
Cash Flow Forecasting
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