Have you ever been in a situation where your CFO asks you to tweak a few assumptions on your operational forecasts and wonders why it takes many hours or even a few days to review an updated operational forecast? Or asks you to convert the operational forecast just by rolling up numbers at a parent level to arrive at a strategic forecast to review with the Board of Directors? Most organizations experience such challenges as a tug-of-war between operational and strategic planning.
Operational planning primarily involves the Financial Planning and Analysis (FP&A) function, whereas strategic planning involves the breadth of Corporate Finance (and related) functions such as FP&A, Treasury, Controllers, Corporate Strategy, Tax, and Legal. To understand the nuances of operating versus strategic planning, let’s contrast the components of operating and strategic forecasts.
Operational planning typically includes department-level operating components such as operating revenues, cost of goods sold (COGS), compensation expenses, utilities, depreciation, etc. Strategic forecasting includes these operating components but at a much higher level (usually not at an individual department level). Strategic forecasts are mostly account-based and include several components that are typically not in an operational forecast like debt schedules, debt covenants, capital structure changes, treasury assumptions, mergers and acquisitions, etc.
Taking an operating forecast and converting it to a strategic forecast (or vice versa) is not an easy task by any means. So, how can you integrate and build a consolidated approach? Based on our numerous years of experience, the following stages provide an enterprise-wide approach that we feel fits well:
Performance Architects has been fortunate to design and build a similar approach for many of our clients:
- Stage 1. Design an account structure that models financial statements in the way the business is actually run (this should not depend on where or how actuals are reported)
- Stage 2. Build a strategic model that incorporates all inputs, assumptions and drivers from all the stakeholders across the enterprise
- Stage 3. Use the strategic forecasts output to create baseline targets at the operational level (department, project, etc.)
- Stage 4. Build an operational model/forecast
- Stage 5. Validate operational plans against actuals data
- Stage 6. Based on the analysis and comparisons from Stage 5, either change the way actuals are coded and reported, and sync up with the way the business views and runs the unit or change the way strategic forecasts are modeled by updating the account structures or methodologies on the strategic side. This tug-of-war will end up synchronizing and bringing your operational and strategic models one step closer.
You can use a combination of tools like Oracle Hyperion Strategic Finance (HSF) for strategic forecasting and Oracle Hyperion Planning for operational forecasting to achieve the above multi-staged approach to enterprise planning. Once you design and implement such a solution, the intent is not necessarily to have a clear-cut winner in the ensuing tug-of-war but to ensure that you unlock the full potential of enterprise-wide planning without compromising either the operational or strategic plans. In addition, you will also be able to unlock better analytics from your performance management applications.
Author: Sree Kumar, Performance Architects