Part Two of Three

In the second of three blogs, Gavin Allen (Managing Director LucaNet UK & Ireland), discusses whether there is a difference between financial planning and operational planning, it's data, complexity and processes.

Financial versus Operational Planning - Are they the same?

In my mind there is a very clear distinction in my pointers above, between what is described as Financial Planning and Operational Planning.

Referring to the basic art of Financial Planning, leveraging actual data portrayed in the chart of accounts, and performing initial forward looking information. Take each line of the chart of accounts – the profit and loss is the place to start this, and decide on double entry accounting rules that should be adopted to plan each of these profit and loss line items. For example, take the sales line of your profit and loss, project forward based on historical and/or statistical trends to derive a forward looking data set.

However, the real importance of such financial planning, is to ensure that these rules (for each line of your profit and loss), are integrated to your balance sheet and then cash flow! In this example of sales, consider the balance sheet and cash flow impacts. Do we account for all of the sales as cash in the month of invoice? Perhaps not, so profile the outturn, hence modelling your debtors and cash flow all at the same time; not to mention being able to model your VAT as you go!

Conversely that same methods apply to expense items, and the impacts on creditors and cash. Yes, I understand that if you could do this by each and every customer and each and every supplier you should gain accuracy, but at what cost? And does it actually give you that much greater accuracy when seeking an initial integrated strategic plan? Imagine the CFO presentation for his forecast cash flow – the slide (or several) that show how the mass of detail for each customer and supplier has derived the results being seen – OR, surely coming from a CFO that presentation is far better stating “for 80% of our revenue assume 60% are collected 1 month after invoices and the remainder in month two” – more strategic but financially intelligent none the less?

In an earlier blog post, we refer to the importance of capturing your actual transactional data, in a simple, efficient and easy to understand manner. Click to read more, and what we had to say on this topic, which very much aligns with establishing a trusted platform of information, prior on embarking on a journey of planning.

Should we go back to basics?

Simple really, and back to basic accounting – debits and credits. I have seen countless complex financial planning models, that forget that despite the fact you are forecasting, budgeting or planning, the principles of double entry accounting have been forgotten or ignored?

Conducted between June and July 2013, research findings fromLoudhouse Research, clearly demonstrated that despite the importance of data, only 17% of companies are truly data driven.

Conducted between June and July 2013, research findings fromLoudhouse Research, clearly demonstrated that despite the importance of data, only 17% of companies are truly data driven.

By looking at an initial financial plan in this way, every line of your profit and loss will be modelled based on historical records of information (which of course can be adjusted as required to incorporate strategic changes), and all linked into the balance sheet and yes the cash flow! At no time in this initial brief have we considered the need for super complex multi-dimensional models involving several hundred personnel (more on this later), with drivers here there and everywhere. Surely this is a better starting point for the forward looking forecasting process – it’s intelligent rule based Financial Planning – providing the ability to easily, simply and more importantly quickly capitalise and react to changes in actual information, providing a clear rule based insight into the health of the organisation and it’s all important cash position.

Consider the “stitching” process of the actual and forecast data? Not an issue really with the profit and loss, but for the balance sheet it is often forgotten that when moving to rolling forecasts, as actual balance sheet closing information becomes available, this will invariably be different to what was forecast. Financial planning should cater for this, and allow for the transition or “unwinding” of the balances? Calculations of interest on bank loans and financing, depreciation flows on future capital investments, eliminations of future inter-company trading.

Can you see the focus and importance here – financial planning – a wider brief than operational planning, with what one could describe as more significant impacts if not done correctly?

The often forgotten art of the Financial Plan?

I am sure by now you are thinking that it’s time to discuss the many modern practices of driver based planning, and yes multi-dimensional planning by every which way under the sun!

But before we do, let’s wrap up the financial planning discussion here. It does not require an army of people to construct, provides a really rapid way of collating a high level strategic forecast or plan, and most importantly allows several iterations and versions of the high level plan to be developed (say goodbye to having to create separate budgets and forecasts, with both being “snapshot” of say the current rolling 36-month forecast?). Providing a catalyst for investment decisions, and the strategic direction of the organisation, that is based on accounting rules / logic, fully auditable and easy to change, prior to the involvement of more operational personnel in the business.

Read that back and ask yourself – this is what most CEO’s and CFO’s require, and let’s face it have always required since the dawn of time! 

Look out for our next blog article in this series in which we will discuss whether business organisations are actually ready for true multi-dimensinal driver based planning. In the mean time you might like to review or recent article where LucaNet has been subject to an independent research study.

To discuss your requirements further, or arrange a personalised one to one demonstration of the LucaNet platform, then please contact us and discover the unique, simply intelligent solution that is LucaNet.

"Our lifetime may be the last that will be lived out in a technological society." Arthur C. Clarke