Utilizing external data to amplify integrated business planning

Forecasting quarterly performance has been one of the most challenging aspects of the post-pandemic corporate world. CFOs’ need to report and forecast frequently has made this process even more stressful for FP&A teams. Moreover, since market uncertainty will continue for the foreseeable future, companies are searching for ways to improve planning, budgeting, and forecasting.

The key to improving planning processes for FP&A teams is to provide a holistic forecast by layering macroeconomic data and enhanced forecasting methods like Integrated Business Planning (IBP). In fact, Integrated Business Planning is critical for large enterprise companies during economic uncertainty. It enables companies to develop a comprehensive view of the business environment, align business objectives with operational capabilities, optimize inventory and supply chain management, manage financial risk, and improve decision-making.

A bottom-up approach 

But, there is still a significant challenge that FP&A teams face even when appropriately implementing IBP within a company. Heavy reliance is on the individual forecasts delivered by each business unit and division. This bottom-up approach carries significant flaws typically inherent within large organizations, adding more challenges for the finance team.

To start compiling, evaluating, and aligning the reports from each division is a tedious task that can take considerable time and effort for FP&A professionals. Teams could automate much of this process, but there is still a need to understand the data, insights, and assumptions that contributed to each forecast.

Accounting for biases 

When developing forecasts in silos, biases and incorrect assumptions naturally make their way into reports. For instance, did a business unit only use past internal sales results to determine a forecast? Or perhaps, there was just “a gut feeling” incorporated in projections. Identifying these issues and biases in reports are arduous tasks for the FP&A team.

Enhancing the process 

Yet, despite the challenges within the bottom-up approach, FP&A teams can not simply turn the entire process on its head. That would be impractical and likely result in adding more work for the finance department and creating new problems within the process. So, there is a need to optimize the IBP process to mitigate the current risks and enhance alignment across the organization.

A collaborative approach

Solving forecasting challenges begins with implementing a collaborative approach to introducing forecasts within the IBP process. This can only occur if the division leaders and the finance team can deliver their versions at the onset of their planning. Then, an environment is produced in which “bottom-up” and “top-down” forecasts are considered during the evaluation and used to find the best outcomes for each company area and the entire organization.

Division leaders do not need to rip and replace their current processes but instead ensure they incorporate the following:

1. Greater defined parameters: Financial teams must create better-defined parameters for the division leaders when developing their forecasts and plans. For example, providing better guidance for the data that can be used within the process or outlining a specific structure for methods to submit reports to the finance team. This creates more uniformity across the entire organization, limits bias, removes tedious work from the FP&A team, and allows for increased automation.
2. An unbiased baseline forecast: To find success compared to traditional methods, finance teams must create top-down or middle-out baseline forecasts that apply to each division or business unit. Successfully developing these reports would avoid diving into the nuances of each business area or becoming redundant with the forecasts already being developed by division leaders. These reports aim to serve as unbiased baselines that incorporate external economic data and business drivers.

The FP&A unbiased baseline forecast

When finance teams create a streamlined process, they can confidently develop forecasts to present to business units, division leaders, and investors. The key for FP&A teams is to develop an accurate report based on macroeconomic and other external data while leveraging the external indicators that are the most significant business drivers for their organization.

An unbiased baseline report would serve as the benchmark for the entire organization when evaluating the forecasts and plans of individual business units and divisions. Therefore this allows the FP&A team to provide data-based guidance when delivering feedback or revisions to business units. Additionally, significant deviations from the baseline serve as alerts that a forecast must be more thoroughly evaluated for errors or biases.

Conclusion: Implementing the process 
The first step for implementing the process is for FP&A teams to determine the leading economic indicators that serve as business drivers for their company. This intelligence is the core element for enhancing the forecasts driving Integrated Business Planning.

From there, finance teams can introduce new parameters into the company’s process and present the baseline forecasts for greater accuracy, even during economic volatility. As a result, not only will FBP improve throughout the organization and finance leaders will also have more confidence when presenting their forecasts.

For more on this topic, read the report “Enhance integrated business planning with external data.“