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Integrated planning - linking partial plans with the overall planning (profit and loss, balance sheet and cash flow)

1. Abstract

The corporate planning process is a controversial subject on which opinions differ widely. Some see a well-structured planning process as an opportunity to gain a competitive edge over rivals. Others regard it as an outright waste of time.

Our experience has shown that an effectively implemented planning process brings companies a clear added value in many respects. Enterprises are helped to achieve their set targets or to take corrective action if unforeseen changes occur in the background conditions. True to the motto “Some people plan so as not to fail. Others fail, because they do not plan”.

2. THE CHALLENGE CONFRONTING BUSINESSES

It is an indisputable fact that a majority of enterprises do plan, but have to contend with all kinds of challenges. If a company cannot find the right answers to these challenges, there is a risk that planning will not be taken seriously; this will have a negative impact on the business.

One essential challenge is the integration of partial plans into the overall corporate planning. A self-contained planning model (profit and loss, balance sheet, cash flow and partial operational plans) leads to a substantial improvement of profitability, balance sheet structure, net current assets and cash flow. The resources released in this way can, for instance, be used for product development or for marketing activities.

Many companies fail to implement fully integrated overall and result planning (profit and loss, balance sheet and cash flow) while many others find it hard to integrate their partial operational plans into the overall/result planning.

3. Modules of an integrated planning solution

To enable businesses to implement an integrated planning solution effectively and so benefit from the resulting competitive advantages, the following points must be observed.

3.1. Planning responsibility

The main responsibility here rests with the management. It must define the staff members who are responsible for successful implementation of the planning process and give them the necessary powers. The number of employees with planning responsibility will depend on the implemented planning concept and size of the business. It is always advisable to define a person with main responsibility who is able to handle both the business management (good knowledge of the corporate process) and technical (familiarity with technical implementation tools) aspects of the planning process. Where partial plans are integrated into the overall planning, a person with responsibility for each partial plan should be designated.

3.2. Planning concept

Once a business has defined the persons with planning responsibility, the next step will be to draw up a professional/management concept. This concept must show how the business wishes to plan in future - or which value drivers are relevant to the success of the business and should therefore be actively influenced by planning. This will involve, among other things, a clear definition of the following points.

3.2.1. Planning areas including partial plans

First of all, the main planning areas of the business should be defined. These always contain the overall and result planning (profit and loss, balance sheet and cash flow) as the basic module. In many businesses, the partial operational plans are another important contributory factor to attainment of the objectives, but they are very seldom included in the higher level overall planning. Examples of partial plans include sales and material, salary, marketing, travel, consulting and IT costs. The aim of these partial plans is to use one model for each partial plan, which is automatically incorporated into the overall planning. This creates an integrated, self-contained cycle within an application which lends itself outstandingly well to counterflow planning (top down and bottom up) and also to simulation or scenario analysis.

3.2.2. Planning dimensions FOR EACH planning area

Following the successful definition of the areas, the planning dimensions, planning hierarchies and planning density must be defined. A decision will be taken here as to which business dimensions constitute the key organizational structures, i.e. in what degree of detail (company, business unit, profit center, cost center) a business makes its plans. Often different dimensions to the overall and result planning determine the partial plans (sales and material, salary, marketing, travel, consulting and IT costs). The table in 4.1.1.1 illustrates an example of possible business dimensions for each planning area.

3.2.3. Planning drivers and reference values

One important contributory factor to better acceptance and greater accuracy of the planning process lies in the definition of value drivers and the use of reference values.

The aim is to significantly accelerate the planning process by means of a driver-based logic and reduce complexity, thus leaving more time for analysis, simulation and scenario modeling. The input of planning values per company, cost center, profit and loss account and month is extremely time-consuming and can be greatly simplified by using value drivers in planning.

The basic idea behind this concept enables the persons responsible for planning to choose the relevant value driver for each account, planning element and business dimension, to enter a value for the planning element and then move on directly to an analysis based on the predefined calculation logic (final planning value and monthly distribution).

3.2.4. Planning integration (coordination of overall plan and partial plans)

As soon as a business has decided to supplement the overall and result planning (profit and loss, balance sheet, cash flow) by including the partial plans, these must all be linked up. Taking a practical example, this means that a business must combine its partial plan for staff (bottom up planning of all personnel costs) with the relevant elements of the profit and loss positions to ensure self-contained planning. Staff planning is carried out for the previously defined business dimensions and measurement parameters. The calculated values are then automatically integrated into the overall planning.

3.2.5. Planning simulation

Integration of all partial plans with the overall and result planning (profit and loss, balance sheet, cash flow) is essential to enable the management to perform simulations and scenario analyses and, by the same token, determine the impact on important profit and loss, balance sheet and cash flow items. The following examples show which questions, among others, may receive a direct answer.

  • What effect do adjustments of sales and purchasing prices have on volumes, profitability and net current assets?
  • Are the planned marketing activities consistent with the sales and margin plan for different product groups?
  • What impact will there be on the profit and loss, balance sheet and cash flow items if I move X per cent of my staff from site A to site B?
  • The implementation of a strategically important project results in a great deal of travel activity. What is the best and most cost-effective site for various discussions?
  • The uncertain currency situation may have an enormous impact on our business. What effect will +/- percentage variations of the key currency pairs have on our balance sheet, profit and loss and cash flow positions and what form could a possible currency hedging strategy (FX hedging) take?

3.3. Planning tools - technical implementation

Planning technical implementation is just as important as drawing up a professional or business management concept. The chosen tool must satisfy important requirements to implement the goal of integrated planning and enable the resulting competitive advantages to be exploited.

The main modules and functionalities that a tool of this kind must satisfy can be summarized in the following areas.

3.3.1. Integrated planning (overall and partial planning)

Experts use the term fully integrated planning to describe the link between overall and result planning (profit and loss, balance sheet and cash flow) and the integration of what are known as partial plans. The selected tool must be capable of illustrating all the business-relevant plans in a central application and of establishing a self-contained link. For example, if a company decides to integrate a staff plan, this means that all the values calculated from this plan on the basis of assumptions (salary, social costs, salary adjustments, bonus, training) will be automatically transferred to the particular items. In addition, all changes in profit and loss values must also have a direct impact on the balance sheet and cash flow positions to create a self-contained cycle which lends itself to coordination.

3.3.2. Driver-based planning

In the course of the planning process, many companies lose their way by going into unnecessary detail because each planning element is entered manually in a planning mask. This increases costs many times over and valuable time is lost. The use of driver-based planning improves the quality of planning and reduces the time required; more time is therefore available for plausibility checks and planning analysis. The tool must be flexible enough to work with existing drivers while enabling additional, enterprise-specific drivers to be readily integrated without abandoning the concept of integrated planning.

3.3.3. Scenario and simulation analysis

As soon as businesses allow the elements described above to be included in their planning model, more time is left for different scenario and simulation analyses. The selected tool must therefore have the functionality which enables this type of scenario and simulation analysis to be performed. An assurance should be obtained that the direct impact of any change in the planning model (profit and loss, partial plans) on all the relevant items of the overall and result planning (profit and loss, balance sheet and cash flow) will be calculated and coordinated. Examples might include changes in FX rates, price simulations or adjustments of payment terms and conditions with customers and suppliers.

3.3.4. The functional database

One of the key enablers of UPM is the modern capability of Functional Databases. Functional Databases are still widely misunderstood.

Functional Databases (for example IBM Planning Analytics / TM1) are often lumped together generically with Business Intelligence and OLAP (On Line Analytical Processing) tools. While it is technically a type of OLAP (sometimes referred to as Multidimensional OLAP or MOLAP) and provides sophisticated Business Intelligence capabilities, this is not the capability for which Functional Database Technology was designed and developed.

Functional Databases are also often noted for and described as “in-memory” or “write-back enabled” databases. While these describe essential aspects of any Functional Database, they are not the defining features.

Functional Database technology was in fact designed and developed to provide highly interactive, collaborative and complex business modeling and analytics using large (even huge) data sets and its defining feature is its spreadsheet-like, cell-orientated modeling capability which makes building models conceptually intuitive for business users already familiar with spreadsheets and enables models using complex chains of calculations that mirror the unified and interactive processes of an organization.

Functional Databases thus essentially bridge the gap between transactional (typically Relational) databases, which are fantastic at storing and managing detailed records, but are cumbersome for analysis and modeling, and spreadsheets, which are great for analysis and modeling, but break quickly when dealing with large data volumes, highly complex models and multiple users trying to use them simultaneously, among other issues.

It is therefore essential that the UPM solution has - at its core - a Functional Database. This is a fact still curiously missed or misunderstood by most of the well-known Performance Management technology solutions available today, and its absence in these solutions has been the dominant factor in true UPM being unachievable for organizations that have invested in those technologies.

4. Apliqo C3 - Practical implementation of an integrated planning solution

The basic requirement for the introduction of an integrated planning model is a solution which satisfies the key criteria described above.

Enterprises are able to develop an integrated planning model from the greenfield, or they can build on a ready-made model and then effect various adjustments during an implementation phase.

The big advantage of a ready-made solution is firstly the much shorter introduction time and the use of a coordinated, best practice management concept. On the other hand, coordination of the relevant overall planning modules (profit and loss, balance sheet and cash flow) is guaranteed.

The Apliqo C3 https://apliqo.com/ integrated planning tool refers to a ready-made solution that contains all the modules described above and has already been introduced by many companies. Apliqo C3 also reflects our best practice approach to integrated planning solutions with the inclusion of driver-based planning.

4.1. Overall and result planning

The basic requirement for a self-contained planning model is the correct illustration of the overall and result planning, comprising the profit and loss, balance sheet and cash flow items. In communication with companies, we often initially hear that these areas are already being planned. However, after a lengthy discussion it emerges that many businesses do not have access to planning information in a self-contained application. A great many businesses plan profit and loss in a central application and the accompanying balance sheet and cash flow areas are only incorporated into the planning outside the application (Excel). In addition, partial plans that are important to the enterprise are often not part of a self-contained application. This has serious drawbacks with respect to the implementation of integrated planning and makes it practically impossible for companies to perform simulation analyses and detect the effects on key profit and loss, balance sheet and cash flow items during performance.

4.1.1. Profit and loss account

4.1.2. Business dimensions

The profit and loss view of the business is an important component. Apliqo C3 gives companies an opportunity to define their relevant business dimensions with specific reference to customers. These are based on standardized business dimensions (company, version and currency) that are important for meaningful reporting and planning. In addition, companies have the opportunity to define generic business dimensions that give them complete flexibility for reporting and planning. These dimensions can, for example, be fed with information from the cost centers, profit centers, business units, divisions or regions and are then available for various purposes. The table below shows an example of possible business dimensions.

Category Sales costs Staff Marketing Travel costs Profit and loss, balance sheet, cash flow
Basic dimensions Version Version Version Version Version
Currency Currency Currency Currency Currency
Time Time Time Time Time
Company Company Company Company Company
Specific dimensions Customer Role Campaigns Travel Business unit
Product Post / person Activities Travel routes Company
Measurement parameters Quantity, price, sales, M. costs Salary, social, tax, bonus, adjustments Various marketing costs Various travel costs Account plan
4.1.2.1. Reference values, planning drivers and distribution drivers

The use of reference values is an important basis for the implementation of driver-based planning. Pre-configured drivers and calculation models can refer back to existing reference values and greatly simplify planning. The definition of reference values is individually adjustable and may contain e.g. information about the previous year, the current annual plan, the latest results for the year or the latest forecast for the year.

Reference values Planning driver Distribution driver
Previous year Previous year plus X, X% Uniform
Current year budget Budget plus X, X% Last year
Current year latest forecast Forecast plus X, X% Current year actual / current year forecast
Monthly average (last x months) % of sales or % of any other sales or cost drivers Month x per quarter
Transfer values from partial plans Manual monthly input
Business model-specific drivers with customer-specific calculation logic

Planning drivers: transfer values from partial plans 

It is also possible to integrate company-specific partial plans (important profit and loss and balance sheet items for businesses), which are very often already available in uncoordinated Excel data files. If a business manages to integrate all these in a special application, enormous progress will be made with respect to cause and effect relationships as well as scenario and simulation analyses. Alongside overall and result planning; Apliqo C3 contains further pre-configured partial plans which are linked together; thus enabling the integrated planning idea to be readily implemented.

4.1.3. Balance sheet

As already indicated, many companies find it difficult to present the modeling of balance sheet items in an integrated planning process. Some companies prepare a plan and rolling forecast balance sheet, but only a few of them have illustrated these items in a self-contained application (profit and loss, balance sheet and cash flow). An even smaller number of companies have integrated the partial plans into this application and are therefore able to analyze the effect of any change of plan on the relevant profit and loss, balance sheet and cash flow items. The benefit of full integration is self-evident; scenario and simulation calculations can be performed using this closed cycle and important balance sheet items optimized, thus making valuable resources available to the business that can then be used for investments designed to implement the strategy.

4.1.3.1. Business dimensions

As already indicated in 4.1.1.1, the business dimensions of profit and loss, balance sheet and cash flow are generally identical. Basic dimensions matching the particular enterprise may be used and defined.

4.1.3.2. Reference values, planning drivers and distribution drivers

For balance sheet planning, Apliqo C3 again adopts the concept of driver-based planning and the staff members responsible for planning can select pre-configured drivers for each balance sheet item. Based on the existing calculation logic, specific drivers or algorithms can be added at any time.

There are likewise individual planning drivers for all other relevant balance sheet items, enabling a company to model key balance sheet items easily and in a straightforward manner. This provides both a valuable insight into the future economic viability of the business and the opportunity to change parameters at any time and analyze the direct impact on the balance sheet items.

The table below shows an overview of the existing reference values and drivers for the net current asset items and illustrates the resulting opportunities for balance sheet modeling.

Reference values AR (receivables) INV (inventory) AP (liabilities)
Previous year Accounts Receivable ACT LY Inventory Value ACT LY Accounts Payable Value ACT LY
Latest annual budget Days Sales Outstanding ACT Days In Inventory ACT Days Payable Outstanding ACT
Latest annual forecast Days Sales Outstanding ACT LY Days In Inventory ACT LY Days Payable Outstanding ACT LY
Monthly average (last x months) Days Sales Outstanding Input Year Even Days In Inventory Input Yr Even Days Payable Outstanding Input Yr Even
Accounts Receivable % Revenue Days In Inventory % Revenue Accounts Payable % Revenue
Days In Inventory % COGS Accounts Payable % COGS
Entry per Month Entry per Month Entry per Month

4.1.4. Cash flow Statement

When dealing with the cash flow statement, many users have difficulty tracing the relevant items. However, with a complete profit and loss account and a constantly updated monthly balance sheet movement per item, the preparation of the cash flow becomes a simple mapping exercise. Once defined, rolling cash flow planning brings a huge competitive advantage for companies. This enables important information to be gained and corrective action taken if developments are moving in the wrong direction (e.g. excess net current assets). This in turn enables companies to optimize all kinds of planning items and so make more liquid resources available.

4.1.4.1. Procedure - closing the cycle (profit and loss, balance sheet, cash flow)

Even if some companies find it hard to illustrate an integrated, self-contained planning model, the way to achieve this is by no means complicated. At least, not if enterprises are given the opportunity to build on an existing, ready-made configured product such as Apliqo C3. The key steps to achieving the target can be summarized in the following areas.

  • Access to trial balance information to prepare profit and loss and balance sheet data.
  • Use and preparation of mapping between the chart of account plan and the cash flow account hierarchy.
  • Reduction of complexity by performing planning on an aggregated chart of account plan.
  • Use of ready-made rules and processes to calculate the profit and loss and balance sheet items and effect automatic cash flow calculations by means of the mapping that has already been defined.

The following overview illustrates a possible presentation of the mapping of profit and loss and balance sheet items for the cash flow statement.

4.2. Operational planning models

Businesses have an opportunity to draw up profit and loss planning on the basis of the particular plan accounts and defined business dimensions. These values are the basis for the automatically calculated balance sheet and cash flow items. In addition, detailed partial plans can be used for various profit and loss and balance sheet items. These enable companies to plan important areas more accurately. The integration of partial operational plans into the overall planning and their presentation in a central application bring many advantages and have a positive effect on the financial situation of the companies concerned. By means of this integration, planning can be performed by a counterflow procedure (top down versus bottom up). Any change in the partial plans has a direct impact on the items in the overall and result planning (profit and loss, balance sheet and cash flow). The following summary explains the concept of integrated planning and the incorporation of various partial plans into the overall and result planning.

 A few of the partial plans referred to above are explained in the following sections together with the impact on the particular items in the overall and result planning.

4.2.1. Change Travel Costs to Travel Sales and material costs

This partial plan enables companies to plan sales and material costs in greater detail or in a business- relevant manner. A range of information from the customer and material master data files is available as a possible business dimension, on the basis of which further planning data can then be entered. In addition, a decision is taken as to whether the planning values (sales and material costs) are defined on the basis of a quantity times price calculation (or derivative versions specific to the business model) or acquired as an input value. Insofar as businesses are able to make further information available (e.g. order book or opportunities), these can also be used as planning drivers in order to enable the future planning values to be calculated automatically.

4.2.2. Staff

This partial plan enables companies to plan staff costs in greater detail or in a business-relevant manner. The staffing plan generally comprises three areas.

Assumptions – Assumptions can be made and used to calculate costs. They include e.g. social costs, tax rates, bonus agreements, salary adjustments.

New employees – Plans can be drawn up for all new employees. Information such as posts, percentages, starting date and total salary are acquired. The calculated figures are automatically transferred to the employee plan.

Existing employees – Plans can be drawn up for all existing employees. Companies can load existing employees and the accompanying data from a surrounding system or from an existing data file and plan the job percentages and costs by entering departures and arrivals.

The company defines the degree of detail of employee planning and may, for instance, make its plans for each individual employee or on the basis of defined employee items.

All of the calculated employee planning values (salary, social costs, bonus) are linked to the relevant profit and loss accounts so that all partial plan changes automatically flow into the profit and loss account and the relevant balance sheet and cash flow items can be adjusted.

4.2.3. Marketing

This partial plan enables companies to plan marketing costs in greater detail or in a business-relevant manner. The company can associate various marketing activities and campaigns with the predefined business dimensions and enter planning values for the particular combinations.

Activity

Campaign

Print

Campaign 1

Campaign 2

TV advertising

Campaign 3

Campaign 4

Radio advertising

Campaign 5

Campaign 6

Billboard/outdoor

Campaign 7

Campaign 8

Events

Campaign 9

Campaign 10

Digital marketing

Campaign 11

Campaign 12

Promotion

Campaign 13

Campaign 14

Public relations

Campaign 15

Campaign 16

Sponsoring

Campaign 17

Campaign 18

Direct marketing

Campaign 19

Campaign 20

Product placement

Campaign 21

Campaign 22

Social media

Campaign 23

Campaign 24

SEO

Campaign 25

Campaign 26

This enables the “what” (sales targets) to be linked with the “how” (marketing activities). By analogy with the other partial plans, the planning values flow directly into the profit and loss items while the particular balance sheet and cash flow items are automatically adjusted on the basis of the existing framework.

4.2.4. Travel costs

This partial plan enables companies to plan the travel costs in greater detail or in a business-relevant manner. The company can define individual travel routes and travel costs for travel-intensive areas and plan these factors on the basis of the number of journeys and overnight stays.

Travel routes

Travel costs per day

Number of travels

Local

Air ticket expenses

Number of travels

Europe A - B

Accommodation expenses

Average day per travel

Europe B - C

Meal allowance expenses

Average night per travel

Europe - America

Car hire and taxis expenses

Europe - Asia

Entertainment expenses

Europe - Africa

Daily allowance expenses

Europe - Australia

Other T and E expenses

By analogy with the other partial plans, the planning values flow directly into the profit and loss items and the relevant balance sheet and cash flow items are automatically adjusted on the basis of the existing framework.

4.2.5. Other partial plans

Businesses have the opportunity to define further partial plans at any time and can link them to the overall and result planning. The particular partial plans are always heavily dependent upon the corporate business model and the particular business drivers. Examples include partial plans for consulting, IT and facility costs, which are planned by the same principle and then linked up.

5. Conclusion

Our experience has shown that few businesses have described a comprehensive overall and result planning (profit and loss, balance sheet, cash flow) in a central application. Even fewer companies integrate important partial plans into the same application. However, this means that substantial potential is lost; that loss could be avoided by coordinating resources, cooperation between the different business units and an understanding of the dependencies between all the partial plans. Moreover, corporate strategy can be better implemented, monitored and optimized by integrated planning.

The implementation of a concept of this kind enables companies to achieve a competitive edge over their rivals which goes further than a reduction of administrative planning expenditure and creation of more time for analysis. From the business management angle, the added value of integrated planning lies in the opportunity to make important cause and effect relationships transparent so enabling corrective action to be taken and financial items optimized. The cash resources gained in this way can be used, for instance, to achieve the strategic goal (product development, marketing investment, expansion of personnel, reduction of debts).

Companies must create the conditions needed to deploy integrated planning. The following three factors are particularly relevant here: employees responsible for planning, preparation of a business concept and its technical implementation. When it comes to implementation, companies can buy technology and develop an integrated model from the greenfield. However, in the best case scenario, they implement a ready-made solution like Apliqo C3, which contains all the components described above, among others, and can be extended at will.

The key advantages can be summarized in the following areas:

  • Specialized reporting and planning tool instead of uncoordinated Excel solutions
  • Faster planning process - much faster provision and processing of data
  • Use of management framework - fully integrated overall and result planning (profit and loss, balance sheet and cash flow)
  • Integration of partial plans - illustration of operational partial plans
  • Use of best practice approaches - driver-based planning and scenario analyses
  • Flexibility - easy adjustment to new background conditions
  • Web application - use on the basis of modern web applications
  • Confidence - staff planning and analyses jointly in a single application with specific and individually prepared reports

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