SWTCH by Pigment
Three days of predictions, insights, and advice from leaders in finance, sales, HR, supply chain and more
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SWTCH by Pigment
Three days of predictions, insights, and advice from leaders in finance, sales, HR, supply chain and more
Register now here
By Alan Dybvig, Managing Partner at Dybvig Consulting
Alan Dybvig
Alan Dybvig is the managing partner of Dybvig Consulting. His intellectual property was implemented to create the operational budget (OB). His business experience includes 32+ years with IBM as a director and senior manager, primarily in supply chain and sales/marketing assignments, and then four years with a Warburg Pincus-financed supply chain startup where the idea for the OB germinated. He has had five articles published in the Journal of Corporate Accounting and Finance, two articles in the Institute of Management Accountants’ Strategic Finance and one each in the Institute for Business Forecasting's blog and INFORMS’ magazine, "OR/MS Today".
Alan Dybvig's LinkedIn profile: https://www.linkedin.com/in/alan-dybvig-0a374ois/
To unite the firm on a single planning foundation, FP&A must adopt the planning frame that drives value for its customers i.e. operations (a.k.a. activities, processes, flow).
In so doing, FP&A must abandon its current planning platform of the traditional budget and its customer-meaningless details of the chart of accounts and departmental budgets.
A single planning platform eliminates the traditional wrangling over costs between Finance (i.e., budgeted costs) and Operations (i.e., actual costs) because the firm now has a cost “coin of the realm” those of its operations. According to the Beyond Budgeting Institute, this also allows the firm to “dedicate resources to processes and not the budget.”
That platform is the Operational Budget (OB) and it brings many benefits to the firm. They were explored in Part 2, 4 and 5 articles. Two additional benefits are described in this article include sales and marketing’s return on investment (ROI) and prescriptive financial what-if analysis.
This article has four sections:
In the specific case of Operations, the Operational Budget provides the following:
It is important to remember two additional benefits of the Operational Budget (OB) model for these Operational data:
These specific production planning benefits and all the other OB benefits are made possible only because the OB is a i) model ii) that is loved prescriptively. According to the FP&A Analytics Maturity Model, the final analytical stage of a company requires prescriptive modelling. See Figure 1 below.
Figure 1. FP&A Analytics Maturity Model
For the purposes of this discussion, sales and marketing's ROI is defined as profit divided by total sales & marketing expenditures; the S of SG&A.
The Operational Budget model includes both
Thus, all costs of the income statement are in the model. This allows the Operational Budget model to solve for best possible profit (or contribution margin or revenue). For more details, please refer to the first article.
If increasing or decreasing sales or marketing expenditures (S) would have improved profit, the Operational Budget model would reflect this. Thus, the S in the solution is the specific total sales and marketing expenditures that created the best possible profit. Since both profit and S were considered simultaneously, the ratio of the two is the best possible.
For additional details, please see the article published in the Nov/December 2015 issue of Wiley's Journal of Corporate Accounting and Finance titled "Truly Maximize the ROI of Total Sales and Marketing's Expenditures with Demand Driven Planning."
What-if analysis is not the same as scenario planning. The Operational Budget’s prescriptive what-if financial analysis is more focused and is distinguished from scenario planning as follows:
The two techniques are complementary; the choice between the two depends on what problem(s), opportunity(s) or risk(s) is/are being assessed.
By abandoning traditional budgeting, FP&A can help businesses create more value for its customers. Operational Budget is one of the tools that can be useful on this journey. Another useful tool is being advocated by the Beyond Budgeting Institute. The relationship between the two was described in the Part 5 article, OB’s support for the Beyond Budgeting Institute’s adaptive management model (BBM).
The Operational Budget provides advanced analytical support to seven of the BBM’s twelve principles and processes. This is possible because the Operational Budget is a prescriptively quantitative model (see Part 1). It is not competitive with the BBM; rather the OB’s advanced analytics complements the BBM. This complementary support provides more value to the firm than either model can provide on its own.
The next two articles of the series will discuss how the Operational Budget can improve M&A/PE analytics and zero-based budgeting.
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