Businesses today face ever-increasing frequency and magnitude of change in the global marketplace. One of the effects is that traditional annual planning and budgeting processes are simply inadequate to effectively manage a business in such a dynamic environment.
Despite this, most companies still dedicate an inordinate amount of time and resources on outdated annual planning and budgeting processes. Organizations typically spend months with their most valuable people in a series of tedious internal negotiations to develop an annual plan and budget that are often outdated even before reaching approval.
For optimum performance, the operating plan needs to be based upon the current reality as it is known and adjusted as realities change. That’s where Integrated Business Planning (IBP) can help.
Why Traditional Annual Planning Doesn’t Work
An annual plan developed the traditional way usually lacks the appropriate information to operate the business and often establishes a framework that leads to disconnected functional plans. The iterative guessing game to come up with the “right numbers” leads to many time-consuming, nonproductive, highly frustrating review meetings.
This traditional process wastes precious time and takes people’s attention away from managing the business in the face of ever-changing business conditions.
The Downsides of Traditional Annual Planning
When leadership teams use the numbers developed with the traditional approach as the official operating plan, it can have unintended — although not surprising — consequences, including:
- Poor performance to the eventually agreed-upon financial plan
- Working capital mismanagement
- Low return on assets
- Increased operating costs
Eventually it becomes apparent that the company is not achieving the plan, leading different functions to begin second-guessing the numbers (again!).
Integrated Business Planning: A Much Better Approach
Leaders have recognized the need for a planning process that effectively responds to ongoing change. IBP is more reliable and trustworthy, and also enables some companies to eliminate their traditional annual planning processes.
Let’s be clear: We are not suggesting that leaders just terminate annual planning. Rather, the traditional process can be replaced with a more robust, dynamic, and routine integrated planning process. With IBP, organizational leaders re-evaluate plans more frequently than once a year and/or once a quarter in order to have the most credible current picture of demand, supply, new product development, strategic initiatives, and the associated financials. Because IBP provides a rolling, long-term forecast that aligns strategic, operational, and financial plans over a 24-month horizon, organizations can plan well ahead of budget season. When it’s time to set budgets, leaders only need to make small adjustments across demand, supply, and portfolio.
Another fundamental difference between IBP and traditional annual planning is how goals and targets are managed with day-to-day operations. One key principle for optimum performance is to separate goals or targets from the current operating plan. Both are certainly needed, but by separating goals from the plan, leadership and management can see gaps that exist, hopefully with enough time to take actions to close them.
How IBP Overcomes Flaws of Annual Planning
In general, IBP bests traditional annual planning by:
- Making demand forecasting and planning a continuous process rather than an infrequent event
- Taking second-guessing out of the process
- Taking time and time lags out of the planning process
- Separating the reward program from current operations planning, thus overcoming inherent biases
- Simplifying and focusing the organization on planning and executing against one set of numbers
- Integrating the annual plan as one of those sets of numbers “at a defined point in time”
Advantages of Integrated Business Planning
Through a well-designed and implemented IBP process, companies can benefit by substantially simplifying their annual planning process, as well as:
- More credible and reliable assumptions driving the operating and financial plans
- More aligned and synchronized planning and execution from top to bottom using one set of numbers
- Regular and routine monthly updates to the plans, which help to minimize or eliminate financial surprises
- Better and more timely information at the point of key decisions
- The annual planning and budgeting process becomes a significant non-event, saving substantial time and money while improving management effectiveness
The Power of IBP
Integrated Business Planning enables leadership and management teams to establish a regular and routine rhythm for complete business review and direction-setting. Companies wedded to traditional annual planning and budgeting processes face significant risk of “losing” in the increasingly dynamic global marketplace. Execution using plans that are based on obsolete assumptions and with inadequate and/or inappropriate detail to drive optimum operational results is an exercise in futility.
Company leaders need to stop relying on the traditional annual planning and budgeting processes and, instead, embrace IBP to successfully manage the frenetic pace of change. The dynamism of today’s business environment demands leadership and management processes that are more adaptive, credible, actionable — and ultimately more successful.
Ready to strengthen your organization’s planning capabilities? Download the full white paper to learn more.