Demand planning and forecasting benefits all areas of a company. In this installment of our series, we will examine the relationship between Demand Planning and Finance.
KEY PERFORMANCE INDICATORS
When going through the budgeting process for the following year, the Management team and Finance department will determine the Key Performance Indicators, or KPIs, that support their business objectives. KPIs are typically related to Revenue, Expenses, Profit, and Inventory Turnover. A forecasting system provides a plan to achieve KPIs, plus the ability to monitor progress and make adjustments as necessary.
A FINANCIAL ROADMAP
A great forecasting system will include an Open-to-Buy feature. An Open-to-Buy is a budgeting tool that companies use to manage inventory and make the best use of their purchasing dollars. It can also be used to project cash flow. It is essentially a financial roadmap for the company.
The Open-to-Buy starts with a Plan (and can be broken down into Categories of Business) and includes Sales, Cost of Goods Sold, Inventory, and Profit Margin, which are laid out by month. Once months are actualized, the Open-to-Buy will be updated with the actual results, enabling Planners and Finance to see how the company is tracking against its goals. From there, they can make adjustments to the Plan based on how the categories are performing to their goals. If one category is beating its Sales and Margin plans, a decision may be made to fuel that business and pull back on the categories that are not meeting their goals.
BEYOND THE BUDGET
Budgets are often done prior to the beginning of the year and often remain static. By using a forecasting system with an Open-to-Buy, Management and Finance will be continually updated on the health of the business. Strategic decisions can be made to achieve the objectives that were set.
In addition, a forecasting system provides deeper analysis than the Balance Sheet. While the balance sheet may show the value of the inventory that is on the books, it will not show you whether the inventory will be profitable or not. A forecasting system will provide profitability information. If an item or category is not meeting its goals, the forecasting system will give early warning signs so problems can be addressed on a timely basis.
CONSISTENT AND ACCURATE REPORTING
A good forecasting system will be able to provide Management and Finance with the reports they need regarding Revenue and Profitability by category, account and vendor. Reports providing Inventory information will also be available. Reports can be developed the way Management and Finance want to see them and can be generated from the system so that they are consistent and accurate each time. This efficiency enables Management and Finance to have the information they need to make strategic decisions more quickly.
A great forecasting system provides visibility to the vital information that is needed to make good business decisions. With the growth of omni-channel business, it has become increasingly complex to gather and examine all the data needed to make these good decisions. A forecasting system enables its users the ability to see this data quickly and easily. Alert systems make it easier to focus on the priority items that are driving the business, or those items that are weighing down the business.
At SAFIO Solutions, some of our clients have realized significant hidden savings because of the increased visibility they now have. One client realized $20,000 in tax savings because they were able to see that some of their inventory was overstated for the past four years. Another client realized they had been overcharged $160,000 on their invoices by having the visibility into the profit margin by SKU information. Another client realized that a salesperson had entered an incorrect price for one of their largest accounts, resulting in very low margins. By having increased visibility into the data, these problems were discovered and corrected very quickly.
RETURN ON INVESTMENT
The Institute of Business Forecasting (IBF) has stated that a 15% improvement in forecasting accuracy leads to a 3% or higher pre-tax dollar improvement for a company. This means that a $100 million company could potentially realize savings of $3 million dollars with a great forecasting system! These numbers are difficult to ignore, especially as the Marketplace becomes increasingly competitive. At SAFIO Solutions, we have found that our clients realize ROI, return on investment, in 18 months or less.
For more information on how forecasting and demand planning can contribute to and assist the many other areas of your business, including the Finance department, contact the industry experts at SAFIO Solutions.