While Finance teams own annual budgets and quarterly forecasts, other functional teams such as Sales, Marketing and Operations will often have separate finance-related forecasts, targets and goals for their respective needs. This can occasionally cause confusion to observers as to the “true” finance forecast when different teams provide different responses. Since Finance teams should be the single source of truth for official measurement of finance-related metrics, such as sales volume or return on investment, they can leverage their position to help align potentially disconnected forecasts, targets and goals.
Become Aware of Other Finance-Related Forecasts
Finance leaders should maintain regular communication with their functional counterparts to ensure they are aware of any finance-related forecasts, such as the ones mentioned above, as well as KPIs for executive leaders that require official measurement. While pushback on who owns the measurement may emerge, Finance leaders should state that the goal is to preempt any future misalignment and have those functions focus on their core priorities. Some examples can include:
The sum of individual salesperson or regional goals related to commissions achievement may not align with the official budget/forecast sales target. This can occur for various reasons, such as differing methodologies for determining the financial sales target versus the ultimate allocation of that sales target to the sales personnel responsible for verticals, channels or regions.
In those cases, the Finance team should try to influence the Sales team to link or align with budget/forecast figures as much as possible so that more granular targets are at least directionally aligned. This way individual sales targets are methodically aligned with the overall vision of the top-level sales forecast.
We would suggest an alignment meeting between the Finance team and Sales leadership during the target setting process. In a working session, drivers of the financial budget/forecast target that may be more regional (e.g., $100M representing X% growth in region B) can be compared to the additional targets (e.g., customer/channel, vertical) the Sales team wants to achieve. For example, the Sales team might want to target $75M across solutions for Customer C and $50M across solutions for Vertical D, implying Y% growth. If at least total growth aligns at an approximate level, both the Finance and Sales teams should feel comfortable with the differing components/methodologies.
Product & Service Goals
Individual product or service goals similarly may not align to the official budget/forecast sales target, given dynamic changes related to channel developments or launch/go-live timing events that are often more frequent than budget and forecast updates, which typically happen quarterly.
These product or service goals should also link or align with budget/forecast figures as much as possible to align at least directionally with the overall vision of the top-level sales forecast.
Similar to the sales quota example noted above, we would suggest an alignment-based working session between the Finance team and Marketing leadership where the drivers of the financial budget/forecast target which may be more regional (e.g., $100M representing X% growth in region B) can be compared to the product or service targets the Marketing team is looking to achieve (e.g., $75M for Solution A, implying Z% growth). If at least total growth aligns at an approximate level, both the Finance and Marketing teams (and the Sales team from the prior example) should feel comfortable with the differing components/methodologies as their teams aim to achieve their goals.
Supply Chain/Fulfillment Management
Some businesses are at the mercy of inventory availability, which is much more difficult to align with Financial budgets and forecasts given the upstream and downstream effects of supply shortages or gluts. Monthly and quarterly changes to supply availability should be considered to adjust Financial and other functional forecasts for such businesses.
For inventory-driven businesses, Supply Chain and Fulfillment teams typically compile updated forecasts at least monthly based on availability. The Finance team should analyze these updates to determine risks and opportunities to existing financial forecasts. When the financial forecast refresh windows come up (typically quarterly), the inventory variances impact should be considered. For example, Finance might lower related forecasts for products in shorter supply than needed or not moving as well as expected.
Opportunities may also arise if demand trends differ among regions and inventory can be moved fairly easily (e.g., non-moving product in slower demand in Region A may be moved to short-supply, higher-demand Region B).
Rolling, Real-Time Sales Outlook
Sales teams will often have a more current pipeline view of the expected sales trends over the next several months, often communicated via rolling weekly or monthly forecasts. When these updates are circulated across the organization, it is recommended to put any variances versus existing Financial budgets/forecasts in perspective to gauge what adjustments may be needed, if any, in the next update cycle.
Related situations that may come up could include sales efforts that are realized ahead or behind schedule (timing differences), which may not require any adjustment when all the affected periods are taken into account. There may also be new positive or negative developments not considered when the financial sales forecasts were constructed. These could include events or trends like geopolitical events (e.g., import or currency challenges) or marketplace changes (e.g., struggling competitors).
Find Agreed-Upon Ways to Align and Measure Separate Forecasts/Targets
After noting the other functional forecasts, targets and KPIs that are finance-related, Finance teams should collaborate with the other functional teams to link or align them to the official budget/forecast. This can be done by designating the applicable figures at a fixed percentage above or below the official budget/forecast.
For example, if leadership wants to push certain regional sales teams above a total Finance forecast growth target of 10%, those regions can be placed at 15% (+5%). Leadership may also want to throttle down other regions that would realistically not be able to reach those targets (e.g., uncontrollable region-specific challenges or prior-year, high-growth hurdles) to compensate.
Furthermore, Finance teams should leverage their quantitative expertise to propose measurement methodologies if they are not yet available. This can include defining the components of ROI measurements, payback periods, customer acquisition costs or proposing the use of trusted third-party sources.
For example, when measuring Marketing ROI, Finance can propose that specific GL accounts, such as Advertising Spend, Trade Show Expense and Direct Marketing Expense, be used to measure “Marketing investment” for all measurement periods (and exclude any non-recurring adjustments). The Finance team can also propose that Operating Income be used as “Return” for the corresponding periods.
Send Achievement Updates on Progress to Stakeholders
As with regular monthly and quarterly financial reporting, the Finance team should collaborate with the functional teams on measurement and achievement updates on these other forecasts, targets and KPIs on a similar cadence. This will provide visibility to all stakeholders so that progress and any needed performance improvement can be acted upon. While some may consider this approach over-communication, these actions can help build trust and nurture the working relationships with those other functional teams for future collaborations.
For stakeholders, we would propose publicizing year-to-date (YTD) on- and off-track measurement for key KPIs, coupled with comments from the associated teams at regularly scheduled quarterly meetings – at a minimum. Monthly email updates with just data updates could also be leveraged for more frequent communication.
If you are looking for help with aligning Finance-related forecasts with other functional teams, or if you are thinking about bringing in financial consultants, then contact us at 8020 Consulting! We offer outside expertise with industry best practices and would be happy to help you define your needs and offer advice on next steps. You can also learn more about managing projects across functions in our free infographic:
About the Author
Marco has 20+ years of Finance and Consulting experience. His work spans various industries including technology, entertainment, consumer products, aerospace & defense, financial services and healthcare. Marco has expertise in Financial Planning & Analysis (budgeting, forecasting, and reporting), Strategic Planning, project management, pricing/cost optimization, financial modeling, merger integration and valuation. Prior to joining 8020 Consulting, Marco held Finance and Strategy positions at Epson America and also worked for various firms including Deloitte Consulting, UBS and Goldman Sachs. Marco holds a B.A. in Economics from Brandeis University, and an MBA from the UCLA Anderson School of Management.
Categorized in: Financial Planning & Analysis