Enhance your sales procedures in operational plan for product quality

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welcome back to the corporate finance academy today we're going to talk about the operating plan annual operating plan master budget whatever you want to call it uh but how that process works what it is and go through some of the details [Music] okay so like we mentioned we're going to talk about the annual operating plan we'll go through a step-by-step process of the different pieces of the creation of that annual plan and you know some details on how to lean or run the process if you're in fp a or you're running a operating plan process some critical things to keep in mind when you go through it so with that let's dive in so you hear this called different things operating plan annual operating plan a master budget different companies have specific terminologies that they use for this but they're all effectively the same thing what you're trying to do is define the company's strategic goals that they have for the next year and sometimes this might be for two years or three years four years and this really helps to get everybody aligned so make sure that the sales team the operating team the finance team hr team everybody in the organization knows what the intention is for the next year or longer it also is going to lock down what the company's financial targets and budget are so those strategical goals what do they mean in terms of numbers and how we should evaluate the business so whether it's a publicly traded company or private company how we should measure the business and how we'll measure leadership so you know a lot of people in from some companies even from the manager level director level vp level all have incentive based pay and get bonus based on if the company achieves targets or division achieves targets and this is the the process that helps establish what those targets will be um you also need to know your cash position and your funding requirements this is especially critical for the finance team um you're going to have to pay salaries you have bonuses to pay you're going to buy capital you have capital expenditures you're gonna have money coming in for the products you sell so you gotta understand what that cash position looks like and if you need money to borrow money or if you're gonna have cash coming in and you're able to maybe use some additional cash and there's a lot of other things that you'll do with the annual operating plan from establishing how many people are going to work you know what that headcount should be if you need to hire people if you're going to invest in technology or engineering or r d and many other things so we'll get into some of those details as we get through the rest of this video so just a quick overview of what the annual budget looks like in totality so you have the annual budget the master budget you can call it you call it many different things but you have that budget then you're going to have a couple things that happen kind of simultaneously although the sales budget will lead the purchasing or production budget a little bit but that's the next step then kind of offshoots of those is you're going to define your sg a spend including your head count your capex and r d so how much money you're going to spend on those areas and what your returns will be inventory and your cost of goods sold late so mainly your labor material and overhead related to your purchasing or product producing the goods for the company then you have your cash plan your cash flow statement and you have an income statement and a balance sheet and those are kind of the financial outputs of all these things that you see above so for this annual operating plan the question is who does the work so in reality you know the finance team finance and accounting is often kind of a gatekeeper for it where they help drive or shepherd the process through but you will have you have to have kind of full engagement throughout the organization you saw in the previous chart you've got sales elements you've got production elements if you have if you're in a manufacturing business hr to know how many people so the whole organization really should be involved and have different responsibilities for pieces of the budget but the finance team ultimately often pulls everything together so the process itself what does include and what has to be done so the first steps here you really have this sales budget and i think of these almost as 1a and 1b but i will say sales is the slightly earlier piece of the process what you're trying to understand is kind of my business unit or by region how much can the business actually sell and why do you need to know that so you really need to know how much you're going to sell so you know how much you need to make um you know for using the example of a manufacturing company it's how much you'll produce if you're a retail company or something along those lines that's how much you have to order and you have to know all the associated costs that go along with the selling and producing of those parts so um you then are going to have how do you actually do it there's tops down for passing there's bottoms up forecasting and i'll touch on that on the next slide what those mean so we'll come back to that if you're not sure what it is just hold on a minute but you use things like market intelligence economic intelligence sometimes these are services you can pay for research that you do you may even employ your marketing team that tracks these things and tracks the rest of the market to understand how much there is out there and how much market share you have or could win you often rely on customer feedback them telling you how much they think they're going to buy or just knowledge about them and how much you think they'll buy trends in the industry is the industry growing or shrinking you know as we've gone through this covered pandemic a lot of trends have changed you've got industries that are hurt you have industries that are actually moving faster you know if you were selling n95 masks you maybe weren't having a stellar time and then covet hidden now you probably can't keep them on your shelves in competitive analysis especially in the the dynamic times of cove and you have different levels of competition in different areas and some people some companies leaving some companies starting up so you're going to use all these factors to try to understand how much you're going to sell kind of in in parallel to this but probably lagging some of the information from the sales team you want to know how much you can and should produce as a business and what is it actually going to take to produce it so you need to understand if the business can actually satisfy the demand so what is its capacity so you kind of start there sometimes and say how much could we make if we had all the people we need and we ran all of our machines at full efficiency and then you want to see if you could sell that and if those changes in demand require you to change your footprint or purchasing strategy so let's say you looked at your capacity you realized you could sell it all do you have to acquire any factory you have to expand one and on the flip side if you have tons of capacity and it's open and you can't sell it all do you have to change something you have to combine buildings or something along those lines um so you're going to look at the sales budget as an input and you're going to try to understand your hard and soft capacity and what hard capacity means is machinery and equipment and how much they can produce and soft capacity would be labor so how many people you need to produce it and you're going to look at how efficient you are you're going to look at your manpower and ultimately you're going to try to understand your labor and material and overhead that go along with with producing so a quick note on tops down versus bottoms up you know if you think about tops down forecasting you're really thinking about taking overall industry data and saying how much of this we could capture or you're taking trends or something like that so it's it's coming from the leadership point of view or in macroeconomic point of view and saying well we think we can do this much whereas with a bottoms up you're really looking at you know granular level detail of your customers your market and you're probably saying okay here are our top 20 customers for each of these customers let's talk to them let's see how much we think they can uh that we think that they'll buy from us and you're getting into every level of detail and similarly if you look at tops down bottoms up for another piece forecasting like forecasting your sg a one way to do a tops down forecast would be just take your total spend of sg a and look at how much your top line growth is and say your top line growth is growing at 10 percent you would just say hey my sg a should only grow at five percent the bottoms up way of doing it would be here's what we have to produce let's go look at exactly how many people we have how much they make how many more people we need to add and come from the bottom to build up to a number to see what it looks like so that would be the tops down versus bottoms up methodology okay so the process itself of the operating plan we talked about production um and kind of the different pieces of that would be when you're establishing your production plan you're going to understand how much labor material overhead you're going to spend and you're also going to think through your capex budget as well as r d if you're in a company that spends a lot on research and development but you know like we talked about the production side of this is really how many units you're going to make and when you think about this you really have to also think about your inventory because your inventory if you have a lot of stuff in inventory and you're starting out the year you might not have to produce as much as the demand calls for and on the flip side if your shelves are barren of inventory and you need some safety stock you may actually have to produce more than the demand and when you go through this production process you're also going to be setting your kpis for the year um you know things like how much scrap you're gonna have your overtime indirect labor all the things that you measure your business by and then and as you do this you're gonna just establish your cost of goods sold so when you have your production units you got to figure out how much it costs to produce those units so things like direct labor direct material and overhead and when you do this you're also going to set productivity targets so generally every business is going to have some sort of target where they anticipate that they get more productive as a business and you know a lot of times you'll see something in the neighborhood of three percent as the target uh for productivity so meaning you you need to get three percent more productive in your manufacturing which will drive your costs down as business unless you have capex and r d so production obviously requires capital spend and sometimes it requires r d so you think about capex it's gonna be things like you're gonna have to replace equipment you have to repair equipment maintenance software you might have to do it projects you might do research and development develop your project products all these things go into this bucket of capex and r d very important to know especially as we get into our cache planning so the next piece is sg a so your sg and a budget needs to be set um and really the first thing you have to do to to do this is to understand your sales production plans and you're gonna have to set things like compensation and benefits bonus travel and training and you know one thing to note about sgna is for all of these things that you go through in the planning process oftentimes the sg a process is the most i'd say emotional of the of the elements so there's a lot of emotion that goes into this um and it's because you're talking about people's compensation and their benefits and their bonuses and how many people leaders can have on their team to get the job done so it can be extremely an extremely emotional piece of the budget setting process so then you have your your cash flow statement your income statement your balance sheet um you know when you think about the cash flow piece of of your budgeting process you've got your sales budget um in your top line sales so this is going to be you know and you're going to combine that with that leads right into your ar and your dsl so days sales outstanding and these are being your cash inflows you still learn how to use this thing so we got your cash inflows and then on the other side you've got your cash outflows you know you've got your ap and your days to pay you've got capex r d we talked about um these are all cash out right and then obviously you have your working capital which is going to include some of the stuff that we talked about okay and then you've got your income statement is going to have a lot of the same input so your sales plan is going to lead right into your income statement you've got your all your sg a expenses you get your cost of goods sold from your production which is your labor material and overhead um so that's all going to affect you and as you go through all this you know all these pieces start to link together so your capex is going to land on your balance sheet your ar is going to land on your balance sheet all your working capital accounts we said ar but you've got ap you know you've got your starting cash and starting inventory and then you've got we know we have our demand and our sales and we also have our production so we know that'll help us get to our ending inventory balance but you have all these factors that start to come together and create your financials from all the steps that we did prior so what is the finance team's role in this so we as the finance team we try to coordinate this process we drive the conversations and discussions we have to make the schedule for it and we have to try to translate the information we get from the operating team which sometimes isn't easy to do because they speak a different language with the translate that into the operational speak into the financials but ultimately i think finance at most companies or many companies runs the show create templates and we collect the inputs create the timelines we create the templates for the powerpoint presentations the decks presentations that leadership that are given to leadership to the board roll up numbers from multiple sources that's one thing to think about when you go when you go through a planning process is it's not as simple as you know just saying here's my numbers you're often looking at you know if you have i'll make up an example as we go but let's say you have a headquarters let's say we're using like nike as an example i have no idea how they're split up but they would say you know basketball as a vertical division you've got running you've got soccer i apologize to our non-us viewers for the soccer comment but and then the other thing you have coming across often is you have like north america you have asia you know you've got europe so however companies structured you have all these different verticals and often you're trying to figure out which level you connect the data for you know you're going to do it at these levels you're going to collect it by region sometimes you have to do both so it can be tricky at the end of the day we have to create a final version of what this plan looks like so some things to think about when you're going through that process one is you really need to stay as close as possible to your operational counterparts at the top of the house it might be presidents vp gms but at the lower level it might be you know your local your sales guy in your region or in your your division um it could be the people the shop that you work at it really can depend you've got to stay close to them and be on the same page when you think about timeline you want to work backwards allow yourself times to roll up so if something is due if everything's going to be due december 1st you have to think backwards and say well we need the full roll up by you know a week before that and we need to to get that full roll up we know it's going to take our finance team seven days from submission to get it fully rolled up we know that the divisional divisions are going to want to review it before that so you just keep working backwards to get to the start date of when you need and make sure you're giving yourself time especially financing time to take all the inputs and and get them ready and you got to remember that even just because you set a deadline doesn't mean people are going to hit it so you have to build in some buffer so if you say something's due on november 1st if you need it by november 1st you may want to ask for it you know three to five days before the end of october so that you can get it on time and you want to try to get a raised agreement to those deadlines because if you make unrealistic deadlines people just are going to ignore them you know version control is really critical you have a hundred different excel files floating around different versions it's hard it's easy for that to get out of hand it's hard to manage it so be careful and have a plan there's a lot of way that you ways you can do it you can use cloud-based files but then you risk people messing up the files so you can use some different security provisions self-protect certain cells but you you gotta have a plan for hyphen controlled version um and you gotta really try hard to leave emotion out of it people will get emotional remember sales incentives are tied to these things you know leadership bonuses are tied people have a lot of money on the line everybody to some extent is going to try to have their target set low because they want to be able to make their bonus so you got to keep that in mind you have a lot of different personalities so you know try to always use data and facts when you're in discussions and try to take your emotion out of it as much as possible again you know just a quick outline of what the budget process looks like from top to bottom and it's it can be more detailed than this but this gives you a nice feel for what it looks like in an ordinary cycle and just a couple last things to think about understand hedges and stretches right um you know when you when you have a stretch that you're assigning to somebody so let's say a division says they're going to do 200 million dollars to divide up and you're going to give them 220. it shouldn't just be a blind 220 you should have some idea or a project that could help them get to 220. even if that project is going to take a lot of work it might not be successful you should be able to say hey look we want you to finish your development of this product sooner and get it to market by middle of the year so you can make an additional 10 or 20 million dollars there should be some basis to that stretch and then you know you're gonna have to deal with people hedging so as you go up multiple levels of the organization if everybody hedges you five five million dollars by the time you get to the top depending on the levels it could be 15 or 20 or 30 million dollars of hedges out there and things don't look good and then at the same time if you're at the top of the house uh and you're in headquarters fp a you might keep a couple hedges for headquarters knowing that some of the businesses might not make their numbers um but the biggest thing i'd say to my advice to finance folks is take the time to really understand what is happening operationally you have to be able to tell a story with the numbers of what's happening in the business so you're going to have to know the assumptions that drive those numbers especially when you're in bottoms up using bottoms up type rollups for your estimates so you know that's it there's some pieces of advice i've been through many of these in my career so if you have questions and comments please leave them but it's it's really a great process i think when you're when you join a new company or you take a new job with an existing company these annual plan settings are one of the best times to actually learn the business so they can be difficult but really embrace it use it as an opportunity to learn as much as you possibly can about the business and it's also a great way to win uh credit and and develop relationships with the operating team if you're successful in these plan processes they'll remember that and you can really improve that relationship so that's it you know please please subscribe i hope you like the videos like them if you do um leave questions comments and we'd be happy to to help you out wherever we can that's it for now we'll have more videos coming soon so take care [Music] you