From the Harvard Business Press Case study of "Plan Operations- Sales Forecast, resource capacity and Dynamic budgets" By Prof. Kaplan and Prof. Norton. Presented as a class work in IoBM-Karachi

1. Plan Operations
Sale Forecast, Resource Capacity & Dynamic Budget
Course: Sales Management
Presented By: Faiza Hammad (13865)
Noman Ameen
Shah Rukh (12485)
Sana Sadiq (12877)
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2. Budgets and Beyond…
• Functions of Budgets in most companies
• Fatal Weaknesses of Budgets
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3. 4 Management Control Processes at BOREALIS
•
Petrochemical Division of 2 Nordic Oil Companies : Neste and Statoil
•
Bogsnes (Head of Budgeting ate StatOil) moved to BOREALIS :
“ Forecast should be real, targets should be challenging. Both should not be the
same Number”
•
Boesen, Financial Controller at BOREALIS supported Bogsnes
“ Budget becomes out dated with in weeks, managers make detailed documents
and never look at them again”
•
Replaced Budget with 4 targeted management Control Processes
•
Functions of 4 targeted management Control Processes
1.) Deliver Capabilities of traditional Annual Budget
2.) Provide much broader set of capabilities
3.) Low cost & no dysfunctional aspects from BUDGETING process
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4. 4 Management Control Processes at BOREALIS
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5. How New Processes at BOREALIS replaced roles in “BUDGET” Role
Budget Roles
High level
planning
Financial
Borealis Processes
and
Tax Rolling Financial Forecast
Target Setting and Performance Balanced Scorecard
Evaluation
Controlling Fixed costs
- Activity Based Costing
- Trend Reporting
- External Bench Marking
Authorizing and Allocating CAPEX
-Small Projects : Trend reporting : Localized
-Medium Projects : Varying Hurdle rate
-Major Strategic Projects : Done by Board
on case to case basis
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6. Framework : Platform for new integrated
Planning & Resource Allocation
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7. Key Innovation of Frame Work : TDABC
• TDABC = Time Driven Activity Based Cost
• Link Strategic Planning to Operational and Capital Budgeting
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8. STEP 1:
USE DRIVER BASED REVENUE PLANNING TO
OBTAIN SALES FORECAST
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9. STEP 1 - Driver based planning to forecast
Recommendation of beyond budget : Quarterly forecast that must b more
than current fiscal year.
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10. STEP 1 - Driver based planning to forecast
PURPOSE:
To avoid surprises with their investing & analyst
communities in comparison with the old way
that give un expected sales announcements &
short fall result in decline of price &
disappointment of investor.
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11. STEP 1 - Driver based planning to forecast
ADVANTAGES:
1. Assistance in short financing planning
2. Receipt & disbursement of cash
3. Reflect current market scenario in comparison to budget
prepared 6 month earlier.
4. Forces manager to look external & internal pressure to
identify new opportunities & work for it through research &
etc.
5. If demand is accelerating than u can invest capital / train or
hire new blood to meet requirement.
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12. STEP 1 -
Driver based planning to forecast
MISCONCEPTION:
This is not four time budgeting in a year & it is
just a planning of revenue items.
NAMED AS: Forecasting revenue through driver
based planning.
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13. STEP 1 -
Driver based planning to forecast
DRIVERS are:
1.New product performance
2.Advertising performance
3.Sales promotions
4.Price performance
5.Sampling performance
6.Distribution
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14. STEP 1 -
Driver based planning to forecast
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15. STEP 1
-
Driver based planning to forecast
• Forecasting Revenue thru driver based
planning can be made for any industry with
the help of their data base, which will be very
useful for forecasting & must in cooperate
competitor & macro environment , supplier,
technology etc.
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16. STEP 1
-
Driver based planning to forecast
• PRACTICAL EXAMPLE: Of financial service firm.
Forecast Revenue (high level sales)
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17. STEP 2: Translate the sales forecast in to sales
and operating plans
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18. STEP 2
•TFP needs to translate its aggregate sales in to operating plan for its next period of
operations.
•TFS expect to achieve its high level sales forecast that is: how many trades must be
executed, how many new account must be opened and how many customer meeting
must be held.
•The operating plans specifies the expected quantity, mix and nature of individual
sales order, production runs and transaction.
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19. STEP 2
For example, to reach a forecast level of sales in each product
and service line , the company could assume the same the same
distribution of order size and frequency experienced in the
past , but increased by the assumed percentage rise in sales .
•Let suppose if the company has raised the minimum order size ,
then planner would eliminate small order and increase the
frequency of larger order.
•
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20. STEP 3: Forecast resource capacity by entering
sales and operating data in to TDABC model
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21. STEP 3
•This step is key innovation in linking a strategic plan to an operating plan.
•TDABC is new costing approach that is faster , simpler and more flexible traditional
activity based costing .
•TDABC assigns cost to product , services and customers based on two fundamental
parameters:
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22. Step 3
Figure shows how the TDABC model has enabled Tower ton financials to translate its
sales and operating plan in to forecast demand for capacity(times) for all its personal
and computing resource.
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23. Step 3
Figure shows how TDABC model forecasts the quantity of resource unit required to
implement a future period operating plan .
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24. Step 3
In step 3 , company uses its projected sales and
operating plan for the upcoming period to
forecast the demand for time from employees
and demand for time and space from tangible
resources such as property , plant and
equpment.
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25. STEP 4:
Derive dynamic forecast (budgets) for
operational and capital spending (OPEX and
CAPEX)
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26. Important Definitions
• OPEX: Operating Expenditure : Spending to supply
employees, to operate equipments & facilities. OPEX runs
through the Income statement
• CAPEX:
Capital
Expenditure:
Spending to add
equipment & technology capacity, & to acquire space to
support growth in future operations. Capitalized on to
balance sheet and depreciated over time through income
statement
• BUDGET: Estimate of future expenses, rather than
conventional “fixed performance target”
Financial accountant determines which type of spending is
OPEX and which is CAPEX
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27. • Managers agree to resource supply for future
• Financial Implications calculation
• From TDBAC Co. already knows the cost of supplying each unit of
resource
• Eg.: Towerton Financials:
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28. • New values after adjustments should be entered in to the model
• Cost and spending forecast will now reflect “future expectations”
rather then “Historic Actuals”
• Fore cast cost of each unit * Qty of each type of Resource
= Budgeted cost of supplying each Resource type
• Results = Budgets derived analytically & quickly from sales &
operations plan
• ANALOGY = MRP (Material Resource Planning)
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29. Forecasting Discretionary Spending
•
Discretionary spending on items: Research, development,
Advertising, Promotion, training and Strategic Initiatives
•
Not a tight casual relationship b/w forecast spend on
discretionary items w/t sales & operating levels
•
Discretionary Items forecast require parallel
quarterly update of revenues
•
Spending on these items is a judgmental call by experienced
executives & not based on automated decisions based on analytical
Models
calculations on
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30. Forecasting Discretionary Spending
•
To complete exercise of forecasting spending levels in Future:
 Planner obtain estimates for discretionary items, from
executive teams of authorized levels
 Financial Accountant classify much of these items as
General & Administrative expense
 Argument is “Spending on strategic initiatives = STRATEX”,
should be classified as new Income statement line item
• Authorization process should be revisited Quarterly based on recent
actual information, economic and financial situations
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31. Process & Advantages of Quarterly Forecast
• Forecast is “pressure tested” in “x-functional” meetings
• Forecast is judged on the bases of financial & Non-Financial
parameters:
Strategic fit
 Risk
 Option Values
• Advantages Include:
awareness of new projects before time
 Better Info about potential size of field
 Defer projects based on low financial capacity heads & volumes
• No Budgets get CUT any where in the process
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32. STEP 5:
Estimate pro forma financial profitability by
product, customer, channel & regional.
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33. Towerton’s Example…
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34. Thank You 
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