Financial Forecasting – SOFP Series Blog #6

Financial Forecasting

SOFP Series Blog #6

In previous blogs we discussed why SOFP is important for the lean organization, and how to complete the first 3 steps of the monthly SOFP process. In this blog we will look at step 4, Value Stream Financial Planning.

Once the sales and operational plan is developed in the SOFP Planning Meeting it is quite straight forward to create a financial forecast for the value stream for the next 18 months. This is important for a lean company because SOFP financial forecast replaces the traditional annual budget. Here’s why: For companies that feel it is necessary to track “budget against actual” each month or each quarter, then this is done using the SOFP financial forecasts.

The financial forecast is calculated directly from the sales and operations forecasts and is prepared as a summary for the whole value stream. This can be accompanied by a more detailed breakdown and showing the assumptions and explanations for the numbers.

The forecast is prepared for each value stream. The components of the forecast are quite straightforward and usually come from the value stream accounting used by lean organizations.

The financial numbers are then consolidated for all the value streams (including NPD and Sales/Marketing if they are not already included in the value streams) and the support costs. This provides the financial forecast for the whole division or company. The financial forecast is included with the package prepared for the Executive SOFP Meeting in Step 5. This ensures that when the SOFP plan is approved, the financial forecast is also approved.

In addition to internal planning, these financial forecasts are used to report expected earnings and other financial information required by bankers, the stock market, owners, board members, and other external parties.

As a part of the financial forecasting, the financial team will review any actions proposed by the value streams that have significant financial impact. The purpose of this is to verify the financial impact of the proposed action and validate the proposed action.