FP&A Week: Breaking the Paradox
October 10-13, 2023
By Kerman Lau, Director of Finance, Workday
Kerman Lau is a seasoned finance executive and trusted advisor to business partners and company leaders.
He uses his strong systems knowledge to drive innovation, and has implemented planning and reporting systems in companies of all sizes. Kerman is currently director of finance at Workday, and regularly speaks and writes about FP&A best practices. Prior to Workday, he worked as a key part of the Finance teams at Electronic Arts, Symantec, and Veritas Technologies
This article covers top challenges currently facing companies during pandemic.
The COVID-19 pandemic forced companies of all sizes to scrap their business plans for 2020 and attempt to come up with new ones even though so much is unknown and changing so fast.
Indeed, many companies are now faced with scenario planning at a level they’ve never done before. We’ve seen companies in aggregate create 30 times more forecasts and scenarios than in a typical week and, in some individual cases surpassing 80 reforecasts in a month. That’s not surprising given how much is unknown about what will happen when states reopen for business, the coronavirus remains unchecked by a vaccine, and consumers and workplaces settle into perhaps new norms. Still, finance teams have to surface meaningful data so critical business decisions can be made.
In the past months, we’ve spoken with more than 1,000 companies grappling with planning challenges. Based on what companies asked, and what we learned, we identified several recommendations on how companies can adjust – and keep adjusting – in today’s new normal.
There’s no need for teams to spend days working on a financial scenario that is outdated an hour after they start. Think of this as big pulse checks, and a way to evaluate top line adjustments. Figuring out where every penny goes and comes from is what you do after the dust settles. Also, plans need the analytics and the recommendations, but don’t bother with the “presentation value” that, in normal times, accompanies them.
The impact of COVID-19 widely varies based on industry, but the key for most companies is to find the big buckets, the “accounts” that matter, such as compensation, CapEx, OpEx, T&E, and event spending expenses, and use them as the core for scenario planning.
In the interest of time, consider sweeping changes to global drivers, as opposed to nitty-gritty analysis. A global sweep, for instance, is a plan to cancel all new hiring or cancel all business travel for a number of months. We’ve found that 40 accounts for most companies seems ideal in creating meaningful what-if scenarios, measured alongside 20 drivers, including growth, price, and volume assumptions around revenue.
Many companies have seen a decrease in sales and marketing costs because people aren’t traveling or entertaining. Those expense savings may be short lived though, as sales teams that aren’t out selling, won’t be generating revenue. Many companies have frozen hiring across the board, but some will selectively pursue strategic roles, like research and development to keep new product pipelines on track. While the ‘broad strokes’ can be efficient from a time perspective for scenario planning, a bit of nuance can pay dividends as well.
Sometimes the impacts will be mixed. One large beverage company had two very different outcomes in their channels. The side of the business selling to grocers was booming. While the other selling to restaurants and bars saw sales drop dramatically, as shelter in place orders shut down most establishments. And on top of all that, they needed to figure out how to meet supply, with reduced shifts and heightened health & safety constraints in their facilities. Navigating this complexity requires detailed modeling to weigh tradeoffs and fully understand the impacts of scenarios.
Surprisingly, less than half of the companies we talked to had a cash flow forecast built into their models, having prioritized planning the P&L over the balance sheet in their initial deployments. Now, given the importance of ensuring sufficient liquidity in an unstable economic environment, many are scrambling to add a forward balance sheet and cash flow statement to their models. These efforts will better position them to understand funding needs, address covenant problems in a range of possible bull and bear case scenarios. As one veteran CFO remarked, “When you’re going to your bank to ask them for flexibility on covenants, it pays to be first in line.”
For companies like Plex Systems, having a cash flow forecast built out in their model allowed them to move quickly, assess the situation, and make adjustments with less risk — understanding that they don’t have unlimited liquidity as a PE/VC backed company. As Raj Amin, vice president of FP&A at Plex explained, “We were confident in our forecasts — which our executives and board want five years out. Because continuous planning is ‘normal course of business’ for us, we were able to articulate our financial strategy virtually immediately vs weeks, giving us an advantage in this rapidly changing business environment by getting in front or our board and debt holders first.”
The companies in the best position are those that have a plan, and, more important, the ability to reforecast that plan when needed. The ability to pivot has never been more important than in the past few months. When states reopen, businesses may well get a boost. But don’t stop there. If COVID-19 infection rates rise again, businesses could get hit, again. By planning for a range of scenarios, you can go to your bank, investors, employees, or your board and say, this is what we think will happen, this is what it looks like if it goes the wrong way, and this is what it looks like if it goes a little bit better.
Working remotely has also been a change for many finance teams amidst the pandemic. Ray Alwani, director of business systems process and strategy at ENMAX, says his team plans virtually. The key to setting yourself up for success? According to Alwani, “If you take the time to build a comprehensive data model — making the right data available at the right time plus leverage the data that you actually have available — it can really enhance your planning capability. We actually integrate our actuals into our planning system on a daily basis. So, at any point in time — and accessed from anywhere — our business partners have up to date information, which is a key input into our planning process.”
Over the past several months, finance teams across every industry, across every sized organization have faced significant challenges in assessing and responding to the pandemic. Holding office hours with FP&A professionals provided insight and understanding, and it’s clear that conditions are changing at a faster pace than we’ve ever seen, requiring a change in the way teams plan.
The ability to move to a continuous planning process has never been more important, so companies can quickly evaluate tradeoffs and make informed business decisions. And while the pandemic has pushed finance teams to adjust, these lessons learned now will enable stronger planning under more predictable circumstances and prove invaluable as companies start to plan for a recovery.
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