One thing’s for certain; uncertainty is here to stay.
Last decade it was the global banking crisis that produced disruption and discontinuity for business. Now the coronavirus pandemic looks set to throw global trade into recession. This steady stream of interruptions has presented financial planning and analysis (FP&A) professionals with significant challenges and now represents the ‘new normal’; a period that the US Army War College suggested has four primary characteristics – Volatility, Uncertainty, Complexity and Ambiguity - or VUCA if you’re a fan of acronyms. It has certainly captured popular imagination, in that it sums up the business environment we have been through in the last few years, and are inevitably going have to face up to in the future.
The Importance of Different Planning Scenarios
The almost instinctive reaction to such crises is to batten down the hatches and tough it out until better times return. Although economic downturns can be severe for both business and individuals such a knee-jerk reaction is seldom the best strategy.
Recessions are typically short-lived, and those that weather recessions best tend to adopt a more balanced approach of continuing to invest in their future while selectively reducing costs. That means simultaneously developing planning scenarios that span short-, medium- and long-term imperatives such as
- immediate hiring freezes
- mothballing of manufacturing plants
- restructuring the balance sheet
In my experience most companies simply do not have FP&A processes that enable business leaders to make informed and incisive decisions across multiple time horizons like this. In fact many do not even possess far simpler planning capabilities, such as keeping departmental plans optimally aligned on a day-to-day basis, let alone being able to demonstrate to investors exactly how various levels of funding are likely to translate into faster growth in more benign times.
Anyone working in the FP&A space knows intermittent disruptions such the COVID-19 epidemic are the just tip of the iceberg because, at some level or another, every business day is a ‘VUCA’ day and if you invest in building FP&A processes that prove their worth every working day then you’ll be better able to weather a crisis.
Building Blocks of ‘Transformational FP&A’
To improve the decision-making process, FP&A needs to transform. There are several steps that could be taken…
- Integrate sales and operational planning with financial data. This will help get a holistic view of the enterprise that immediately shows how changes impact financial results. Traditionally, sales and operational planning are siloed in other systems or supported by disparate spreadsheets. How does this manifest itself in the real world? For example, a company can have a production planning application where products are set up in a bill of materials, materials given different costs in different currencies, suppliers given different credit terms, and batches set up to meet top-down sales demand. Changes to any variables update the 5-year financial P&L, Balance Sheet and Cash Flow in real time.
- Build processes around external drivers, such as market growth trends, and internal drivers, such as customer retention rates and productivity ratios, so forecasts can effectively become light-touch.
- Run processes in real time rather than batch mode. With latest financial modelling using in-memory technology, the effect of relatively large data updates can be almost immediate, there is no need to wait for a lengthy process to complete before being able to view the financial effect. Users can model iteratively and explore how the choices they make impact financial results.
- Have business managers and FP&A professional collaborate around a shared set of data, that is always up to date, and is held under enterprise level security. This means that departmental plans can be quickly aligned to address a crisis or exploit an emerging opportunity. With modern cloud technology enabled for mobile devices, it is increasingly common for executive boards to view the latest forecast on-line, and for the CFO to be able to demonstrate the effect of different scenarios then and there.
- It is imperative that planning platforms are as intuitive and as easy to use as consumer apps, so that FP&A teams can build and amend models themselves, rather than wait for internal and external IT specialist to do this for them.
For me, the critical attribute of such capabilities is that processes are integrated, so I’ll add the term ‘Integrated FP&A’ into the mix. By that I mean systematically bringing together a myriad of different types of financial and non-financial processes, across finance, sales, marketing, workforce (HR), and the supply chain on a single platform to give a 360° view of the business, despite the fact that different departments are typically working on differing time horizons and at vastly different levels of granularity.
In recent years, having created ‘Integrated FP&A’ capabilities for clients, I’ve seen companies substantially reduce cycle times for core processes, such as budgeting and reforecasting sales pipelines, while almost totally eradicating the need for outside IT support, which has given them greater agility while simultaneously driving down the cost of the finance function.
I’ve also seen companies benefit from more accurate forecasting and being more able to home in on the underlying causes of variances, resulting in them making better informed responses. Today as companies battle with the continuing uncertainty of how soon the economy will recover from the COVID-19 lockdown, they are telling us that they don’t know how they would have coped with their old systems and ways of operating. In these difficult times, such comments demonstrate the importance of an integrated approach.