Real-time planning helps CFOs answer pandemic-critical 'what if' questions
September 22, 2020 | By Patrick Picha, Paul Prendergast
How do you conduct financial planning and analysis in a world thrown into chaos by COVID-19?
It's a question many organizations are struggling to answer, with some 70% of firms in the S&P 500 having had to revise or completely withdraw their earnings guidance. Today, finance teams must navigate towards an uncertain future at a time when macro and microeconomic conditions are uniquely complex. And they must do it on the basis of dramatically shortened planning horizons. It's not enough to think in terms of quarters and years; they must think in terms of weeks and months.
These new realities demand a real-time approach to planning in which financial teams use scenario modeling and simulation tools to plan for a range of possible outcomes. Leveraging external data in volume and drawing on connected intelligence from across the business, finance teams can ask those all-important "what if" questions to identify the best path forward.
From our work with finance teams that have forged a strong response to the pandemic, we've identified four steps CFOs can take to ensure their function is delivering as required.
1. Determine the right time horizon for forecasting
Over the next three to six months, finance teams will help their business plan for a range of short-term needs around areas such as sales, workforce, cash flow, distribution, and supply chain. However, these short-term considerations should be balanced by a robust 12-month plan to take to stakeholders. The latter should factor in alternative scenarios for the initial three months, as economic disruption begins to subside.
One global consumer goods manufacturing company we work with has taken this approach. Having grown rapidly through acquisitions, the company was using a wide variety of metrics and calculations across its business units. This involved a lot of time-consuming manual work and made it difficult for the finance team to gain a complete, accurate and consistent view of its planning, budgeting and forecasting.
To solve for that, the company had to define standards across its global enterprise and deploy processes and technology to help it govern, sustain and evolve its forecasting capabilities. It now uses a rolling forecast and leverages scenario modeling to understand the impact of new and emerging trends on its business.
2. Identify the drivers of the financial forecast
COVID-19 has created drivers that CFOs will need to identify for their forecasts and planning. For example, rising unemployment will likely increase loan defaults and delays in paying down credit cards – drivers that will have a clear impact on the products offered by financial services firms. By mapping financial divergence from their pre-COVID to post-COVID forecasts, finance teams can identify where value can be gained, or where it risks being lost. The key is to put in place a framework to capture and update the variables affecting the business on a monthly, weekly, or even daily basis.
The system a large fast food chain implemented has enabled it to better synchronize external drivers with its forecasting. As part of that, it move from a fragmented model to a centralized one by creating one global standard for planning, budgeting, and forecasting and providing a tailored implementation roadmap for each country and region. Internally, it's working on implementing a consistent process model across its operations so it can more rapidly see impacts to its business globally and locally.
This approach has given the finance organization the flexibility, agility, and consistency needed to rapidly complete and revise its budgets, forecasts and annual operating plans that reflect changing or new business drivers as they emerge.
3. Model rapid changes to external factors
- Quality data in volume. Finance teams need to ensure they have access to high quality data in sufficient volume. It doesn't have to be perfect, but it has to be of high quality to enable reliable modeling.
- Correlations and interconnections. Finance teams need to be able to find correlations and interconnections among key categories such as sales, cost of goods sold, working capital, workforce, among others. Data visualization tools and machine learning technologies are increasingly being used by organizations to help identify correlations that traditional modeling might miss.
- Short-term prediction models. AI and machine learning tools should be used to create very short-term prediction models. These can help guide the organization through the pandemic while pointing the way to changes that might need to be made in the future.
- '"What if" scenarios. Finance teams should use "what if" scenario modeling to understand the impact of change.
Leading companies are already marching into the future of predictive analytics-based planning, budgeting, and forecasting – such as one large retailer we work with. The company defined its future state practices and capabilities for major segments of its North America business. Eventually, the predictive analytics-based approach will be deployed globally. When this happens, it will be one of the first companies in any business sector to use statistical modeling and predictive analytics across the entire financial planning, budgeting, and forecast capability.
4. Create agile planning processes and solutions
Scenario planning should be integrated. For instance, if the workforce team changes its growth rate assumptions, this should be automatically reflected in operations and finance planning. One approach would be to create a cross-functional team to identify changes in the key drivers behind financial performance. Aided by timely, relevant data, sophisticated analytics and visualization tools, the team's insights can be used to update scenario modeling and related financial forecasts. There is now an opportunity to integrate sales and operations planning (S&OP) and workforce planning with financial outcomes across a number of dimensions in an end to end model.
As CFOs start to transform planning and analysis to make it more agile and connected, the cloud has a role to play. The cloud allows finance teams to adopt without delay the AI and machine learning capabilities they require. The cloud can also help finance and establish consistent processes across the lines of business, define common metrics, and implement the governance needed to ensure integrity and trust in the data.
One large media company we work with has already deployed such a scenario modeling approach. The company uses cloud-based analytics to plan M&A growth scenarios, adjusting input variables such as macroeconomic indicators and cash flow in real-time. This allows the company to visualize impact upon a set of output KPIs, including revenue and expense growth rates, EBITDA and margins, adjusted earnings per share, share price, market capitalization, price/earnings ratio and leverage rate.
COVID-19 has made the case for the transformation of financial planning and forecasting. CFOs that adapt to real-time scenario modeling now will help their organizations get through the immediate crisis and plan for the post-COVID world. That means focusing on short- and long-term planning, implementing a rigorous focus on the drivers of financial planning, preparing for change and modeling for a broad range of possibilities.
This article was written by Patrick Picha and Paul Prendergast from CFO Dive and was legally licensed through the Industry Dive publisher network. Please direct all licensing questions to firstname.lastname@example.org.
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