Companies need a new approach to financial planning and performance management one that informs rapid realignment of plans and actions and ensures organizational resilience.
by Ankur Agrawal, Kapil Chandra, Matthew Maloney, and Michele Tam
Planning has never been a particularly easy task, but the spread of COVID-19 has made it even more difficult. Finance professionals are used to accuracy, consistency, and relatively predictable planning cycles, not the unclear economic conditions and time horizons of a global pandemic. As one executive told us: “The five-year plan that we would be sending to the board right now is completely out the window. How do we plan in this environment when we don’t know what is going to happen?”
Clearly, companies’ existing plans and assumptions will need to be revised in light of the rapidly changing global health situation, which is creating uneven economic effects across all industries (exhibit). In normal times, financial-planning teams generally use a range of driver- based models for budgeting, forecasting, and root-cause analysis. Over the years, they have likely cultivated their own standard reports and preferred views of information. Few have probably encountered the degrees of uncertainty they’re experiencing now or been asked to conjure up a crystal ball in a matter of days to make the most important decisions their companies have ever faced.
Financial planning and performance management under this unprecedented period of turmoil requires a new, systematic approach, one that will allow the CFO and finance team to quickly alert the company to options emerging as a result of the coronavirus.
Specifically, the financial-planning team should focus on the following five steps: get a clear view of the company’s starting position; build a fact base and use it to develop a range of scenarios; align on a financial plan with the “direction of travel”; determine best actions and moves; and, finally, identify the “trigger points” that will prompt the business to adjust and adapt forecasts and financial plans with alacrity.
In this period of pandemic, companies are at wildly different levels of liquidity and risk tolerance.Regardless of their starting points, all of them can use all or various aspects of this five-step planning process to cut through the uncertainty and make the best possible decisions.
The financial-planning team’s primary responsibility is to help guide the organization through the worst of the crisis—as opposed to the mandate for the plan-ahead team, which is to look beyond the day-to-day of the crisis and develop a view of how the future may unfold. Once the worst has passed, however, there is also an opportunity for the CFO and the finance team to use the crisis as a starting point for deep discussions with businessunit leaders about how the overall planning process may need to change in the next normal.
Get a clear view of the company’s starting position
The company needs a clear view of its starting position in the wake of the pandemic. To get this, it should convene a COVID-19 financial-planning team, supported by a range of cross-functional experts (for instance, in sales and in supply chains). Together, the financial-planning team and cross-functional experts can build a solid fact base, one that tells a comprehensive story about historical and current market and financial trends, as well as potential future indicators. The financial plan
that the company rolled out in January 2020 can be a good anchor point for this exercise, as it can help to establish any assumptions that will need to change as a result of the pandemic.
The team should build a driver-based model from revenue to cash, looking monthly (or weekly if liquidity is at stake). It should compare the latest trends and the key operational drivers of the business (those inputs that have the most impact) prior to the crisis with the key drivers of the business since the crisis started. What has changed? What specific liquidity risks have emerged? How sensitive are these drivers to current uncertainties in the market? It is also important to look at business drivers within the industry (vendors, customers, and geographies) and how those have changed pre- and postpandemic. The outcome from all this will be a baseline set of facts to compare against emerging
scenarios. These scenarios will become the new “true north” for the financial-planning team and the anchor points of the financial plan for the next 18 months.
Develop a range of scenarios
With a reliable fact base in hand, the financialplanning team should be able to quickly model three or four scenarios for how the pandemic might play out within its industry: a best case (optimistic), a worst case (pessimistic), a momentum case (continue on the current trajectory), and a mostlikely case. In this way, the team can ensure that a breadth of outcomes are being explored; the organization cannot simply pick the middle scenario as the most likely case.
Each scenario must be assessed along three dimensions: depth of the decline, duration of the decline, and the time required to ramp back up. Each scenario must also accurately reflect the company’s starting point: A company experiencing a slight decline in sales as a result of COVID-19 (grocery, for example) may only need to plan for small, nonstructural changes to ensure that it successfully weathers the crisis. By contrast, a company that has lost half of its sales as a result of the pandemic (hospitality, for instance) may need to plan for a revamp of its entire cost structure and even its entire business model. Hence the “best” and “worst” cases will look different for different companies, even in the same industry.