Businesses are steadily marching on, even if the future is unpredictable as a result of the COVID-19 pandemic. Finance teams can help manage risks and guide decision-making with scenario planning. In our last article we looked at several of the key areas to consider, from calculating burn rate to workforce planning. Now let’s explore how to go about it.
Whereas finance teams typically look at what’s happened in the past, scenario planning is all about anticipating the future. Speaking in a recent Oracle NetSuite Open for Business event, Eric Luehmann, Global Director of Business Applications at Sprinklr, a provider of cloud-based customer experience management software, explained how the company has been dealing with changing revenue and spend during the pandemic. The experience has strengthened the company’s confidence in its forecasting abilities, he says:
People can’t think about what to do right now. Right now is in the rear view mirror. We have to set up to see the next big thing, and in business, there’s always going to be a next big thing.
A template for examining the future
There’s detailed practical advice on scenario planning in an article on Brainyard by Oracle NetSuite’s David Luther and me. The article also includes a link to a downloadable scenario planning template to help teams through the planning process with guidance on avoiding common problems. Let’s start by with a definition:
Scenario planning lets business decision makers identify ranges of potential outcomes and estimated impacts based on internal and external factors both known and anticipated. From projecting financial earnings and estimating cash flow to mitigating risk, scenario planning goes beyond financial planning to create an integrated approach for dealing with uncertainty.
That’s something we all need at the moment, but it comes at a cost – it can be an “enormous undertaking.” Therefore it’s important to focus on the end result and not let planning get out of hand. While you need to map a range of scenarios, you should still keep it simple and focus on building a “nimble response strategy,” we advise.
Here are our tips on managing scenario planning scope creep:
- Recognise the importance of the team’s time.
- Spend more time on creation and analysis of problems/questions, less on “what if” tangents.
- Define important outcomes.
- Decide how you will put your scenarios to use; that will inform scope.
- Create measures of success.
- Recognise an evolving context and narrative.
Scenario planning has much in common with business continuity planning, but usually considers a longer timeframe. Just sitting down to review potential outcomes can be a valuable exercise for the business, as we note:
In both processes, the journey may be as valuable as the final product. By bringing leaders together to think through what could affect your business, you may reduce risk.
Finance can be the glue that binds the plan
For finance teams who are just getting started on planning, having certain capabilities built into their financials software helps automate some of the preparation by pulling real-time data directly from critical operational areas, like supply chain and inventory, project management, cash flow, workforce and customer records. It lifts a tremendous burden for getting started. Speaking on The NetSuite Podcast earlier this year, Nate Mariner, Global Senior Business Manager for NetSuite Planning and Budgeting, empathises with the challenges of planning for new developments such as the pandemic:
That request comes, and nothing that you have looks anything like it. ‘I may need new vendors, I may have new locations, how the heck am I going to show the numbers and how that might make sense?’ The question before that is, ‘Where’s the template? I have to go create something from scratch to even start to test my assumptions there?’
To me, that’s the biggest underlying benefit. By removing the manual pieces, you’ll focus on the larger questions. The framework is there for you to use.”
Ryan Thomas, General Manager at Depatie Fluid Power, which makes hydraulic and pneumatic equipment for the health sector, has been through this process. Speaking in a recent webinar in the Open for Business series, he says that having a planning framework in place helped deal with changing events as the pandemic took hold:
None of our scenarios were right, but we weren’t too far off. At the end of the day, I think we made some really good decisions.
This experience has given Depatie more confidence in its financial decision-making, regardless of when the budgeting process occurs, says Thomas:
As we've gotten to know the planning and budgeting processes, it's allowed us to simplify so we can do scenario planning more easily. We can run scenarios and make adjustments, but not go through a complete financial re-evaluation every few months.
Whatever the outcome of the current pandemic and its aftermath, establishing the right habits now when it comes to budgeting and planning will serve the business well in the future. The need for scenario planning has never been greater, but it’s always going to be an important part of the finance toolbox.