2020 brought unprecedented challenges to almost every business around the world. The business landscape has changed to the point that there is no more 'business as usual'. This has dramatically raised the bar for planning.
With changes in regulations and how we work, day to day, businesses now operate in a less predictable environment that rewards companies that take the time to create flexible, agile plans. Conversely, companies that wait to be surprised or fail to anticipate different events — even outliers — can miss threats from which they cannot recover. Planning multiple scenarios is no longer an option — it's now a modern business requirement.
There's an understandable aversion to rigid, old-school planning using outdated tools and poorly designed processes — but this is where many businesses still find themselves. Too often, it's an 18-month annual planning cycle to create budgets and forecasts of questionable authenticity and reliability that miss key scenarios, such as:
- What happens if the economy contracts five to seven percent next year?
- How will competitors respond in the next year?
- How will travel costs change in the next year due to the pandemic?
- How vulnerable is top line revenue to the loss of a few key customers?
- What if market demand for a key product suddenly plummets?
Planning in 2021
Traditionally, firms create annual plans with quarterly updates to profit and loss, cash flows, and capital spending. Fortunately, they're increasingly moving away from spreadsheets and embracing specialized planning tools that can:
- Integrate directly with key financial applications.
- Automatically maintain an audit trail of who updated each balance and when.
- Enable multiple users to work on the same plan simultaneously.
- Rapidly create and populate alternative plan assumptions to accelerate the creation of scenario-based budgets and plans.
Just as important, these new planning tools extend beyond the walls of finance to enable operational and non-financial teams to understand the impacts of different actions on revenue and costs. For example, you can gain insight into how the timing of new hires impacts revenue in subsequent quarters, or see the economic impacts of subscription bookings, services utilization, sales capacity, and more. When you can model the changes from one set of numbers and assumptions, you see the potential impact to the entire business in real time.
Speed means scenarios
Perhaps the greatest advantage of modern planning tools is simply speed. Many firms are using cloud planning tools as an easy means to dramatically increase planning frequency. Since they produce much of the work automatically, you can generate more granular, realistic, and timely forecasts and respond to changes as they happen.
Take, for example, home loan technology company Knock. The company grew rapidly from a small to midsize business over the span of just three years. With a financially complex business model in an extremely detailed real estate industry, Knock's small accounting team faced ever-growing manual work, while the business lacked the visibility it needed.
With a move to cloud-based Sage Intacct Budgeting and Planning, Knock has eliminated three days of manual work each month, while gaining more flexible forecasting and budget vs actuals reporting. That speed and flexibility is important as Knock continues expanding its markets and product types. Now, Knock's finance team can easily add new markets into budgets and have them seamlessly roll up into a company-wide view for planning. And it's gaining additional insights by bringing in nonfinancial data from systems including deal tracking, marketing, and the industry-wide Multiple Listing Service (MLS) database.
Businesses, and more specifically executive teams, must take some risks to grow. The best businesses take smart risks while also managing downside risks. Executive teams, in their planning process, must carefully research and analyze what could happen to their business in any number of scenarios, some of which they may or may not have previously experienced:
- Natural disasters.
- Data breaches.
- Supply chain disruptions.
- Employee actions.
- Adverse publicity/scandal.
- Wars and terrorism.
- Macroeconomic growth or contraction.
- Government actions (e.g., tariffs, trade embargos, tax increases, sanctions).
- New regulations.
- Material changes to competitive landscape.
- Employee malfeasance or error.
With some scenarios (eg, a data center goes down), you have a formal disaster recovery policy that is routinely tested. But for other scenarios (eg, outsized inflation) you need a combination playbook and financial plan that incorporates new costs, opportunities, and business responses.
For each scenario, you need to be able to identify when you're entering the early stages and what countermeasures you'll implement. Some scenarios are quite obvious and immediate (eg, a tornado destroys a key distribution center), while others can sneak up on the business over time (eg, a new Internet-only competitor quietly siphons off many of your best customers).
Scenario planning differs from traditional forecasting that uses an agreed-upon budget to build the three basic 'Best, Worst, and Likely' forecasts. This might help to prepare 'plan vs actual' reports, but it doesn't provide guidance about how to confront a game-changing event. Scenario plans won't stop that unusual event from occurring, but they can expedite your response. That shortened response time could save your business millions and hasten its return to a level of normalcy.
This leads back to the example of Knock. When COVID-19 hit, Knock was in a position to use scenario modeling to help it navigate uncertain times. The company's head of finance, Megan Dunne, ran multiple scenarios in just a few hours that included comparative P&Ls with impacts on revenue, costs, cash, and more based on varying sets of assumptions. Then, as things changed through March, April, and May, they were able to update those scenarios and recalculate the impact. Dunne noted, "Those scenarios were the key driver of the decisions that were made by the business."
What scenarios need
Planning tools will likely shift the focus from internal financial transaction data toward greater use of externally sourced big data. Imagine the power of scenario plans that can factor in:
- The impact of weather on retail sales.
- Whether a pandemic from afar is threatening the supply chain.
- Looming warranty or recall issues (based on social sentiment intelligence).
- Changes in customer reviews that correlate to revenue and discounts offered.
Scenario plans might also factor in sensor data for insights into potential machine repair costs based on algorithmic analyses of prior and expected repair data. This ability to predict when a company will need to make repairs will hopefully reduce unplanned downtime (which improves net profits).
Big data feeds might help spot emerging trends and early-identify data points and leading indicators that are harbingers of things to come. That could include increased seismic activity, rising temperatures, mutating viruses, changing birth rates, or increased political tensions. When that leading indicator is present, you can implement the scenario plan for this event, do a quick update, and get moving while there's time to get out in front of competitors.
As we begin to emerge from the worst of the COVID-19 pandemic, it's a good time to reflect on how you can plan for the next 'unforeseeable disruption' — by frequently and easily re-planning throughout the year, adding more non-financial data to spot anomalies, and identifying signal changes early and often.
To make planning easier, you may want to consider newer, more modern technology to manage your planning. However, instead of just replicating current practices, processes, and technologies in the new system, it should push you into building (and frequently updating) a wider range of scenarios.
The changes we've all experienced in the past 12+ months may abate, but frequent disruptive change is likely a part of our future. Smart businesses will equip themselves with tools that thrive in these fast-moving times. Ensuring you have a dynamic planning process in place can help you focus on business objectives, maximize profits, and proactively manage resources. If you would like to learn more about how you can make that happen, download this ebook on how a modern, cloud solution can help make sure your planning tools are in sync with this new business world.