Are you addicted to scenario planning yet? In recent months, CFOs and their teams have been busy compiling all kinds of what-if scenarios:
- What’s our cash runway for worst-case and best-case?
- Over what time period?
- How does working from home change our costs?
- How have your customers’ needs shifted?
- What’s the state of their business?
- What will our workforce look like by year end?
For all these questions and others, the role of scenario planning has been elevated as it helps businesses deal with what the past few months have thrown at us. And looking forward to the traditional August – December budget season, scenario planning is taking on new significance for the foreseeable future.
Many have had to learn the ropes as they go, but a few have found themselves in their element. In a recent webinar in the Open for Business series, Manuel Romero, who manages business strategy for Argentine managed services provider Neutrona Networks, declares himself a fan:
I'm kind of a scenario planning addict. I always try to push managers, CEOs and the company to roll with the process.
Romero says the practice of scenario planning has kept Neutrona's strategy firmly focused on what's in front of it rather than acting off old information. And that’s a key point. Instead of simply extrapolating past trends into the future, scenario planning helps map different potential outcomes. That’s why businesses have been finding it so useful recently.
No one knows what the future holds, but there are signs of what works. In a recent CFO Central article for NetSuite’s Brainyard, CFO in-residence Josh Burwick what will get the attention of investors, and by extension what should be the goal of your scenario planning:
Prior to the pandemic, companies that made the case that they could achieve scale quickly were staked with significant investments. No one cared that they were burning through piles of cash. Fast, expensive growth is now superseded by smart, profitable, sustainable growth. So if you rely heavily on expensive customer acquisition channels, such as paid search, it may be time to explore new, less costly avenues, such as organic content to drive SEO and brand recognition, or inexpensive social ad platforms. Growth companies that emerge from the pandemic stronger will be the ones whose technology investments make their businesses more efficient, and that spend wisely on marketing, sales and other functions. Only then will unit economics make sense. My advice: While your competitors cut people and likely service levels, invest in systems that will allow your company to better and more cost-efficiently serve customers.
Accounting for a return to the office
Another issue that’s making reliable forecasting very difficult is the lack of consensus over when staff who are currently working from home will be able to return to the office – and how they’ll be accommodated when and if they do. Janet Schijns, CEO of channel consultancy JS Group, recommends CFOs should calculate the per-employee cost of various return to work scenarios before finalising a decision between going back to the office versus continuing with WFH. This is “a rough balancing act for any CFO,” she warns. “The costs are significant in either scenario.”
Working from home isn’t cost-free, she notes. There are infrastructure and equipment costs to bear in mind – what if self-contained “office pods” installed at an employee’s home become the latest executive perk? On the other hand, JS Group recently participated in a study that found the cost of fitting out existing offices for social distancing and other measures could run to seven figures for many companies.
Many businesses will opt for a hybrid of the two, she believes, but none of these choices are easy, she concludes:
The permutations are seemingly endless, and figuring out what’s most cost effective is up to CFOs. While there’s more to consider than the bottom line, like employee preferences and the nature of your business, cash flow is king right now. Does it make sense to spend a ton of money on a new lease and buildout when it’s possible a vaccine is widely available in a year to 18 months?
Finance needs to take a wider view
Workforce planning is another area where businesses must examine different scenarios. This is traditionally left to HR teams. But Marc Holliday, senior product manager for HCM at Oracle NetSuite, argues that finance needs to get involved in people analytics too:
Finance leaders need to drive the workforce planning process in close collaboration with human resources colleagues, and with support from senior executives. Aligning headcount to budgets to ensure there are no cost overruns now, or in the future, is part and parcel of the CFO’s mandate to manage runway. By having a proactive plan, CFOs can identify and mitigate risks before the business reaches a crisis point. Or, conversely, spot pockets of expertise that could give you a leg up.
His article includes a useful downloadable sample of a Workforce Planning Template, including seven areas to cover for a complete data-driven HR planning strategy.
Across all of these areas – cash runway, facilities spend and workforce management – scenario planning helps finance teams bring the data together for analysis, to help guide the business as it decides its next steps. In our next article, we’ll examine in more detail how to go about scenario planning.
For now, I’ll leave you with a final word from Adam Levison, Head of Finance at natural toothpaste maker Hello Products, who spoke in a recent NetSuite video round-up of customer views on cash flow, planning and forecasting:
The world's a really unsure place right now. So, we don't know everything that's going to happen. We all just need to be prepared to shift, be flexible, be adaptable to whatever the new world brings for us.