Real-time planning helps CFOs address key 'what-if' questions amid the pandemic

As COVID-19 throws the world into turmoil, how should financial planning and analysis be conducted? This is a question many organizations are struggling to answer, with about 70% of companies in the S&P 500 having to modify or completely withdraw their earnings guidance. Today, finance teams must navigate an uncertain future during a period of exceptionally complex macroeconomic and microeconomic conditions, and must plan based on significantly shortened planning cycles. Thinking only quarterly and annually is no longer sufficient; they need to plan by week and by month.

These new realities require a real-time planning approach, where finance teams use scenario modeling and simulation tools to plan for a range of possible outcomes. By heavily leveraging external data and integrating connected intelligence from all parts of the business, finance teams can ask the critical "what-if" questions to determine the best path forward.

Based on our experience working with finance teams that have responded robustly to the pandemic, we have identified four steps CFOs can take to ensure their function delivers as needed.

1. Determine the appropriate time horizon for forecasts

Over the next three to six months, finance teams will help the business plan for a range of short-term needs in areas such as sales, workforce, cash flow, distribution, and supply chain. However, these short-term considerations should be balanced with a robust 12-month plan for stakeholders. The latter should account for alternative scenarios for the initial three months as economic disruption begins to subside.

A global consumer goods manufacturing company we worked with has adopted this approach. The company grew rapidly through acquisitions, and its business units used a variety of different metrics and calculation methods. This involved significant time-consuming manual work, making it difficult for the finance team to obtain a complete, accurate, and consistent view of planning, budgeting, and forecasting.

To address this issue, the company had to define standards across its global enterprise and deploy processes and technologies to help govern, sustain, and develop its forecasting capabilities. Now, it uses rolling forecasts and leverages scenario modeling to understand the impact of emerging trends on its business.

2. Identify the drivers of financial forecasts

COVID-19 has created drivers that CFOs need to identify in their forecasts and planning. For example, rising unemployment rates may increase loan defaults and delays in credit card payments—drivers that will have a clear impact on the products offered by financial services companies. By mapping the differences between pre-pandemic and post-pandemic financial forecasts, finance teams can identify where value may be gained or at risk.

The key is to establish a framework to capture and update variables affecting the business on a monthly, weekly, or even daily basis.

A large fast-food chain implemented a system that enables it to better synchronize external drivers with forecasts. As part of this, it shifted from a decentralized model to a centralized one by creating globally unified planning, budgeting, and forecasting standards, with tailored implementation roadmaps for each country and region. Internally, it is working to implement consistent process models across its operations to more quickly see the global and local impact on its business.

This approach gives the finance organization the flexibility, agility, and consistency needed to quickly complete and revise budgets, forecasts, and annual operating plans to reflect changing or new business drivers.

3. Model rapid changes in external factors

There are four elements to rapid, accurate scenario modeling:

• High-quality data volume.Finance teams need to ensure access to a sufficient volume of high-quality data. The data does not need to be perfect, but it must be high quality to enable reliable modeling.
• Relevance and interconnectivity.Finance teams need to be able to find correlations and interconnectivity among key categories such as sales, cost of sales, working capital, and workforce. Organizations are increasingly using data visualization tools and machine learning techniques to help identify correlations that traditional modeling might miss.
• Short-term forecasting models.AI and machine learning tools should be used to create very short-term forecasting models. These models can help guide the organization through the pandemic while pointing out changes that may need to be made in the future.
• "What-if" scenarios.Finance teams should use "what-if" scenario modeling to understand the impact of changes.

Leading companies have already moved toward a future of planning, budgeting, and forecasting based on predictive analytics—such as a large retailer we worked with. The company defined future-state practices and capabilities for major parts of its North American operations. Ultimately, the predictive analytics-based approach will be deployed globally. At that point, it will be among the first companies in any business unit to use statistical modeling and predictive analytics across its entire financial planning, budgeting, and forecasting capabilities.

4. Create agile planning processes and solutions

Scenario planning should be integrated. For example, if the workforce team changes its growth rate assumptions, this should automatically be reflected in operational and financial planning. One approach is to create a cross-functional team to identify changes in key drivers of financial performance. With timely, relevant data, advanced 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 results across multiple dimensions into a single end-to-end model.

As CFOs begin to transform planning and analysis to be more agile and connected, the cloud plays a significant role. The cloud allows finance teams to immediately adopt the AI and machine learning capabilities they need. The cloud also helps finance departments establish consistent processes across business lines, define common metrics, and implement the governance needed to ensure data integrity and trust.

A large media company we worked with has already deployed such a scenario modeling approach. The company uses cloud-based analytics to plan M&A growth scenarios, adjusting input variables in real time, such as macroeconomic indicators and cash flow. This enables the company to visualize the impact on a set of output KPIs, including revenue and expense growth rates, EBITDA and margins, adjusted EPS, stock price, market capitalization, P/E ratio, and leverage ratio.

COVID-19 has proven the necessity of financial planning and forecasting transformation. CFOs who adapt to real-time scenario modeling now will help their organizations navigate the immediate crisis and plan for a post-COVID world. This means focusing on both short-term and long-term planning, implementing rigorous attention to the drivers of financial planning, preparing for change, and modeling for a wide range of possibilities.