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Finance, FP&A

2. Scenario Analysis has become an essential part of FP&A

In the first of this series we explored the concept of ‘organisational resilience’ – that is the ability of an enterprise to make an appropriate response to a crisis, and eventually rebound to a viable and sustainable level of trading. Since we were first hit by the global COVID-19 pandemic, numerous business researchers and gurus have written extensively about best practice in surviving a crisis, but there are three that are most pertinent to those working in finance.   

Establishing structures that enable rapid decision making

Research has shown that the most resilient companies are typically early-responders, that make incisive decisions, and the best way to enable that is by establishing a multi-disciplinary team of senior people, that is empowered to make rapid decisions. Call it a crisis management team if you like, but the important thing at the beginning of a crisis is that they meet daily and can make decisions and reallocate resources quickly, cutting through the red tape and management hierarchies that typically slow corporate decision making.

One of the characteristics of resilient organisations is that while they emphasise quick, efficient, and continuous decision making, few took big bets on the future, but preferred to make a continuous stream of small decisions that they could quickly test and refine. In practice this meant these agile organisations did not have to build consensus around a single decision, but could rapidly explore a number of potential courses of action before agreeing a way forward.

Below this senior team was a network of local teams with accountability for a business function or unit resulting in a flexible, scalable network of teams that cut through the traditional management hierarchy. Such agile practices have enabled organisations to make fast decisions and to absorb and adapt to challenges, with McKinsey’s research showing that 93 percent of organisations thought their agile business units had performed “better” or “significantly better” than normal, on both customer satisfaction and operational measures. It may well be the way some companies choose to work in the future.

Enabling rapid and continuous scenario analysis

Clearly, financial planning and analysis professionals are embedded in these networks of teams at every level, with specific responsibility for providing their peers with insights into the likely implications of the choices they face. But this is not planning; nor is it simply reworking a new version of an existing planning model with a few variables changed. It is full-blown scenario analysis simulating how possible external and internal influences might impact financial performance with input values, business drivers, assumptions, and occasionally the entire business logic, constantly in a state of flux.

Providing the rapid and detailed feedback that crisis teams need for incisive decision-making is clearly beyond the capability of both spreadsheets and siloed, domain specific, planning tools. FP&A professionals need a planning platform that enables real-time what-if analysis based on changes in drivers and assumptions. What’s more, they also need the ability to create new scenarios on the fly, rather than waiting on internal or external resources to build and amend planning models for them.

adopting a real-time planning platform

As many readers will know, an FP&A professional gets a never-ending stream of questions about what’s happening to cash-flow and liquidity. Today their forecasts are highly dependent on constantly moving external factors, such as how the UK Treasury is forecasting trading might be impacted; when consumers might get back into the shops or whether supplies from overseas could be interrupted. To compound this complexity, managers will want to run multiple scenarios of best, worst and most-likely scenarios based on various ways the company could respond to current events. That’s one big workload that won’t be going away any time soon, and without a real-time planning platform, such as that of our partner Anaplan, which is designed to be self-managed by financial professionals themselves, many finance teams will struggle.  

But with the benefit of hindsight, and a judicious investment in technology, the uncertainty inherent in the current crisis may be looked back on as the tipping point that accelerated the transition of finance from a focus on reporting history, to a focus on forward-looking decision support that helps organisations navigate uncharted waters. Who knows? One thing you can be sure of though; this sudden and severe disruption has made traditional planning and budgeting processes, and tools that underpinned them, totally obsolete.

To learn more download our guide - Connected Planning: Key to FP&A Transformation.      

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If you’d like to learn more about accelerating Finance Transformation, we'd like to hear from you.  We’ll be able to answer all of your questions and explain the processes we use to help you build resilience.

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References: [i] 'Resilience and value: A CFO tool kit for withstanding shocks’, McKinsey podcast, September 9, 2019.  [ii] ‘COVID-19: How CFOs can drive resilience and value in an evolved role’, Christian Mertin, EY 4 minute read, 24 August 2020. 

Finance FP&A

Steve Benham

Steve's passion is to help finance departments become genuine business partners, transforming them from corporate historians into fortune tellers, so that CFOs become relied upon for insights into the effect of decisions on future profitability. Steve qualified as an accountant with PwC and spent 15 years of his early career in CFO roles, before forging a career in cost management consulting, spanning over 20 years. Steve has implemented large cost management projects and developed deep expertise in key sectors including Airlines, Utilities and Manufacturing. Prior to establishing Profit& in 2016, Steve was a Director in PwC Finance Consulting and Cost Management Practice Lead in Vantage Performance Solutions. Steve also led Consulting Practices for Cost Management in technology firms including SAP, Business Objects and ALG Software.

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