FP&A teams will need to maintain multiple scenarios to steer organizations through turbulent times and identify opportunities.
Once again, as we’re all aware, recent events have thrown the business world into the realm of the unknown and the unplanned. This unforeseen event came quickly and without warning, and almost overnight led to a “Gross Domestic Product stall,” with many businesses slowing down or operations stopping; suppliers worrying about payment; and employees wondering whether they will stay employed. This sudden event also forced companies to quickly assess liquidity and the ability to ride out the turmoil intact. While CFOs and their finance teams clearly have a role in addressing these challenges, many struggle with practical ideas on exactly how that will work and what can be done in the short term.
What are most finance organizations doing today?
Everyone is working long hours, trying to assess the short- and medium-term impacts caused by the current economic situation. The assumptions behind all aspects of the income statement and balance sheet are changing frequently (in many cases, daily). The financial planning and analysis (FP&A) teams are coordinating the inputs from all areas of the organization and trying to manage all the permutations in spreadsheets and other systems. These are not designed to accommodate multiple scenarios at the same time, nor the multitude of assumptions that must be made when handling a crisis.
In short, meaningful outputs are hard to come by, and actions to close emerging gaps are proving elusive to many businesses. This, in turn, will have a negative impact on the CFO’s discussion with the business on strategy.
Severe macro-economic events often require significant intervention in operations and dramatic course corrections to business strategy in an environment of great uncertainty.
CEOs need to understand the impacts and formulate new targets, while updating business plans with some hope that these modified plans and objectives are achievable. As FP&A teams respond to the challenge, they are often sent into a tailspin without the tools or access to instant insight to advise executives. This is very different to established stress-testing processes. Normally, significant re-planning can take weeks, if not months, of intense effort, and multiple iterations and hand-offs. This is the norm today for many corporations who do not have agile scenario planning and strategic modeling capabilities. It is no criticism of the caliber or the effort of the FP&A teams; they are generally just not equipped with the tools for this type of job when it needs to be done quickly in a time of crisis, as the current situation dictates.
So it is no surprise that a stressful reaction is often the answer to a stressful situation.
Can we reduce the stress in times of crisis? Should we be better equipped for “off-the-cuff” and ad-hoc scenario analysis? Does it add any value if we’re only partially correct in our analysis? Uncertainty will always be with us – but should we attempt to quantify it? Can we? Do we need the insight behind the uncertainty to quantify the impacts of each probability and understand the associated corrective actions? When faced with this range of questions, the simple options are
- Do nothing
- Plan for the worst, while hoping for the best
- Consider all the probable permutations and make better decisions, based on understanding the outcome for whichever path prevails:
1. Is doing nothing an option? No, a “wait-and-see” approach is often the worst approach in a crisis.
There’s too much at stake and the potential short-, medium- and long-term impacts in a time of crisis are often too severe to not consider as early as possible. This means that we must look at what’s happening today and over the next 30 days, and do the best we can with the information we have. A wait-and-see approach closes the door on potentially critical liquidity actions and other short-term moves that will pay off in the longer term.
2. Is planning for the worst the safest bet?
Many consider doomsday planning as the ultimate protective shield, planning actions around this worst-case scenario and hoping for upside. While this approach can be appealing, especially in risk-averse companies, this conservatism may lead to draconian measures, which could prevent the organization from being competitive when the market upside commences and hence, could contribute to the exact opposite of survival.
Developing a worst-case scenario and stress testing the company’s liquidity and other key performance indicators (KPIs) against that worst case is one situation that should be considered, but it certainly should not be the only one that is acted upon. The tunnel vision associated with focusing on a single worst-case scenario is ultimately not a good answer – organizations should have learnt that from spending years and billions on stress-testing – preparing for just one catastrophic outcome is not the most likely outcome.
3. If planning for the unknown is hard, can I really think about planning for multiple versions of the unknown?
Trying to predict a single answer to what is going to happen is almost impossible. Finance needs to deal in data points and not crystal balls, so what do we do? The only thing we can say with certainty is that we cannot predict the single outcome of any situation, let alone crisis situations such as 9/11, the 2009 financial crisis or COVID-19. Therefore, we need to be able to run and maintain multiple complex scenarios at the same time, so that we understand the impacts and can plan actions for many given scenarios.
It is arguably easier to build assumptions for multiple scenarios; as not everyone has to agree on all the assumptions, we can run variations. But to do this, we need well-configured, multi-dimensional, instant calculation power and a platform that brings this all together. That is not a simple ask.
So yes, we should be better equipped to deal with these challenges, and it is unfortunate that many times this isn’t fully appreciated until a crisis occurs. Finance should strive to move from reporting to analysis to truly driving insight and impact to stay relevant and drive economic value. While this should always be the case, it is particularly pertinent in times of crisis.
If it was easy, most organizations would have the tools and processes in place already. However, most do not. It is normally not possible to manage and maintain numerous complex scenarios for products and geographies in multi-dimensionality without the right tools, and without investing in these tools, it is hard to accomplish much in the way of driving value from insights. These challenges are way beyond the capabilities of spreadsheets and more detailed transactional tools that take hours to update each time changes occur. There are many better options available now.
