Do you know how the world will look like in a year? Do you know what situation your company will be in a year from now? I doubt the answer is “Yes” to any of these questions. Nonetheless, that is the task you are faced with. It’s the annual budgeting season and you must predict your company’s performance for 2023.
Challenges are piling up. The good news? We’ve been used to unprecedented challenges piling up amidst the planning process for some years now. The bad news? It’s still in no way easy to predict how things will turn out. Inflation is at a 40-year high across the world. We have war in Europe. Interest rates are rising faster than ever before. It’s virtually impossible to predict what will happen next.
Governments and central banks are once again digging deep into the toolbox. Some with relatively conventional measures i.e., interest rates and others like in the UK relatively unconventional measures providing never-before-seen astronomic tax breaks. Stock markets have generally been plummeting and we’ve seen significant currency movements e.g., British Pound going to an almost 40-year low vs. the US Dollar. And all indicators are pointing towards a recession. The times continue to be uncertain indeed!
These are all assumptions that you usually consider central to your planning process. We can all agree that you cannot predict how these assumptions will develop in the coming year. The question is “how do you tackle them and plan accordingly?”.
The burden falls on the finance team
Once again, your finance team is called upon to do the impossible. We’re barely out of Covid where finance teams were pushed to the brink of their abilities before we again find ourselves in uncharted territories. The task given by the CEO is clear though: to provide the best estimate of 2023 and prepare a few alternate scenarios including an action plan of what to do if they materialize.
The ask may seem unrealistic to you; however, the ask is the ask. And you are the best person to deliver this so once again you will put your finance team to the test. It’s important though that we use the learnings we got from Covid. If you think that you could revert to the old budget process, you are mistaken.
When visibility is limited, and we know whatever we forecast is likely to be gravely wrong we also need a different approach. Finance leaders told me they made two specific changes during Covid.
- They increased the frequency of their forecasting
- They included less details
The changes didn’t come without challenges though. While most companies have planning tools many lacked the flexibility to cater for the changes. The answer? Excel! This is not a pun on Excel but rather to say that it led to unsustainably high workloads and made the planning process more error prone.
This wasn’t the only challenge. Naturally, the changes also led to running an ad hoc process because finance leaders didn’t expect they needed to use it again. After all, we did find ourselves in an unprecedented situation. However, normal is never coming back. There’s only what McKinsey calls the “next normal” or the ''next unprecedented'' situation.
How to respond to the “next unprecedented”?
Instead of expecting that normal returns it’s time we synthesize our learnings from recent years into a new process. And this entails not only re-designing our planning process but forcing ourselves to take a more holistic approach. First, we should look at how we drive the right strategic choices in the company and secondly how we follow up on these choices.
The CFO’s role in a strategy process is to ensure all options are put on the table with a well-made business case behind each. CFOs also need to facilitate the right discussions and ensure choices are indeed made about what big moves a company should make. Finally, it’s to ensure that enough resources are allocated to the moves the company will be making.
- Once choices are made planning starts and now the CFO moves from being a facilitator to an owner. Here’s the process I suggest that you employ:
- Document the assumptions behind the strategy by asking “what would have to be true for our strategy to be a good strategy” Establish confidence intervals for each of the assumptions in your strategy e.g., inflation should be between 1-5% Set up tracking mechanisms to ensure you can track the assumptions in as close to real time as possible
- At any time where the actual numbers of your assumptions breach the confidence interval it should trigger a strategy action planning session
- In these sessions you should discuss if you believe the strategy still holds true and what actions should be taken to address the changed reality
This is a fundamentally different way to plan but one that is agile and suited for a world of the “Next Unprecedented”. It’s form of Just-In-Time planning where you essentially plan continuously as you track the development in your strategic assumptions.
Let’s consider the example of inflation. You have established a confidence interval of 1-5%. You will, of course, track the lagging indicator of the inflation rate. However, we all know that you’ll be acting too late if this is your only indicator. In addition, you should track major price indices and perhaps even the real-time development in individual prices of say oil, electricity, various food commodities, and other raw materials. What you track should be correlated with the most important metrics to your company and your customers.
Following such a process you will get plenty of early warning indicators that inflation will breach your confidence interval. Long before you get the final inflation number, you’ll be having an action planning session to discuss how to deal with the increased inflation.
Does your tech stack support this process?
As we are now formalizing a new planning process we also need to consider if this is supported by our current planning tool and other supported tech applications. Otherwise, we just end in an even bigger Excel-hell than we experienced during Covid. Let’s consider what key features your planning tool should support.
- Scenario-modelling to support building business cases behind strategic options
- A central repository for storing and tracking your assumptions ideally with possibility of tapping directly into external sources for real-time tracking
- A driver-based model of your most important financial metrics but essentially P&L, balance sheet, and cash flow
- A link between real-time tracking of assumptions and the driver-based model to create rolling projections of your expected performance
- A flexible interface to allow for on-the-spot modelling when discussing action planning
- Simple and intuitive visualizations to help management understand performance
These are some of the key features and, of course, there should be integration to Excel so it’s still possible to do flexible ad hoc analysis. However, Excel cannot be the main tool for running this process.
It should be easy for you to check if your current tech stack supports this new way of planning. If not, now would be a good time to consider your alternatives. They are available and your team sorely needs one to ensure they can deliver on the CEO’s expectations.
How is your finance team addressing the “next unprecedented” world in which we have rarely-seen-before inflation levels, a looming recession, and an unstable security situation?
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