To help improve your financial planning and analysis, we’ve put together a list of five key focus areas for CFOs and finance managers to hone in on:
1. Move to driver-based planning
Oliver Wyman has recently highlighted the benefits of introducing the modern forecasting practice of Continuous Integrated Planning (CIP). In such a model, the focus is on rapid identification of emerging opportunities and risks.
A core element of CIP is the ability to use data to generate insights on key business drivers or metrics. Using this insight, CIP shifts from a focus on static, linear, one-time planning processes to a model in which the planning function is ‘always on’. This ensures finance leaders can adapt early and effectively to volatility in business or market performance without ‘flying blind’.
To enable driver-based planning, businesses need access to accurate, real-time data and analytics that furnish leaders with granular insights. This enables the financial planning team to monitor performance against predictions, identify trends early on and intervene to adjust spend accordingly, thereby protecting the business from unforeseen shortfalls.
2. Invest in talent for the planning team
It sounds generic, but bringing in the best possible talent is one of the simplest wins you can achieve in financial planning.
Without the requisite expertise to interpret and act on the insights generated by driver-based planning, those insights could go to waste. Worse, they could be incorrectly interpreted, with those assumptions baked-in to ultimately harmful strategy and planning decisions.
Any talent brought into the financial planning and analytics function must also be well-versed in advanced analytics and technologies. They must be able to analyze complex data, identify trends and consider the business implications of those trends over multiple dimensions and timeframes, effectively shouldering responsibility for the running of the entire financial planning and analysis process.
3. Establish overall business proximity & alignment
Finance must act as an advisor to other business functions. Strategic planning and forecasting can’t be achieved without close proximity to each department within the organization.
Finance leaders should look to establish close partnership and collaboration with senior management, developing an organizational structure where CFOs and forecast analysts have enough proximity to the business to enhance communication and, thereby, improve proactive decision making.
Organizations should also look to create rotational programs and offer non-finance related training initiatives. This might sound counter-intuitive, but it will bring financial planning teams into greater contact with other departments, developing new skills and ‘learning the language’ of each function within the business, fostering trust between departments.
Establishing business proximity can help finance leaders achieve cost efficiencies, develop new customer segments, and determine better pricing.
4. Hold back some resources for contingency
While budgets are typically fixed for the year in most organizations, COVID-19 has shown that flexibility is essential. With uncertainty continuing throughout FY 21/22 and beyond, CFOs will need to maintain that flexible approach in 2021. Indeed, they should take a modular approach to budgeting, building various options and contingencies into budgets.
McKinsey advises that, going forward, budgets should contain centrally-controlled pools of funds, which can be used when certain triggers indicate the need to do so, e.g. when demand spikes or troughs in a certain region.
These centrally-managed fund reserves should be focused on supporting variable-cost categories but may also be released in stages throughout the year to support capital expenditures, R&D projects, and hiring initiatives. They may not need to be used at all, but in volatile times, it’s vital to have that buffer to enable businesses to react when necessary.
5. Stress-test scenarios
Building on the ability to generate forecasting and strategy insights, financial planners must make sure to stress test their plans against different potential scenarios. CFOs must ensure that crisis response protocols will remain effective in the year ahead.
McKinsey summarizes the correct approach to stress-testing:
There’s never a bad time to stress-test your business projections, and though it’s always advisable to do so, in the current economic landscape it’s absolutely essential. Failing to prepare, as they say, is preparing to fail.
In many ways, businesses are playing a waiting game to discover the fallout of the ongoing pandemic, but that doesn’t mean financial planning needs to be caught on the back foot once more. By taking these steps and being proactive with forecasting, strategy and decision-making, financial planning and analysis leaders can help to build robust, resilient and agile organizations with a foundation for success in 2021 and beyond.
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