Technology, business models, and the very landscape of organizations in virtually every industry are all evolving at an unprecedented pace.
That acceleration, though, has left many business leaders wondering how they can possibly create an effective financial plan that provides both resilience and agility. As a way of navigating such a business challenge, organizational leaders should look to their chief financial officers (CFOs) and controllers.
These accounting professionals and their finance teams can identify solutions that will promote business continuity by leveraging scenario planning. Scenario planning helps businesses mitigate risk, improve their agility, promote resilience, and weather unexpected economic storms.
The most effective strategic planning frameworks use business forecasting tools in conjunction with real-world cash flow data to ensure that organizations are prepared to overcome both short-term challenges and long-term growth barriers.
How Finance Executives Can Facilitate Scenario Planning
When engaging in scenario planning for their organization, finance executives should do the following:
Identify Stakeholder Responsibilities
The most effective scenario-planning methods rely on a top-down approach, which should come as no surprise; it is impossible for a business to engage in prompt decision-making unless it has a clearly defined organizational structure.
The first step to scenario planning involves identifying and conveying stakeholder responsibilities. Finance executives need to know precisely who will take ownership when it comes time to make important financial decisions for the organization. After the finance executive works with organizational leaders to form a team of stakeholders, the group can move on to scenario planning.
Determine Key Profit Drivers
Next, finance executives will need to determine key profit drivers for the business. They should look past traditional drivers, as these are primarily used for long-term planning, not comprehensive scenario analysis.
A natural starting point is the company’s financial statements. The CFO should examine what business goal or objective supports each line item on these statements. Identifying key profit drivers will help the finance executive uncover potential weak points in the company’s revenue strategy.
Conduct a Comprehensive Analysis of Performance Data
Here is where the heavy lifting begins. The CFO will need to start making inferences based on a comprehensive analysis of relevant financial data. In order to accomplish that, the organization must have already collected qualitative and quantitative data.
Chances are that the organization already has these sets of data available. However, since the data will originate from a combination of external and internal sources, it may not be compiled in a centralized location. That can make it difficult to locate the data that the CFO needs, much less to actually analyze it.
As a precursor to its scenario planning efforts, organizations should ensure that they have access to a robust financial management and accounting solution. A prime example would be a cloud-based enterprise resource planning (ERP) platform that includes reporting, analytics, and accounting tools.
Such a solution can expedite the scenario planning process and provide CFOs with real-time visibility into their companies’ financial health.
Account for Every Variable
Scenario planning is all about optimizing organizational transparency by uncovering every single variable and analyzing its potential impact on the business. In order to achieve this, the CFO of the business must have a broad focus, which means that they will need to assess the company’s entire balance sheet, including every source of revenue and all debts.
It is vital that the CFO considers somewhat obscure items like warehouse utility expenses, accumulated depreciation, and even equipment leases/rental fees. Only then can they engage in comprehensive scenario planning.
If a CFO overlooks even seemingly unimportant variables, every aspect of their analysis will be skewed. As a result, the entire scenario planning exercise will be far less effective and potentially useless.
Narrow Their Focus
After a finance executive has gathered and analyzed all relevant data, they can then begin to evaluate all potential scenarios, which will help the finance team be more prepared when they encounter unlikely but plausible scenarios that will strain the company’s budget.
The CFO can then begin to narrow their focus and pay closer attention to potentially catastrophic scenarios. For instance, little effort should be devoted to preparing for a scenario that is deemed to have minimal impact on the business. Conversely, the entire finance team should be mobilized to address probable outcomes that could threaten business continuity.
Planning for Uncertainty Is a Necessity
If the last few years have taught businesses anything, it is that the market is more unpredictable and volatile than ever. Therefore, business leaders must strive to expect the unexpected and prepare for the uncertainties of tomorrow through comprehensive scenario planning.
A scenario planning framework will enable finance executives to inform business decision-making processes, instill confidence in stakeholders, and maintain positive relationships with customers. It will also bolster organizational resilience and agility by allowing businesses to explore the financial repercussions of various developments within their ecosystem.
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