Every business undertakes financial planning to support long-term strategies. Planning drives covenant compliance, investments, and future M&A work. It’s at the core of every finance organisation.
Yet, as we all now know, planning has changed—and it has changed dramatically.
Finance leaders across the world are fundamentally changing how they plan, because our perceptions of business risk have changed. 2019 financial plans for 2020, going through the most careful and diligent process, are void.
Usually, financial planning is performed on a quarterly, bi-annual, or annual basis by finance departments. That process traditionally involved a huge number of data sources, slow manual processes, lots of spreadsheet formulas and long planning cycles. Before 2020, this was already out of step with the speed of business transformation and cultural change. Now our world is changing hour by hour, the old way of financial planning is no longer relevant, and it needs a total re-boot.
Rapid advances in technology are helping to address this planning overhaul, allowing an organisation to adopt a continuous planning mindset. Planning is no longer completed in silos in finance—it’s inclusive of many different business departments.
What is continuous planning?
Continuous planning is a real-time forecast that doesn’t require a cyclical planning model. Many activities are automated, so finance leaders can concentrate on higher value activities like simulations and scenario modelling. During the pandemic, it has been instrumental in developing responses to different circumstances. How companies adapt to shocks like this pandemic, and manage their cash flows could be the difference between growth and survival.
The ability to see the impact on business forecasts allows for management to make decisions on costs, restructuring, or take advantage of other market opportunities.
The impact of organisational change on finance teams
Before the pandemic, finance teams were changing. However, COVID-19 has severely disrupted the pace of organisational change. As businesses change their workforces, and technology supports us even more, it underpins why continuous planning should now be the norm.
COVID-19 has demanded fluidity in teams – people changing roles, being assigned to specific projects, or moving on. Having a continuous planning backbone that links operational and financial models enables these changes to be captured to ensure that nothing slips through the proverbial net. This is especially important when markets are volatile, because more business scenarios need to be thought through now by different finance team members. As change goes on around us, having an automated “always-on” planning infrastructure helps to prevent the breaking and disruption of planning cycles.
Scenario planning on a global basis
To adopt continuous planning to keep everything moving in real-time, you need a number of critical components.
The global nature of business means that there is a constant stream of new opportunities to explore. For example:
- What would happen if we sourced materials from Argentina?
- What if we moved production to the UK?
- What if we increased the US marketing budget by 3%?
Having a planning system which supports this type of scenario analysis is critical to maximising opportunities, together with bringing financial planning outside the realm of just finance and into business operations. If you extend planning to people on the frontline of the organisation, as well as the finance team, you allow the people who understand what is happening on the ground to participate. As their feedback and entries rollup from operational plans into the finance plans, it gives a more accurate view of forecasting than ever before.
Critical success factors to continuous planning
To adopt a continuous planning mindset across your organisation, here are a few pointers.
- Spend time forecasting what matters
- Identify Key Business Drivers
- It is critical to understand the key drivers of Revenue and Expenses and how they interrelate.
- By identifying five to ten key business drivers before starting the planning process, you greatly enhance the relevance and achievability of your plan.
- 80/20 Rule
- Spend your time planning material accounts. For example, if a given Revenue account makes up <1% of the total, don’t spend a lot of time and effort planning it. Pick accounts that are material.
- Spend time analyzing the data vs. number crunching.
- Challenge the Status Quo
- Focus on historically material variances
- Where do you historically see material variances? Accounts? Products? Departments? Geographies?
- Value: Significant time savings, ability to perform more analysis.
Automate where you can and leverage internal data:
- Planning has historically been a time- consuming, manual, multi-spreadsheet-driven exercise, often resulting in errors and data reconciliation challenges
- Automate inputs where possible, for example (among other things), link new leads in your CRM system to updated revenue forecasts, or allow a clear connection between the sales team and the actual forecast updated in real time.
Involve all functional areas in the planning cycle:
- Planning can be finance-centric, involving a handful of senior management.
- Today’s mobile- and cloud-based technologies allow greater collaboration between sales, marketing, operations, supply chain manufacturing, and finance within a single, unified system. This could involve functions updating the forecast for latest projections, but also providing qualitative information from the front line (e.g., a salesperson learning that a customer is expecting lower than anticipated sales).
Simplify inputs and outputs:
- If you are to include more functions in the planning process, it is important to ensure that they only have access to what they need to do.
- Although the underlying planning model may be complex, it is important to reduce the inputs and outputs to only the core information that functions need access to do to maximise user adoption.
Communicate the KPIs:
- Identify the key metrics that senior management will use to monitor the business on a daily, weekly, and monthly basis.
- The output of the planning process should allow management to easily monitor actual vs. forecast, track variances, and test the impact of multiple scenarios on the business.
- Consistent KPIs throughout the planning process ensure that management are making decisions on a like-for-like basis.
A lot is being asked of today’s finance teams. They need more agility, tech-savvy skills and a watertight planning process as underlying financial and operational drivers are turned upside down.
COVID-19 has pushed finance to think in different ways and break cyclical and quarterly patterns. It is also shifting ways of working, driving forward technology adoption and triggering new team structures.
The business case for continuous planning has never been stronger.
Richard Sampson is SVP of EMEA at insightsoftware, a global provider of financial reporting solutions with more than 25,000 customers worldwide.