By Edward Roske, CEO, interRel
With COVID-19 and the resulting economic disruption, it’s difficult for companies to plan when the future is—to put it mildly—so uncertain. But if there’s one thing we can say with certainty, it’s that your budget numbers for 2020 are going to be wrong.
The good news is that there are 5 specific uncertainty planning EPM tools you can use to not only survive, but also thrive.
Uncertainty planning is the concept of preparing for “what if” scenarios: What if our organization, our industry, or even the entire economy goes a different direction?”
During times of upheaval, the finance department and other teams crunching the numbers go from being “corporate overhead” to “the most important departments in the company.” Why? Because during times of change, people crave information.
Organizations need to be focused on planning for the outcome of this coronavirus environment through scenario planning. A lot of FP&A professionals are feeling at sea right now. They don’t know which scenario is going to be correct—which is why they need to plan for multiple scenarios. If you only have one plan, you’re planning to be wrong.
And you don’t just need a set of numbers, but a set of actions. Time is of the essence. You must be able to generate new scenarios in minutes, not days. In slow times you can focus on precision. In critical times, you need quick, high-level information.
Not sure how to get started? We have 3 simple rules to help steer your direction:
Once you have these new scenarios planned, you can take these forecasts and share them with the organization along with an action plan if each of those scenarios actually happens.
The next step is strategic modeling, which helps you figure out what your constraints are. When will you violate your debt covenants? When will you use your available cash, or when will you need greater capital lending?
Use strategic modeling to model your revenue, expenses, balance sheet, and cash flow to get more insight into liquidity. And take action on these strategic models so you don’t run out of money.
One of the largest cruise lines in the world is an interRel customer. At the start of 2020, we were working on a planning project for several of its subsidiaries. The travel/hospitality industry was one of the hardest hit by the COVID-19 pandemic—so, as you might expect, they called us at the end of March and told us that they were putting the project on hold.
But then they surprised us when they said they wanted to redirect our resources to a new project. They immediately wanted to focus on scenario planning and strategic modeling. They needed to know what would happen to their capital, how much money they would need, and when they might run out of cash. And they wanted it in 30 days.
Strategic modeling is something that can quickly be implemented in weeks, like we did for our cruise client. Then you can easily make changes to your models—for example, asking, “What if customer revenue decreased by 5%?” or “What if SG&A dropped by 30%?” Once you understand what your constraints are, you can start modeling how to navigate these treacherous waters.
Even as some businesses are reopening, most are in reactive mode. Far too many companies wait until they’re out of money to figure out what they should stop doing: what locations are the least profitable, what products they should discontinue, and, sadly, which people will no longer be needed. You need to understand which stores are costing you money, which facilities are expendable, and which people aren’t pulling their weight. Then take those high-level costs, allocate them down by product, location, or customer, and take action.
That’s where profitability and cost management come into play. You have products, services, locations, and customers that are making you money. However, you need to know which products to stop, which locations to close, what 20% of customers are costing 80% of your profitability. Then take those unprofitable money drains, and stop doing them NOW, while you still have liquidity.
Implement a profitability solution now, or you’ll implement it later when the bankruptcy judge orders you to.
The fourth EPM tool you need right now is data visualization, which gives you a big picture view of your key performance indicators in real time.
Companies have to make sure that they’re absorbing information as it comes in. The health, economic, and political environment is changing too quickly to wait until the quarter closes to find out what happened. If there’s data that could trigger a different action or raise a deeper question, you need that data now.
At interRel, we use Oracle Cloud EPM for our financial analytics because there are dashboards built into it that provide a heads-up display on your financials. These dashboards are easy to create because they recycle the forms which are already being used to input your forecasts, budgets, and other scenarios. The dashboards are fully interactive: if users edit data, they’ll immediately see the impact. So, it’s good to combine data with visualizations that can illustrate where your data is moving (which it’s doing very quickly right now).
I would avoid an IT-intensive tool right now. You need to be able to answer questions as they come up, and make sophisticated graphics in minutes instead of days.
The fifth tool you need right now is narrative reporting, a tool that puts words together with numbers. Many companies use narrative reporting after the numbers have come in for variance analysis to explain budget and forecast variances to actuals. But you can also use it ahead of time to communicate the scenarios you’re planning to.
Once it’s clear which scenario you’re in, you need to use it to communicate how you will respond. This gives context to why your numbers aren’t in line with the original forecasts. Narrative reporting is your way of unjamming lines of communication so you can have constructive conversations about why your numbers are wrong, and what you’re going to do about it.
To bring this all together, your organization needs information now more than ever: