How can I help my organization adapt to a more volatile business environment?
Reimagining financial planning and analysis will be essential to navigating a widening array of business risks.
No company was prepared for the massive upheaval wrought by COVID-19. But seismic business threats didn’t begin and end with the pandemic.
Indeed, a growing sense of unpredictability has been demanding increased mindshare from the C-Suites in general, whether around the changing climate, natural disasters, social and political volatility, or disruptive competition from newcomers like well-funded unicorns. There’s no vaccine for ongoing business threats, of course, therefore companies must be nimbler and more forward-looking than ever to stay ahead of the next emerging risk that just might upend all of their carefully prepared business forecasts.
To support this shift, the finance team will play a key role. As executives seek faster insights on critical “what if?” scenarios, finance teams will be challenged to move beyond the “we’ve always done it this way” model of historical-based forecasting and reporting delivered on standard timetables. It’s a chance for CFOs and their teams to reimagine their whole approach to financial planning and analysis (FP&A)—and expand their overall contributions to the company.
Financial Planning and Analysis 2.0
The new reality will see CFOs moving their teams from thinking about financial planning as a table-stakes corporate function to becoming a larger strategy and enterprise planning partner. Finance leaders already have access to a large volume of high-quality data and analytics, and so they are now uniquely positioned to turn that data into meaningful insights that go well beyond traditional budgeting and accounting processes.
To make this transition, CFOs will need to identify new ways to enhance their approach to financial planning and analysis—new processes, skillsets, technologies and best-practices. Here are six areas of emphasis that we have identified to enable finance leaders to provide their business counterparts with timelier and more relevant advice and insights.
1. Find your key business drivers
Stop leaning on past financials as your primary guide to future results. Instead, identify the core internal and external data that best correlates with future financials. Perform tests to examine which drivers produce material changes to key performance measures such as revenue, volume and costs. For most companies, there are 5 to 10 such drivers.
2. Broaden your dataset
The universe of available data has been growing exponentially, providing tens of thousands of signals that AI-enabled systems can use to significantly improve accuracy in predictions. While traditional forecasts have often relied on historical data like past purchases, many of today’s signals (like customer sentiment, health outcomes or web search data) may have better predictive value in dynamic circumstances. Go beyond macro-level trends to explore localized data that guides localized strategies.
3. Ditch the annual budget
It may seem like a radical move, but annual budgets have long hindered managers from adapting to a changing business landscape. Instead, employ a rolling forecast aligned with the business cycle. This forecast should change continuously, based on observed performance and changes to your key business drivers. Beyond making your organization more adaptable, this approach also increases the speed, transparency, efficiency and accuracy of the planning process.
4. Employ rapid strategic modeling
Executives can’t wait weeks for answers when the situation on the ground is changing each day. Rapid strategic modeling helps financial professionals tackle a defined problem and uses internal and external data to perform short-term modeling and what-if scenarios, often within a day. Recently, for example, KPMG helped a utility client to quickly respond to shifts in energy usage patterns resulting from the pandemic.
5. Use predictive analytics
Powered by cognitive technologies and a broader dataset, predictive analytics can surface patterns and identify issues well before they impact financial statements. For example, one manufacturer doesn’t just rely on conventional metrics to prioritize accounts for collection, such as days past due or the account size. Instead, it incorporates a range of other factors that signal likelihood to pay within a given time frame. By using analytics to refine its collections targeting, the company has improved its days sales outstanding performance while also reducing sales reps’ time diverted to collections.
6. Empower your people
Today’s executives need real-time, on-demand data and analysis to make key tactical decisions in changing situations. They can’t wait for FP&A to gather data, extract it from spreadsheets, “run the numbers” and provide the related insights. To do this, FP&A teams will want to identify the right new technologies and skillsets that will enable more dynamic business planning and analytics for their company. The result? The ability for key executives to access consistent data across the organization, use cutting-edge data visualization tools that present complex information in user-friendly ways and even develop mobile applications that permit self-service analysis.
When the pandemic first struck, organizations with disparate forecasting processes were slow to build out what-if scenarios, while companies that had identified specific business drivers and employed cognitive technologies such as AI were able to initiate the needed risk mitigation measures almost at the click of a button. It won’t be the last time that well-prepared and forward-looking organizations stay ahead of the next emerging risk.