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Financial discipline for optimized performance
Series: Developing new finance models to thrive in unpredictable environments
When economic performance rests on the shoulders of the finance function, an operating discipline that optimizes performance in the long-term is essential. With marketplace uncertainty and rapid transformation exposing the difficulty in planning for the future with increasingly limited processes and forecast models, we explore how to develop a new financial discipline in business that enables organizations to make better decisions, remain agile, and find opportunities in unpredictable environments.
June 16, 2022
A blog post by David Cutbill, principal, Deloitte & Touche LLP
Note: This post is a deep dive into our March 2021 article: Finance discipline for optimized performance
Finance discipline for optimized performance
Around the globe and in most industries, whether a company is going through aggressive growth or tightly managing margins against increased competition, marketplace uncertainty, inflation, and disruption, the future is increasingly unpredictable. This significantly lessens the predictive value of historical financial reporting, highlights the weaknesses of inflexible forecasting processes, and often results in an inability to efficiently and agilely allocate capital and cash across businesses. Recent events of the past couple of years have heightened the unpredictable environment and exposed the need for enhanced financial disciplines that enable flexible, agile management that incorporate multiple competing views of the future.
Finance professionals may be wondering how organizations can effectively plan for the future when the present is rife with uncertainty. It’s a reasonable question. One that may be answered with a few key initiatives and considerations at the foundation of finance. When future economic performance rests on the finance function’s shoulders, supporting and continually evaluating current decision-making that optimizes performance in the long term is essential—and it is possible with a new financial discipline that remodels the finance data, forecasting, and delivery models to better predict with and align to the future of finance.
What is driving the need for new financial discipline?
Marketplace volatility—whether from macroeconomic events like the pandemic, rapid disruption and innovation, inflation, or increased vectors of competition—has meant that historical financial information is decreasing in value, either for the markets to appraise companies or for management to make strategic or operational decisions. Unfortunately, the traditional design for the annual planning and forecasting process fails to pick up this slack. It typically has built-in rigidity, limited ability to reforecast, and a focus on a single view of the future with linear execution plans.
Another underlying constraint is the lack of organized and connected internal and external data that informs management on marketplace and business impacts across different time horizons. We have heard the terms “driver-based budgeting” and “single source of the truth,” but oftentimes these have not migrated into a company-wide, driver-based information hierarchy that can effectively synthesize and use increasingly large amounts of historical, current, and predictive trend data.
The effective management of different kinds of risk is also not ingrained in many management disciplines, which often treats risk management as a separate parallel or one-off exercise that does not adequately maximize the return on risk across a plethora of strategic and operational decisions.
Guiding principles for a new finance discipline
- Manages against multiple views of the future
- Leverages diverse external economic and ecosystem evolution data
- Incorporates a future-focused view across multiple time horizons
- Allows for agile and surgical management across the business
- Supports decision-making with flexible and responsive execution
- Lessens the impact of management biases on decisions and execution
- Maximizes combined long-term success across diverse businesses
When faced with these challenges, creating a new breed of frameworks enabled by financial discipline to meet a different set of criteria may better position the business to thrive in the current and future environment.
How to develop new finance discipline to enhance performance
The elements of finance discipline that we explore here develop from a foundation of robust scenario development and resilient scenario planning. From there, agile capital allocation and predictive forecasting enable more structured and flexible decision-making, incorporating better real-time insight from across the business ecosystem. At the core of this approach is rethinking and retooling the finance data model, forecast and planning models, and delivery models in the finance framework, which enable the whole of the finance discipline journey.
In times of uncertainty, predicting the plausible future seems increasingly difficult, at times even futile. However, structured scenario planning can empower organizations with more confidence in decisions taken now, enabling actions against multiple potential scenarios that are designed to improve operational resilience and financial performance, mitigating many of the challenges with predictions amid uncertainty.
Scenario planning uses real-world data and possible outcomes against critical uncertainties to create hypotheses about what could happen. Each assumption examines the implications for each scenario within the company’s specific business environment. It is important to remember that these scenarios create stories about what the future may be like. They are not predictions about what will happen, but hypotheses about what could happen, designed to shed light on new opportunities or hidden risks. They also provide greater clarity on a fundamental question: What would need to be true for this future to materialize?
See the methodology for developing resilient scenarios for better financial planning
Another key underdeveloped finance discipline is capital enhancement, which enables a more agile business model and resilient organization. Using scenarios with their implications and impact can maintain adequate liquidity in the current environment to cover different negative outcomes while also identifying surplus capital as possible leverage for investment and business opportunities.
Organizations can start responding to the current climate by upgrading short-term working capital and liquidity management with more transparency across the enterprise. Future transformation introduces scenario planning and optionality into a more agile capital allocation process that can adapt in real time for changes in the business and operating environment.
Explore how to create more capital agility now and more capital resilience for the future
The act of forecasting needs to be more agile and constantly updated, even while incorporating multiple potential scenarios. Businesses can hotwire traditional planning and forecasting processes by utilizing scenario planning along with predictive analytics and data technologies. These new technologies use automation and robotics tools with a capacity to produce more accurate and voluminous data in real time and that surpass the speed and volume limits of manual processes and historical forecast models.
This velocity of data means better information, and better information informs better forecasting. Data- and scenario-driven statistical models, alongside agile planning and short-term capital allocation, constitute a new financial discipline. Concentrating on these disciplines collectively fosters a more resilient business that can optimize performance now while setting up future success in an ever-changing environment.
Key takeaways to know about finance discipline
Here are some key insights and actions to know and take to guide finance professionals through the integrated components of a new finance discipline. It is essential to build and enhance these finance models to support effective decision-making and optimize performance in these increasingly uncertain times. These five insights and five actions are steps you can take now on a finance discipline journey into a thriving future of finance.
Key Contacts
Recommendations
Making the ESG journey a priority
Considerations to better prepare for the growing ESG landscape
Risk and controls reporting
Developing an internal controls program for a changing risk profile
