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How to execute annual financial planning during COVID-19
Strategies for companies, CFOs, and planning leaders
Never has the process of prediction been so crucial. In response, CFOs and FP&A leaders should look to take immediate action to mitigate uncertainty during the current cycle, while enhancing processes over time to develop a more dynamic, effective financial planning organization into the future.
- New challenges
- Immediate actions to mitigate uncertainty
- Considerations for quarterly forecasts
- Building a resilient process
- Get in touch
Planning processes face new challenges
The times we are living in are historic and unprecedented. Without historical business context to provide guidance, the challenge of predicting future market and consumer behavior is exacerbated.
In a normal year, planning is a complex effort. With the instability of the current world, organizations are facing additional challenges in their planning and forecasting processes:
- Constant scenario development and modeling
- Discomfort and lack of confidence in future projections
- Urgent need for decisions and courses of action
- Unclear decision-making framework and ambiguous criteria or triggers for contingencies
- Excessive and resource-consuming manual iteration
What considerations should CFOs and planning leaders contemplate when conducting financial planning with a global pandemic in progress? Keep reading or download the PDF.
Immediate actions to mitigate uncertainty and strategies for developing a more dynamic, effective planning organization
As organizations prepare to plan for FY 2021 amidst the current pandemic, the following strategies can help mitigate uncertainty to yield a more effective, useful financial plan for 2021 and improve the process going forward as well:
Considerations for quarterly forecasts and compensation planning
Organizations should carry these practices forward and layer in the following to help build a sustainable planning process that is more robust, flexible, and shock-resistant.
- Leverage the power of a rolling, monthly forecast: Many organizations perform a quarterly forecast (if they execute a forecast at all). Now, the days of only executing a forecast quarterly are being challenged. Executives are increasingly expecting a forward-looking view of the financials updated on a monthly, if not on-demand, basis to adjust projections and incorporate new scenarios. Organizations should consider forecasting key line items, and underlying drivers, on a monthly basis, including top-line drivers, revenue growth, and operating profit. Given changing market conditions, identifying core drivers and metrics by which organizations evaluate forecast-to-actuals variance on a monthly basis may prove to be a more valuable exercise for the organization than executing a detailed plan. Given the greater frequency, it will be critical to lessen the burden to create an integrated baseline across these metrics, as well as to rapidly pivot and generate new and alternate scenarios.
- Consider the impact that changes to the financial planning process will have on incentive compensation planning: Implementing the strategies above may have implications for how compensation will be tied to actual versus plan performance—a practice common across many organizations. As changes to the strategic planning and financial planning process are identified, it will be crucial for these changes to flow through to planning and executing incentive compensation as well.
Building a resilient financial planning process
Financial planning, and embracing digital capabilities such as algorithmic and driver-based mechanisms to enable scenario modeling agility, is now more important than ever. In times of uncertainty, identifying and discussing potential scenarios in a scientific manner can help organizations prepare for the future. Enhanced capabilities will likely be necessary to rapidly digest and assign value to evolving sources of information in order to incorporate that perspective within planning and forecasting models in an efficient and scalable way.
To successfully deliver, finance organizations should challenge the existing mechanisms by which they are executing their planning and forecasting processes and developing associated scenarios. Targeted efforts using the short- and long-term strategies above can bolster planning capabilities across times of crisis, recovery, and business as usual and unlock the value that is uniquely attributable to financial forecasting and its ability to inform and strengthen strategic decision-making.
What is algorithmic modeling and forecasting?
Algorithmic modeling and forecasting uses statistical models to describe what’s likely to happen in the future. It’s a process that relies on warehouses of historical company and market data, statistical algorithms chosen by experienced data scientists, and modern computing capabilities that can make collecting, storing, and analyzing data fast and affordable. Forecasting models offer more value when they can account for biases, handle events and anomalies in the data, and course-correct on their own. That’s where machine learning comes into play. Over time, forecasting accuracy improves as algorithms “learn” from previous cycles. Deloitte’s own PrecisionViewTM solution combines data science, machine learning, and advanced visualization to help companies accelerate their planning and scenario modeling efforts to more quickly move to action.