FP&A key discipline for a post-lockdown world
By Allan Saffy, Executive: Financial Planning & Analytics at Decision Inc.
At the beginning of March, few decision-makers could have anticipated the significant impact a lockdown would have on operations. Apart from the human tragedy of the COVID-19 pandemic, this black swan event has resulted in great economic uncertainty requiring a massive repositioning of financial planning and analysis (FP&A) activity.
Think back to April 20 when the price of West Texas Crude (WTI) crashed below $0 for the first time in history. This resulted in WTI future contracts dropping to as low as -$37.63 per barrel. Something not many, if any, analysts could have predicted. And then there is March 12 when the Dow Jones Industrial Average had its worst drop of 2 353 points since the infamous 1987 ‘Black Monday’ crash. Even though it has recovered slightly since then, many investors are unwilling to make any medium-to-long-term predictions.
Adding fuel to this fire is how quickly unsubstantiated information has spread on social networks. While ‘fake news’ is not a recent phenomenon, the coronavirus has only exacerbated it. From 5G technology being the cause of the virus to governments around the world injecting people with trackers, things are only getting crazier as the global lockdown continues. Even making the spreading of fake news a criminal offence in South Africa has done little to stop it being viewed as fact.
Amidst all this, FP&A has become more critical than ever and something not to be overlooked. Planning and preparing for the uncertainties of the future are greatly influenced by the changes happening in the daily operations of businesses.
Even though there is merit to the argument that all the intricacies related to the knock-on effects of pandemics (up to now) have been difficult to plan for, Gartner says these must be considered an operational risk that can be classified under such other extremes as natural disasters and social unrest. And planning for any operational risk is vital to minimise the impact on employees whether they are working remotely or in a dramatically different office environment.
Getting to grips with how the organisational supply chain must evolve and how service delivery will change all form part of this. The daily operations of the business have irrevocably changed. Even post-lockdown, there is likely never going to be a return to what was once considered the status quo.
Because cash flow into an organisation will be incredibly limited during these times, managing it as effectively as possible is a business priority. Suddenly, FP&A is the most important function inside any company irrespective of the industry sector.
Part of this requires decision-makers to run multiple scenarios given how quickly events change during the lockdown. For this to happen, leaders must accept that on-demand planning is a new reality. Whether a business does that with innovative technology built around artificial intelligence and machine learning or relying on more traditional solutions like spreadsheets, it is the function itself that will be the most challenging.
To this end, organisations need the ability to rapidly test each scenario to know what needs to be done to achieve the best outcome in each. This is where innovations such as Scenario Modelling Accelerators are critical to cover multiple industries and functions. These provide decision-makers with a faster way of understanding and quantifying the risk to the business and can create complex scenarios in minutes.
These are difficult times with questions now revolving as much about the cash impact on income statements and balance sheets as they do about what the cash reserves of the organisation will look like. Those businesses that are completely shut down (think hospitality and entertainment), do not have the ability to generate revenue. For them, modelling must be done on how they will operate without cash and which employees will be paid and who will not be.
Throughout this, technology is a key enabler. It equips the business with innovative tools to become more agile. These [tools] provide the means to more effectively embrace digital transformation and capitalise on any potential growth opportunities in the market.
But if companies are to build momentum after a period of inactivity, they need to rely on their customers to start spending with them again. For this to happen, the organisation must show the value it brings through products and services designed for a post-lockdown market. Even if it is difficult to fully understand the long-term impact of the past several weeks on business, data is generated daily that can help inform the planning for the future.
As more information becomes available, companies will be in a stronger position to put policies and processes in place that can just be tweaked as the country moves through the various lockdown levels. Organisations are now relying on their key stakeholders, executives, and management to make the right assumptions, test it to see what it means from a financial perspective, and how it will ripple through the value drivers in the organisation.
And, of course, if there is a negative impact on how best to change and adapt to turn things around.
But for the time being, decisions will focus on stretching cash as far as possible. The days of time-based financial planning like budgets and forecasts are over. To be competitive, a company must be able to plan on demand. As a result, monthly plans will need to be replaced by real-time ones better indicating the market realities of the present. And in doing so, a business will be in a stronger position to weather any difficult storms that come upon its way.