insight magazine

Planning for the Future in Unprecedented Times

If the tumult of 2020 has you wondering how to even begin planning for 2021, fear not: Scenario planning can help finance professionals budget, strategize, and position their organizations for success. By Natalie Rooney | Winter 2020

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Think back to your business plan and budget for 2020. Your organization likely spent some time making plans and building out finances for the coming year—and that plan was likely scrapped by March.

In the past, budgets were created by taking the prior year’s information and rolling it forward with updated forecasts, but we can’t reliably do that anymore, says Donny Shimamoto, CPA, CITP, CGMA, founder and managing director of IntrapriseTechKnowlogies LLC. “The key is switching to a more forward-looking mindset to figure out what’s realistic given the changing business conditions,” he says.

Given the shocks of 2020, business leaders are looking for new ways to plan for the future. Jack Alexander, CPA, founder of Jack Alexander and Associates LLC, says scenario planning can be a powerful tool for these turbulent times, as it offers a structured way for dealing with uncertainty by identifying a range of possible outcomes and estimated impacts and then evaluating potential actions.

Scenario planning also tends to be an underutilized tool. While presenting at a November 2019 conference, Alexander asked the audience of finance professionals about the assumptions for the economy in their business and financial plans. A majority had no assumptions at all.

“A single-track scenario is dangerous and creates a false sense of security,” he says. “It’s almost certain the future will deviate.”

Defining Scenario Planning

Scenario planning and analysis can help prepare an organization to think about various business outcomes—such as winning or losing a major contract, or even unforeseen disasters such as a global pandemic—and the impact those events may have on the organization as a whole. Scenario planning can be used to map out cash flow projections, succession planning, and even black swan events.

Alexander shares the following (very basic) steps for scenario planning: First, identify critical uncertainties. What are the big open-ended questions your organization needs to consider? Second, develop a robust model with explicit assumptions that’s capable of generating key outcomes. Third, determine the most likely outcome as well as alternative plausible scenarios. Fourth, model out those outcomes with estimated impacts and trigger events that would signal the need for an organizational response. Finally, monitor those assumptions, focusing on critical drivers and the indicators leading up to trigger events.

Alexander asserts that scenario planning should be organization-wide and part of each planning cycle, whether that’s a budget, a strategic plan, or a capital investment decision. The point of scenario planning is to create a tested and approved process to respond to all outcomes, including crisis events. “All of these things can be prepared for in advance,” Alexander says.

2021’s Possibilities

Claire Burke, CPA, treasurer and vice president of finance at Dearborn Group, says her budgeting and financial planning process begins with a lot of questions. For 2021, her team is asking questions such as: Will the economy continue in its current state? Will it get better? Will it get worse? What about COVID-19?

Given current levels of uncertainty, she advises that a conservative approach be taken with administrative expenses, noting she would rather have some cushion in case things take a turn for the worse versus having to make major cuts quickly later on. This could include keeping headcount where it is and cutting non-essential expenses. Scenario planning is a very helpful tool in determining the appropriate expense level for 2021, as well as providing a better understanding of potential risks and opportunities.

Burke also advises looking to 2022 and 2023. “The impact of the pandemic could continue for multiple years,” she cautions. “Stress test the worst- and best-case scenarios tailored to your industry. Look at the levers you might want to change, the what-ifs. Help the senior leadership team understand the range of possibilities for the years ahead based on various decisions.”

While COVID-19 has created many challenges, there are upsides that could provide a competitive advantage in the future. “Don’t just focus on the challenges,” Burke advises. “Look for opportunities to pursue or change your business model—a lot of organizations are shifting to digital. Understand how this could help better position your company for the future. You could potentially leapfrog your competition.”

For instance, remote work at Dearborn has generated streamlined processes, the elimination of paper, and digital approvals in the finance area. “Our team is in a stronger position now than we were earlier in the year,” Burke says. “Our close process has improved significantly. We now spend more time analyzing and providing quality information to management.”

The Strategic Value of Finance and Accounting

As his company looks ahead to 2021, their scenario modeling has become more comprehensive and granular, says Steve Latreille, vice president and corporate controller at Ingredion Inc. Because Ingredion is a global company, the many different scenarios being modeled must also be tailored by country and region to reflect the differing impacts of the pandemic across the globe. “This gives us confidence that we have a risk-balanced plan going forward,” he says. “Our modeling is now more robust and agile than what we’ve done in the past.”

The pandemic and recession combined have reinforced how important it is for the finance function to have a seat at the table for budget and strategy discussions. “It’s crucial for finance to lead the planning and modeling processes and then help executives communicate the results to the investors and board of directors,” Latreille emphasizes. “Your leadership team is relying on a tightly disciplined corporate finance group to keep the organization aligned.”

That sentiment is echoed by Burke. “The biggest value we can bring to our organizations is providing timely, relevant data that not only shows what happened and why, but also provides indicators of the future,” she says. “We can interpret that data and help our senior leadership team connect those dots when making business decisions. With all this incredible uncertainty, data is the only consistent thing we can rely on.”

It’s important to remember that business leaders are looking to the finance function to tell a complete story—not just sharing the numbers, but explaining the reasons for them and their implications. “Sometimes we assume everyone interprets a set of data the same way we would,” Latreille says. “They really don’t. Be more specific and qualitative when communicating with business teams to help them make decisions. Clear insights are important.”

Latreille stresses that the finance function serves a critical role in times of significant uncertainty, and finance professionals need to be broad-minded thought partners. “As we look ahead to 2021, finance and accounting professionals can help build consensus based on connectivity,” he says. “We play a critical part and should remain focused on continuing that leadership role going forward.”

Importantly, effective scenario planning helps educate an organization’s senior team as to how bad certain situations could be and how to mitigate the damage. “Focus on areas that you might have control over and develop remediation plans,” Alexander says. It’s a strategy he has used in the past to get the whole senior team working together. “Once finance put together those scenarios, walked people through them, and explained details, we were able to home in on areas we could influence to keep us on track.”

That doesn’t mean there still won’t be a lot of zigging and zagging as organizations continue to navigate the pandemic, but Alexander says it’s about keeping your eye on the ball: “It’s not a linear route. It was, and still is, a roller coaster, but we’re not letting up on our diligence. We’re leveraging data so we can understand what’s going on and be proactive.”

Whatever role CPAs play in the organization, Latreille says it pays to get out of your lane every now and then and have deeper discussions about everything from obstacles in manufacturing to what your customers are saying. “Be as broad-thinking as you can be. Build relationships outside of your function. Don’t just rely on existing reporting mechanisms. Pressure test and seek to understand the signals throughout the organization,” he advises.

And don’t forget, you’re playing the long game. “Continue to make strategic investments and bets,” Latreille says. “This isn’t a time to totally pause and reflect. Make sure you continue to focus on pathways for growth if you have the opportunity to do so. You still have a strategic roadmap to follow. Keep the organization focused and aligned.”

Opportunities for All

Effective scenario planning isn’t just for large organizations—in fact, smaller businesses might actually find themselves better able to plan and pivot than larger organizations that are more complex and unwieldy. Shimamoto says the key is figuring out likely—or even unlikely—scenarios and then running the numbers using those drivers.

This is where opportunity for accounting and finance professionals presents itself. “We’re the ones who can analyze the numbers, design the models, ask the right questions, and look at the different scenarios and implications,” Shimamoto says. “We can help organizations work through the changes to their business models. You can’t predict the future, but you can anticipate scenarios and plan responses.”

Corporate finance and accounting teams and CPAs alike can use scenario planning as part of ongoing efforts in developing plans and projections, whether it’s for their own organizations or for their clients. Shimamoto encourages CPAs to think of their mission as providing peace of mind, vision, and hope to their clients—something scenario planning can really help with. “Let’s figure out how to not just survive, but thrive,” he says. “Provide different roadmaps for different scenarios. Create clarity on what needs to be done should certain trigger events start to happen. If we stay focused on the positive and how to get through this instead of focusing on everything that’s going wrong, we can thrive and bring hope to the world that we will make it through this pandemic together.”

Burke says she’s happy to be part of a team that’s leading more than 1,000 employees through these crazy times. “We’re all under stress, but this won’t last forever. As finance professionals, we’re going to get through this,” she says. “I like to view these challenges as opportunities for our profession to show the value we can provide to our organizations and clients. This is our time to shine.”

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