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
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.”