Huge disruptions, such as COVID-19 or recessions, are often catalysts for organisations to optimise their businesses. To do this quickly and reliably, organisations need the ability to understand what it will mean to shut down a store, run sales campaigns or reduce the workforce. Will it put too much stress on other parts of our organisation? What about our stock levels, and what will it mean to the bottom line? In a fast-changing environment, as we’re experiencing with COVID-19, you may find that your usual once a year forecasting exercise needs to be more like monthly (or more). If recent experience and history have taught us anything, it’s that well-prepared businesses who can plan and pivot quickly will weather the storm, and can even emerge stronger than before.
With this in mind, here are a 3 steps that you can take to improve your financial forecasting and business continuity planning.
Step 1: Facing up to your risks
The biggest risk to your business is that it becomes unsustainable or irrelevant due to disruptive change. A core requirement of any business would be to have the ability to do the following:
- Forecasting and modelling the various scenarios that could cause that change.
- Development and modelling of a variety of appropriate countermeasures.
When it comes to fundamental business continuity planning, you need the ability to forecast the cash flow impacts of a decline in revenue and/or increase in costs or disruption to supply over varying durations of time and at different levels of severity. It applies equally to a pandemic, a cyber-attack, a war (military or trade), a global or local economic crisis, or the introduction of disruptive technology that makes your current business model obsolete.
Step 2: Plan and forecast
Once you’ve forecasted the impact of various scenario events, you’re in a position to plan and forecast appropriate countermeasures. This is the time to put processes in place and organise resources to implement those countermeasures.
It can be a complex process to forecast the consolidated income statement, balance sheet and most importantly, the cash flow impacts of various scenarios. These are also based on flexing the many key business drivers such as changes in demand, supply costs, staff expenses, interest and exchange rates etc. Spreadsheet modelling is generally not up to the job for any but the simplest of businesses.
Step 3: Consider a forecasting and planning application
That leads to the need for a forecasting and planning application that can quickly calculate the impacts of various scenarios and generate a revised integrated income statement, balance sheet and cash flow reporting for future periods. The added value from implementing a forecasting application is that you can move from cyclical budgeting to rolling forecasting and always have an up to date view of the rest of the year, the next financial year and the mid and long-range plan.
In these times of rapid change, there is no such thing as “business as usual” for any prolonged period. It would help if you always had a “most likely” forecast, but at the bare minimum would be a worst-case (unexpected event or crisis) and a best-case scenario. Using a driver-based forecasting model with multiple dimensions also enables easy forecasting of other scenarios such as product launches, price changes, organic growth, acquisitions, etc.
This is a key foundation for true sustainability reporting. You should be able to predict the impacts to your business from changes in the environment (both green and economic). If you can manage those changes and sustain them over the long term, there is opportunity to leverage them for competitive advantage and growth. You’re not just in survival mode.
Last year’s audited annual report won’t help you in a crisis. Nor will last month’s financial reports. The quality of your business continuity planning is what will decide your business’ survival and that planning requires the ability to forecast.
Investing for the future
Many organisations focus and invest hugely in the historical reporting aspect of Financial Management Information Systems and ERPs, possibly far too often mainly due to the fear factor of being non-compliant to the various regulatory bodies. But right now, many organisations are wishing they’d invested significantly more in forecasting and planning. Is the accuracy of last month’s reported results more important than forecasting and planning for next month? Don’t get me wrong; having accurate and reliable historical data is very important. It’s important because it’s often a good base for predicting future results, but that doesn’t change the adage of “what’s behind me, is behind me.”
I also like the analogy that you can’t drive a car by looking in the rear vision mirror. You need to look through the windscreen and manage the future obstacles on your way to your chosen destination, which I hope for all of you reading this is success. Don’t throw the rear vision mirror away though; it can be really useful seeing who might be going to pass you.
If you want to talk about moving from a cyclical budgeting process to a rolling forecasting and planning model to improve business performance, reach out to me any time.