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FP&A Done Right: Planning for What’s Next in Uncertain Times

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This is a guest blog post from our partner Workday Adaptive Planning, written by Michael Magaro. The blog post was originally published on FEI Daily.

The COVID-19 pandemic changed our world, almost overnight, and businesses are having to adjust. The unprecedented nature of the pandemic means no one knows how deep the economic downturn will be, or how long it will last, which makes financial planning for businesses especially difficult.

Fitch Ratings’ “Global Economic Outlook” states that global economic activity will decline by 1.9% this year with the U.S., Eurozone and UK GDP down by 3.3%, 4.2% and 3.9%, respectively. Some industries will be more impacted than others, and next to no one has historical experience with pandemic conditions.

Companies are clearly having a hard time planning. A survey from Gartner of 99 CFOs and finance leaders taken April 14-19 revealed that 42% of CFOs have not incorporated a second wave outbreak of COVID-19 in the financial scenarios they are building for the remainder of 2020, a finding dubbed “surprising,” by Alexander Bant, practice vice president, research, for the Gartner Finance.  Many public companies have also withdrawn guidance due to lack of visibility.

So how do companies plan when visibility is so cloudy, and unknowns are so numerous?

For the finance team at Workday, we are embracing scenario planning—basically harnessing the power of “what if”—to respond to COVID-19, and so are many of our customers. Our cloud planning platform is processing up to 30 times more forecasts and build-out scenarios for customers than in a typical, pre-pandemic week. And given the volatility and unpredictability we’ve seen, it’s not likely to ease up soon.

But the reality is that agility starts with planning. Not long before the pandemic hit, we, like many companies, had our plan in hand and were evaluating many different potential outcomes, including whether the long-running economic expansion would begin to show signs of slowing. As the realities of the pandemic came into view, we stepped up scenario planning in order to adapt to changing market conditions–and achieve the level of agility our business demands. And, while we continue to adjust and adapt like all companies, we identified five critical steps for successful scenario planning.

Step One: Assess potential impact to the top line

How will what’s happening impact revenue and the various revenue streams that feed the top line number? For many companies, this will include impacts to new business activity, customer retention, and assumptions that went into the impact of new product launches — if any exist.

Each business faces a different situation. During the pandemic, many hospitality businesses are struggling. Meanwhile, many online retailers are going strong. Each industry’s history can be instructive. During the 2002 Dotcom crash and the 2008 financial crisis, for instance, software companies with a higher percentage of SMB customers took a bigger hit to monthly renewal rates.

Because no one has historical data for a pandemic, it’s important to start off fairly basic with scenario planning. Model some elements from the top line, such as new sales, business renewal activity, and up-sell to existing customers by quarter throughout the year. Consider a range of scenarios possible for your business, perhaps 50%, 65% and 80% of a pre-pandemic plan. This gives a good view into what could happen to the income statement and balance sheet and help businesses understand variances on metrics that matter most to them. For organizations similar to Workday, that’s subscription revenue growth, non-GAAP operating margin, and, ultimately, cash flow.

Step Two: Identify levers on the investment side of the business

What levers do you have to pull? For most companies, people are the biggest cost. Do you hire as planned before the pandemic? What are the differences between hiring as planned, freezing hiring for the rest of the year, and the range of options in between? No business wants to cut job cuts at any time, so it’s important to understand other cost levers at your disposal, and the various outcomes possible when you pull them. To understand your big levers, you have to really understand your business.

Step Three: Align leadership

The finance team alone should not decide steps one and two. Involve all leaders so you get the right picture and analysis, and make sure you’ve identified the right levers. Involving leaders keeps everyone aligned and thinking about the right things. For many companies this may take the form of dashboards shared across the leadership team or creating regular review meetings.

Step Four: Identify a good outcome

Ask what a good outcome looks like for your organization. This will differ for each organization. Is it to retain existing customers? Is it to retain your workforce, or to maintain a customer satisfaction standard? Is it to expand and win market share from distracted competitors? By identifying what matters most to your organization, you’ll better prioritize through steps one, two, and three. And in today’s climate, that desired outcome may change, further elevating the importance of a continuous approach to planning.

Step Five: Dive deeper

Once you have your various scenarios, and have received feedback on them, dive deeper. For some companies, this will mean digging into supply chain issues, for others it may be assessing risk by segment, etc. Third-party research can help you decide how to respond. For instance, if you know a number of your suppliers or customers are feeling a lot of pain, how can you be proactive in supporting them? Align various teams on this topic, too. For instance, sales and customer service hear directly from customers. Their knowledge should inform your analysis and drive your ability to help your customers, partners, and your own top line.

Scenario planning to continuous planning

Even prior to the pandemic, Workday’s finance organization was working toward a continuous planning framework. Our aim is to shift from annual planning and budgeting to continuous planning via more frequent reviews and assessment of how changing conditions impact our product roadmaps, and vice-a-versa. Along the way, we look at such things as margins and cash flow. Whenever conditions change, we anticipate being able to take action and adjust our model. For instance, if product development runs behind schedule, do we adjust by upping investment to get it back up to speed or do we adjust our top line estimates? If we’re operating correctly under the continuous planning framework, planning is not a point in time—it is continuous.

Embracing flexibility

The pandemic is challenging us as humans, as companies, and as business partners in all kinds of new ways. When any crisis hits, finance teams need to be able to seamlessly navigate the kinks that come with uncertainty. Scenario planning—and eventually continuous planning—enables us to embrace flexibility and to use it our advantage.

This blog post was also published by Workday Adaptive Planning and appeared here.

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FP&A Done Right: The Victors of the Decade Combine Agility and Resilience

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As we near the end of the decade, it’s a good time to think back about what businesses have learned from an FP&A perspective, and how they can fortify and position themselves for the next decade and for future decades.

The beginning of this decade saw the evolution of online analytical processing (OLAP) systems, such as our beloved TM1, grow into comprehensive and sophisticated platforms for holistic financial and operational performance management. In theory we had the tools to empower Finance to reveal the secrets of business success locked in our systems and in our data.

The last few years of the decade have seen our imaginations captured by the disruptors, the unicorns and those who have seemingly mastered the elusive “digital transformation.” But as we’ve learned over the last quarter, some of those “darlings” of the business world may not be the successes they first appeared to be. Take WeWork for example: the company has not managed growth effectively. They are at a point (or possibly past it) where Finance could step in, do some serious analysis and revisit the company’s business model. Other headline catching companies are growing exponentially, but struggle with delivering profits. This too, points to where Finance can be playing a larger role.

Business Resilience? Or Agility?

These musings were prompted by a recent article by McKinsey on business resilience. When we think about disruptors and unicorns, we might associate them more with the popular FP&A theme of business agility. One of our business partners, Adaptive Insights, frequently talks about business agility in the context of needing to make faster and more informed decisions. The backbone of this is continuous planning, which is spearheaded by the Office of Finance.

In one sense, perhaps, business agility is the young business, the quick, rookie running back on the football field – dodging and weaving and making stellar plays, with end zone celebrations when the offense is in control of the game.

But where does resiliency come in? To me, the resilient business is the more established, mature defensive linebacker, whose job is to thwart the competition, and who is less likely to be celebrating in the end zone, but just as important to winning the game.

The question for all of us, on the precipice of a new decade is, “Will we be playing a mostly offensive game in the next few years, or a mostly defensive game? Perhaps both.” And furthermore, how do we, the CFOs and the leaders in the Office of Finance, best prepare, plan and enable our organizations for what’s to come?

Facing the Future

McKinsey mentions that while we are still in “the largest global economic expansion in history, the outlook is uncertain.” Isn’t it always? The article states that in the company’s latest survey on economic conditions, “executives’ views on the current global economy and expectations of future global growth are less favorable than they have been in years.” I’d posit a good executive is outwardly optimistic and inwardly financially, cautiously pessimistic.

It is in this context that McKinsey examines what makes a company resilient. The article defines resilient organizations as those that exhibit a “willingness to take decisive action to strengthen their balance sheets and improve cash flow before the [previous] downturn hit, often by divesting non-core assets, reducing debt, and improving the efficiency of working capital.” To become a resilient business, McKinsey recommends the following three steps:

  1. Enhance the role of the finance team. They recommend doing this in strategic planning, business analytics and decision-making at all levels of the organization. As the article states, “The best way to do this is to embed finance managers alongside business unit leaders and empower them to be partners in running the business.” Think about that for a moment – take the traditional “bean counter” out of Finance and put her or him with the business unit leader. Imagine the possibilities: the finance professional knows where the data is, how to get answers from that data, and how to slice and dice that data in different ways. The business leader knows what questions to ask – questions urgent for today’s business challenges and vital for tomorrow’s business opportunities and threats.
  2. Pressure test capital structure and scenario plan. McKinsey recommends doing this with both capital structure and cash flow, and using a range of scenarios, “from an economic crisis to other disruptive events.” You might feel somewhat certain your industry will not have a massive disruption like that of Uber on the taxi industry. But what if you are a sports arena? How much overall revenue could, for example, MetLife Stadium lose should there be an NFL strike? Over how many games? While that is not a global crisis, it is an economic crisis with impact far beyond ticket sales. On a global level, are companies pressure testing and scenario planning for the potential impact of Brexit, of various international tariffs and trade disputes that, significantly increase the price of French cheeses and wines served at the high-end luxury suites at a stadium?
  3. Take immediate action to harvest hidden value from their balance sheet. McKinsey research shows “that working capital management is surprisingly variable, even among companies in the same industry.” The organization has found that “large companies that make a focused effort can typically free up more than $100 million from working capital and redeploy it to priority projects.” This argues for going beyond traditional budgeting and embracing more flexible planning methodologies, such as rolling forecasting or active planning. For example, McKinsey revealed that they saw “upside realized by companies that consistently track cash returns on an asset level and that make an ongoing effort to reevaluate and mitigate their liabilities.” With traditional budgeting and planning, you are assessing your balancing sheet in the past. By adopting rolling forecasting or active planning – where you have the tools and skill sets to assess and adjust your balance sheet proactively – you have the power to gain this upside.

As McKinsey states, “While most CFOs have a role in setting company strategy, the rest of the finance organization are sometimes viewed as passive scorekeepers. Best-in-class organizations, in contrast, expect their finance professionals to play a substantial role with business-unit leaders to set strategic priorities.”

Your Game Plan: Find Your Enabling Technology

So, what’s your best game plan for the coming years? McKinsey specifically mentions these best-in-class organizations have finance teams that “utilize innovative performance management tools to help determine how the business is actually performing and suggest steps to optimize results.” At Revelwood we’ve been consulting on and delivering solutions for financial and operational performance management for 25 years. One would think most mid-sized businesses have moved off of spreadsheets for their budgeting, planning and reporting activities. But, day-after-day, our team here speaks with not just new upstarts, but established, even large, publicly traded companies that rely on spreadsheets as the backbone of their core activities in the Office of Finance. Spreadsheets have a role in the Office of Finance and always will. But any organization that uses only spreadsheets simply can’t achieve true resiliency. And they can’t embrace agility.

Your Game Plan: Think Differently About the Office of Finance

How can you unlock the potential hidden within your finance team to add true value to the business? Think differently about how to enhance your team members’ roles. Maybe it’s even a matter of breaking up some aspects of the physical office and having finance team members sit among their associated business units. Separate their function from their strategic role. Be agile about how you think about your people and what they can do for the business.

The End Game: Resilience and Agility

As I mentioned, we think the victors of the next decade will strike a good balance between resilience and agility. Or, offense and defense. Invest in the right enabling technology, rethink the role of the Finance team, and build the skillsets and mindsets for both. That’s your best game plan.

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