Reforecasting towards recovery: best practices for financial and workforce planning
By Tim Wakeford, VP Financials Product Strategy at Workday
COVID-19 has caused unprecedented upheaval for business in 2020. From revenue projections to headcount forecasts, hiring, proposed operational expenditure (OPEX), and capital expenditure (CAPEX), almost all financial planning has had to go back to the drawing board at least once. As a result, finance, planning and accounting teams have been haunted by the challenge of having to chart a new course quickly, with little grasp of what the future could hold. But, how do you deal with unpredictable revenue, as well as workforce and capacity planning, when you can’t rely on historical data models or even traditional predictive ones? The answer lies in access to data, real-time data, and having the agility to make the right decisions at the right time.
Today organisations need a real-time view into their cash flow, to make decisions and emerge from the pandemic in a position of strength. Yet, recent research showed that three out of four finance executives found that their planning processes had not prepared them for an economic disruption such as the one we’re living in. In fact, based on conversations we’ve had with prospective clients, many finance professionals still face versioning headaches, number crunching or toggling between spreadsheets. These archaic processes are hardly something CFOs and their teams can afford to deal with, while under pressure to react quickly to any market shift that will impact the company’s bottom line. At the same time, we’ve been talking to many customers to understand how they are approaching forecasting during the disruption. What we’ve learnt is that there is an increased need for two things across the board: more granular forecasts and a finer time horizon. These two dominant tasks point to the demand for business agility and flexibility. The key to unlocking these capabilities lies in implementing a new forecasting model. The question is, what is the right forecasting model that will see your company emerge from the disruption in a positive position?
Consider a driver-based forecasting modelling
There has been a definitive move during this disruptive period to a driver-based forecasting model — an approach that links operational activities to the calculation of key variable revenues and expenses. Rather than focusing on budgeting or forecasting the end Sterling amounts, this model considers how they are calculated. The calculation components are the key assumptions and your operational drivers (the key activities that go on within your business). This model is proving popular, as during a recent webinar for finance professionals, we asked the attendees to share what were their main focuses when forecasting and planning for different scenarios. More than a third (34%) are planning for the top line to accommodate changes in demand, while nearly one in every three professionals is focusing on their cash position. Whereas less than a quarter (22%) are interested in planning for workforce factors like headcount, hiring, capacity, and utilisation. The reality is that each company will have its own priorities and metrics, but before building an array of forecasts, it’s important to think about where your business must focus its resources to deliver real return on investment.
To decide which metrics are most important for your team, and to build an engaging driver-based forecasting model that works for your business and that will highlight where to invest your time and efforts, there are three steps you can follow:
Align with the business priorities. Constant communication is key to make sure all areas of the organisations are working towards the same goal. Align with other senior managers across the business on the metrics that are most important for them, to know what to prioritise when running “what-if” scenarios.
Identify your largest business drivers. To focus your time, you should forecast based on the levers that would have the largest financial impact on the business. Whether that’s a disruption in the supply chain or a significant impact in sales demand.
Focus on two to three meaningful scenarios. While the future is still unclear, at this point in time, you probably have an idea of what could go wrong — from a second wave to customers that are spending less. Focus your resources on those key changes and only iterate and refine the scenarios that will matter to your business.
Understand the value of having a single source of truth
Marching towards the same goal is crucial to recovery in a time of crisis. In order to do so, turning managers across the business into active participants in your ongoing forecasting efforts will be essential. To make this partnership work, finance teams need to share insights that are valuable to all areas of the business based on the forecasts, and the best way to do this is by having a common data model that acts as a single source of truth. This way, you’ll ensure that the data insights you’re getting are actionable across the organisation and that every department and executive is empowered to act with the same insight. Furthermore, having the same data model being used in your planning and cloud ERP system will help the business to understand what’s happening in real-time, and you to see what can change to accommodate unforeseen expenses or losses.
Using this insight, teams may then explore the decision to freeze new hires for a certain period of time, for example. While the impact of this decision can be calculated with a spreadsheet work-up, this approach gives only a limited view. An integrated approach with a common data model allows teams to iterate multiple times quickly. In turn, this helps in defining what the right moment to action this critical decision will be. Revenue, headcount and cash flow are operational drivers, and this single source of truth will ensure they are always accurately represented. Something that a spreadsheet, which is more susceptible to human error and to having multiple versions with different numbers floating around, simply cannot guarantee.
Guide the business with a constant forecasting feedback loop
What’s become clear throughout the pandemic, and the disruption it has caused, is that finance roles are becoming less about filling spreadsheets and more about guiding all areas of the organisation to make agile decisions. By sharing well-modelled scenarios with senior management on an ongoing basis, leaders in the organisation will be able to respond quicker, making fundamental decisions such as reducing expenses or changing customer payment options. The faster you’re able to feedback with valuable real time data-backed insights, the easier it will be to mitigate risk and manage the crisis as it evolves.
While businesses are having to accelerate their pace over the last months, this level of agility is here to stay. Change is always a constant, and finance teams that implement driver-based forecast modelling, with a common data model, and engage leaders across the business with data-led insights are in a stronger position to respond to uncertainty. Ultimately, businesses that keep this active planning approach will be able to survive this turbulent time, protect their workforce and emerge triumphant.
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