financial planning

Financial Planning with 2020 Vision

The past year has been challenging for everyone, not to mention those responsible for financial planning. We’ve tested our collective resilience and speedily adapted our tools and processes to an asynchronous and virtual world.  

While retailers shuttered their bricks-and-mortar businesses, consumers adapted their buying patterns to the online world—a world of abundant choice and low consumer loyalty.  

Technology was the big winner, enabling everything from remote collaboration, connection security, business continuity, and remote learning. In recent months, we’ve sensed the storm settling into a more predictable pattern. 

Reflecting on our “lost year” with the benefit of 2020 hindsight, we’ve been through unprecedented disruption that’s catapulted us an estimated five years forward in digital adoption in a matter of months. 2020 has been a difficult year for the C-Suite too, with the CFO in focus as the business seeks answers, guidance, and insights.

CFOs are now expecting the unexpected, peering around corners in an effort to be ready for the next disruption. As the economy begins its long recovery, demand will continue to be unpredictable and uneven across geographies, customer segments, industries, and products. Once the fog of uncertainty begins to fade, we anticipate a rebound will kick in. Although the truth is that the future is uncertain, we can use “2020 vision” to aid our financial planning.  

Hindsight is 2020: 4 Lessons for Better Financial Planning

Disruption challenges even the most tenured leaders. It calls for visionary leadership in the face of uncertainty and requires microscopic focus in the midst of chaos. CFOs are advancing into the second year of uncertainty armed with lessons learned and a broad range of insights on business risks, demand volatility, strategy, and treasury.  

With the pandemic persisting into a second year, we’ve identified four lessons learned by CFOs that can help them better handle future crises and financial planning.

1. Agility is critical.

The pandemic has reignited the need for regular and flexible financial planning.

When the crisis started, revised plans were quickly drafted with limited data points. Not only were Finance teams unaccustomed to gathering and incorporating such a wide variety of inputs and scenarios, but the additional noise also caused by the sheer volatility of inputs created delays and pressure to an already stressful decision-making process.  

Highly detailed, real-time data is critical to creating a finely tuned crisis response. Early warning signals should be in place to alert stakeholders when a deviation is detected. Having all stakeholders aligned on a single source of truth can prevent delays in communicating across silos, drafting emails, or debating the version of the numbers being reviewed.

With the benefit of 20/20 vision, our advice is to assess your organization’s (people, processes, and systems) agility now.  

Take this time to reflect and rethink. Can you sustain the agility required of Finance over the past twelve months? What benefit would that create going forward? What worked, what didn’t, and what should you continue doing?  

Assess your reaction times and address and skill deficiencies that represent risks to your team and the wider business. While we may have spent most of 2020 improvising and learning by doing, 2021 is the time to build on those learnings by embedding what worked well into business as usual going forward.

2. Cash is king (again).

The pandemic has refocused the business on the importance of cash reserves and capital allocation.

Market shock prompted a “dash for cash” by CFOs who were caught out by the depth of the economic impacts. Short-term funding markets reeled. Redemptions from institutional prime money market funds in mid-March 2020 “surged 30%, a faster outflow than during the 2008 financial crisis.” 

Companies with significant exposure to severely impacted sectors sought to diversify the risk by investing in adjacent markets and products or by divesting non-core assets. Many companies drew down lines of credit to carry them through—but accessing credit was slow and resource-intensive for many.

One year into the coronavirus crisis, 56% of CFOs say that they need to completely rethink their capital allocation strategy. About two-thirds were unable to fund all planned projects in 2020, which will undoubtedly have consequences going forward, especially as the pace of transformation quickens.

CFOs need to inject some resilience into the capital allocation strategy. The establishment of a “war chest” or “rainy day fund” will ensure you can act quickly when volatility hits. Keep a cash reserve with some ideas on how it might be used. Hold back some spend in a central reserve to be used if certain triggers are met (e.g., if demand increases by X%, move forward with hiring or invest in new product opportunities.)

3. Understand your business levers.

Examine how your business model responded to changing circumstances, such as reductions in travel, cancellations of flagship conferences, and increasing cybersecurity threats.  

Was there a corresponding drop in sales activity, collaboration, or overall productivity? Take stock of the trends affecting your business—digital sales, e-commerce, personalization, learning, collaboration, sourcing models, cash availability. What are the implications for your business and financial planning?  

Finally, think about how these trends may impact your market segment, and those of your customers, as we begin to emerge from recession in 2022.

4. Mind your people.

The pandemic enforced remote working practices, highlighting the need for secure collaboration tools.

Across the world, a sudden switch to remote work blurred the boundary for employees between work and home. Employers initially reported an increase in productivity and many employees reported enjoying spending more time with their loved ones despite some challenges in working effectively. 

 Twelve months on, however, a different picture is emerging. Burnout was already on the increase pre-Covid when it was included in the International Classification of Diseases by the WHO. By March 2021, DDI’s Global Leadership Forecast 2021 reported that almost 60% of leaders feel used up at the end of the workday, a strong indicator of burnout.  Of those, 44% of leaders expected to change companies.

Final Thoughts: Go for Growth

If the pandemic has proven one single hypothesis, it’s that growth is possible even in the most challenging circumstances—if you are prepared to fuel it.  

Standing still is not an option in the midst of upheaval and changing market conditions.  CFOs should devote a similar degree of focus to growth as we have historically devoted to cost reduction in challenging times. Here’s how:

  • Clean up your customer and market data. Bring all of your datasets up to date and reexamine segmentation by industry, market, and geography.  Look for emerging trends and extrapolate them. Create a refresh schedule to ensure this data is always available as a reference point in decision-making.
  • Take the opportunity to rethink your revenue model. What new asks are coming from your customer base, and why?  Are they asking to move away from subscription services to pay-as-you-go services?  For some companies, the change may represent a foundational shift to the business model, for example, moving from a large upfront investment to a subscription model  Then, what are the implications for the rest of the business—revenue recognition, commissions accounting, cash flow, or your sales processes?
  • Embrace digital capabilities and engagement. Avoid piecemeal implementations or an ala carte approach. Assess the impact on sales processes, team collaborations, customer relationships, and the agility of your suppliers.  A cost-effective, low-touch sales and marketing offering is a significant pivot.  
  • Set dynamic pricing. Customers in some industries are demanding more transparent pricing to enable them to manage their own costs.  How well do you understand your pricing model?  Is your pricing model agile enough to react to changing market conditions?
  • Review automation and streamline processes. Embrace low-code technologies that enable business users. There is no time to learn new tools and implement enterprise-wide timelines.
  • Look at adjacencies and evolve your product portfolio. Are there legacy products and services that are not contributing to the bottom line?  Time to eliminate those. 
  • Know your data and put it to work. It’s likely that the pandemic has raised the profile of CFOs and their finance teams in every business. Capitalize on this relevance by giving business leaders the data they need to plan effectively.  

The focus for financial planning into 2021 and beyond should be driving knowledge and awareness in other business leaders in Sales, Marketing, Product, IT, and Operations to understand how the financial data impacts their departments and how they can, in turn, impact the data.  

It’s time for collaborative financial planning.  

The time has come to democratize financial data to ensure everyone is on the same page when making critical real-time decisions that impact the wider business. Once the core financial data is easily and regularly accessible, look around the finance ecosystem to see what else is available and could offer some insights into changing market conditions. Be prepared to explore relationships between data sets that normally reside in separate systems.   

However, don’t get buried in the data! While we are all working virtually, there can be a tendency for CFOs to lose themselves in analysis. Stakeholders may be used to receiving a faceless report in the past.   

However, it’s critical that CFOs are visible to stakeholders and business partners. Make it a priority to insert yourself into critical decisions—if you don’t have an opinion immediately, take notes on what pieces of data are missing or would have been useful in making that decision.  Remember you are part of an ecosystem that is also adapting to disruption. 

Finance leaders need to be prepared for the long haul, keeping their companies profitable while looking after their teams. 

But how do you do that when you’re trying to navigate without a map? Perhaps more importantly, how do you keep doing what it takes as long as it takes?

Set the destination, and let data be your GPS. Download our free guide for CFOs to learn how to streamline your financial planning with a continuous month-end close process.

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