The CFO's Scenario Planning - Make Proactive Decisions in Times of Uncertainty

MAY 01, 2021 08:01 AM

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How can stakeholders in an organization accurately plan their company's financial plan in a time of rapid change in technology and business models? The change in technology is inevitable, and management boards and other stakeholders are looking to the CFO and finance team to help them provide solutions that will have a lasting impact.

Many organizations are unprepared when unexpected events occur, like the COVID-19 pandemic. Modern CFOs using scenario planning can survive during times of uncertainty and eliminate some of the guesswork. This type of scenario planning allows finance teams to run faster while giving them the agility to visualize multiple "what-if" scenarios; more frequent scenarios to examine potential impacts on the business enable a faster assessment response. This COVID-19 pandemic has shown a lack of historical data for finance teams when creating plans, causing them to make swift decisions and making it difficult to forecast accurately.

Scenario planning helps companies minimize risk, stay agile, and maintain business continuity when a potential shift occurs. This strategic planning method integrates cash flow and business forecasting so organizations can balance short-term needs with long-term priorities to better prepare for what is ahead.

1. Stakeholders Responsibility

This exercise is a top-down strategic approach to identifying the stakeholders who will take ownership and responsibility for the business. It helps build the right leaders who can use the C-suite's support for quick decision-making. After the stakeholder team is formed, the whole plan can be implemented.

2. Key Drivers

Traditional drivers are for long-range planning and do not depend on too much. Using root cause analysis will best capture what is more important now. First, look at the organization's financial statements and check what supports each line item; this will help make the financial team aware of unlikely alternate futures they had not thought of.

3. Analyze Sources of Data

To develop key assumptions, scenario planning requires collecting quantitative and qualitative data with a combination of information from both internal and external sources.

4. Apply a Full Trial Balance

To ensure sufficient transparency in the cause-and-effect relationships, focus on the organization's full income statement, balance sheet, and cash flow. Consider including miscellaneous debit items such as office/ warehouse rent, equipment, and salaries, in addition to credit amounts like accumulated depreciation, unearned fees, and accounts payable.

5. Limit the Scenarios

Evaluating all the scenarios ensures that your finance team will be as prepared as possible when unlikely things happen. Before running a comprehensive analysis, start with a broad set of scenarios, then narrow your set with enough detail into each selected scenario; this will cover probable outcomes from "low impact on our business" to "potential bankruptcy."

FAQs

What is scenario planning, and why is it important for CFOs, especially in times of uncertainty?
Scenario planning is a strategic method that helps organizations prepare for unexpected events and potential shifts in the business environment. It involves visualizing multiple "what-if" scenarios and assessing their possible impact on the business. Scenario planning is crucial for CFOs, particularly during periods of rapid technological change and economic uncertainty (like the COVID-19 pandemic). It allows finance teams to run faster, eliminate some of the guesswork, and make swift decisions based on a range of possibilities rather than relying solely on historical data, which may be insufficient or irrelevant. This proactive approach minimizes risk, maintains business continuity, and balances short-term needs with long-term priorities.
Who should be involved in the scenario planning process, and what are their responsibilities?
Scenario planning requires a top-down strategic approach. Key organizational stakeholders should be identified and assigned ownership and responsibility for different aspects of the business. This includes building the right leadership team, gaining C-suite support, and ensuring quick decision-making. The stakeholder team is then responsible for rolling out the whole plan for implementation across the organization.
What are the key drivers that should be considered in scenario planning?
Traditional long-range planning drivers may not be sufficient in dynamic environments. Scenario planning should focus on identifying the root causes of potential changes and their impact on the business. Start by analyzing the organization's financial statements and identifying the factors that support each line item. This will make the financial team aware of unlikely alternate futures they had not thought of.
What types of data should be collected and analyzed for effective scenario planning?
Effective scenario planning requires a combination of both quantitative and qualitative data from internal and external sources. This comprehensive data collection ensures that key assumptions are well-informed and that the scenarios developed are realistic and relevant to the organization's specific context.
What role does an Oracle Cloud Partner play in effective scenario planning?
The right Oracle Cloud Partner can help organizations reposition their finance teams in scenario planning, effectively communicate financial results, and improve overall performance. They provide expertise in implementing and leveraging Oracle Cloud applications to support scenario planning activities. This includes delivering tailored application combinations based on the business's specific requirements and ensuring long-term value.

As you plan, the right Oracle Cloud Partner will help your organization's finance team to reposition in scenario planning and communicate financial results effectively to improve performance while instilling confidence in employees, customers, and investors. With a proven track record of quickly delivering long-term value to various companies, the right Oracle Cloud Partner will provide the combination of these applications to businesses based on their requirements.

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About SMACT Works

SMACT Works is a technology-focused systems integrator and IT/ERP consulting firm. We deliver end-to-end consulting, managed, and implementation services for Oracle Cloud Applications, IaaS & PaaS, On-Premise PeopleSoft & EBS Applications. Headquartered in Dublin, OH, we have a global presence with North America and Asia offices. We are an Oracle Gold Partner Cloud Standard, ISO 9001, and 27001 certified delivery organization serving customers with Excellence and Integrity.