The purpose of planning is to enable executives and managers to make better-informed decisions more consistently. Planning within an organization requires setting objectives and weighing the alternative methods of achieving those objectives, because there are usually multiple potential paths to success. The best results are achieved when the process considers a range of scenarios for an organization’s operating environment because the future is always uncertain. And planning also involves assessing the impact of various trade-offs because resources aren’t infinite. Executives who include these factors in their planning approach can see further and deeper into the future and therefore are equipped to make better decisions.
Senior executives should ask themselves what they would pay to have deeper forward visibility during periods of competitive challenges, market volatility or economic crisis. Visibility that enables them to shift from “What now?” to “What’s next?” Visibility into potential impacts on their income statement and how that will affect their cash flow and balance sheet. The visibility made possible by quickly having answers to a range of “what-if” questions such as “What would happen if competitors cut prices on this line of products by 7%?” or “What if corporate tax rates rise to this percent?” or “What if a key raw material price declines by 12%?”
Most executives answer that it would be extremely valuable to have almost immediate answers to such questions. Especially during a period of economic uncertainty when anything can happen and being able to respond immediately to disruptions can pay off on the bottom line. Forward visibility gained through contingency planning requires having quick answers to what-if questions instead of “I’ll get back to you with that.”
Small and midsize businesses (SMB) usually cannot support this sort of contingency planning. Our Business Planning benchmark research found that just 12% of companies have all the numbers they need to assess trade-offs in planning and 58% have little or no ability to do so. A main reason why they can’t? Our research also found that 65% of these organizations use desktop spreadsheets for budgeting. Spreadsheets are an indispensable tool for finance and accounting organizations, but they cannot provide rapid answers to what-if questions. The process of collecting input from multiple business units and consolidating these inputs into a single plan and budget takes too long and is a major reason why “I’ll get back to you with that” is the default answer. This is an answer that should no longer be acceptable because technology advances achieved over the past decade have made it possible for SMB organizations to deploy planning and budgeting capabilities once available only to large enterprises.
Determining how best to proceed under multiple scenarios is valuable because such contingency planning enables an organization to respond to changing conditions with greater agility. Executives benefit from having their organization explore multiple scenarios and their impact on operations as well as the various response options. Managers can then anticipate the choices they might make and react sooner. It is also important for the finance organization to be able to understand the impact each scenario will have on cash flow and the balance sheet, not just the income statement. The timing of capital projects, working capital management and mitigating the risk of breaching debt covenants are all dependent on having visibility into future cash flows and the condition of the balance sheet.
A dedicated planning application, especially one that is fully integrated with the company’s financial management or ERP system, can significantly speed up planning and budgeting cycles. One reason is that the forecast and budget data collected from individual business units is accurately consolidated in moments and can be compared immediately to historical data at a granular level of detail. The data necessary to understand trade-offs is available in this single system. Rapidly creating and updating rolling forecasts that immediately incorporate actuals is straightforward. Reports comparing one scenario at any level of detail and from multiple perspectives (such as by region, product line or customer) can be generated immediately and suggested changes to assumptions can be assessed in real time. It is possible for executives and managers to have a dialog to consider the best course of action because answers to questions are at their fingertips.
Any crisis forces organizations to make decisions rapidly, and even numbers-driven executives can find they must make snap judgements based on limited data. Dedicated planning and budgeting software, especially when tightly integrated with a financial management system or ERP, can provide executives and managers immediate answers to what-if questions, enabling them to make better informed decisions in real time. Faster planning and decision cycles also pay off in steady-state environments. Organizations can develop agility because they can do more extensive scenario planning in the same amount of time they currently spend wrangling spreadsheets. Small and midsize companies now have practical and affordable options for evolving how they plan, budget and review performance. These tools are valuable under any circumstance and provide executives with immediate answers to enhance their visibility into the future.