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3 Practical Tips for Budgeting, Planning and Forecasting During Black Swan Events

Apr. 21 2020 by Leslie Cant, Product Marketing Director - CCH Tagetik

Performance Management Budgeting & Planning

No one could have seen COVID-19 coming. A global pandemic of this magnitude is simply unprecedented territory. Indeed, this pandemic has been both the most unpredictable and unexpected of black swan events. Many loops have been thrown. Many a stumble made. With the exception of China and maybe India, we’re now looking at a global recession. The predicted loss of global income? In the trillions of dollars, according to the United Nations Conference on Trade and Development. That exact way the fallout lands is still yet to be seen.

For finance teams tasked with making sense of it all, we have few benchmarks or reliable assumptions to lean on, and thus, our only true certainty is uncertainty. In a global event that changes by the minute, we're faced with two seemingly insurmountable challenges: 1. to anticipate the unpredictable, and 2. to quickly adapt with the best possible outcome in mind. But how?

Here are three steps you can take right now to help you navigate ways to adjust and adapt your corporate plans in the face of disruptive events like COVID-19.

1. Model Multiple Scenarios

It's unlikely that even the most diligent planners would have modeled scenarios that reflect a situation as dire as the impact COVID-19 is having in companies and the economy alike. The worst-case business outcome many of us projected at the beginning of the year might very well be the best we can hope for. That's why scenario modeling is such a critical process during black swan events.

By building a standard scenario for each plan, you effectively create a series of way points that you can use to navigate through the COVID-19 storm. These standard scenarios are uninfluenced by the exceptional nature of our current circumstances. This is why they’re essential to have at the base of each planning process.

Once you've built your standard scenario, the effects deriving from this exceptional situation will be on top and saved as an alternate scenario. Obviously, these alternates will deviate significantly from the standard scenario.

Your ability to build alternate scenarios is critical to moving through a rapidly evolving situation in an adaptable way. This is because any plan built today could be disregarded tomorrow due to the still-too-uncertain and evolving nature of COVID-19. On a hopeful note, the standard scenario represents the reference point that we can aim to return to as soon as possible once this situation has passed.

Scenario building is indeed a critical function for crafting a sound COVID-19 business continuity plan. At this point, it is only prudent to take a look at worst-case scenarios and develop a contingency plan for each.

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2. As always: Cash is king

It goes without saying that companies with low cash reserves, unstable cash flows, or exclusively brick and mortar operations are incredibly vulnerable. With the flick of a switch, for many, business is no longer about profitability. It's about keeping the lights on. This is why organizations should simulate financial stress tests and create cash recovery plans immediately.

If we’ve said it once, we’ve said it a thousand times: cash is king. While this principle is always valid, it is even more valid today. In times of crisis, providing financial stress tests and cash recovery plans to understand the impacts to cash is fundamental. Indeed, the best thing a company can do is model the impact of these scenarios on performance. By doing so, you can understand how much your capital will be able to withstand the impact of adverse economic events. This is an important first step in identifying the actions you need to take to recover and mitigate cash needs.

Of course, there are a few critical elements you should take into consideration. By evaluating the market, credit/clientele, and production/logistic risks, you can better gauge the health of your company during unfavorable situations like COVID-19.

Furthering this point, Deloitte suggests immediately developing a treasury plan for cash management as part of your overall business risk and continuity plans, if you do not have one already. This plan should look at cash across the whole supply chain and your entire financial ecosystem, as "the approaches you take to manage cash will have implications for not only your business but also for your customers."

For many companies, this means taking stock of the actions that would preserve the most critical customers, suppliers, and employees. Finance is in the best position to quantify the cash impact of these hefty decisions before they're set in stone.

3. Continuous monitoring

As the COVID-19 outbreak continues to impact even the farthest-reaching corners of the world with astounding speed, so have responses to the crisis. Governments and companies alike have been forced to shoot from the hip with little information, trying to mitigate human and economic devastation.

With the pace of change running rampant, monitoring and reporting on KPIs must be done daily. A near real-time frequency is required so that you can keep a bird's eye view of the cash impacts on your business and have the performance insight to reframe your plans constantly. With that said, it’s important to be selective in choosing the KPIs you'll monitor at this aggressive pace.

Instead of monitoring every KPI you can get your eyes on, identify a set of five to ten indicators that allow you to keep the situation under control. An excessive number of KPIs will only lead to a waste of energy in both KPI production and analysis.

After gathering and reporting on those near real-time analytics, managers must react swiftly. As managing director of BCG, Martin Greeves said, “Managers often resist disseminating plans until they are completely sure, and then they are reluctant to change them for fear of looking indecisive or misinformed, or of creating confusion in the organization. A living document, with a time-stamped ‘best current view’ is essential to learn and adapt in a rapidly changing situation.”

Agility and an emphasis on adaptability are key qualities to adopt at every level of the organization. Continuous monitoring is essential to your ability to pivot.

Remember to keep the long game in mind. It’s easy to get stuck in short-term thinking. But, as everything does, this too shall pass. We couldn’t see this coming, which should be a lesson to us all: although the exact nature of black swan events is unforeseeable, black swan events are inevitable. To become agile in the face of black swan events — and any type of industry, technology, or economic disruption — employing tools that maximize your time and insights is critical,

To learn more about how you can use your CCH Tagetik Budgeting, Planning and Forecasting software to assist you during times of disruption, watch the video series Must Haves in Today’s Turbulent Times.

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