How should companies execute annual financial planning during COVID-19?Planning season is around the corner. What considerations should CFOs and planning leaders contemplate when conducting such a crucial forward-looking financial activity with a global pandemic in progress?

The times we are living in are historic and unprecedented. Without historical business context to provide guidance, the challenge of predicting future market and consumer behavior is exacerbated.

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How should companies execute annual financial planning during COVID-19?

Leading-practice organizations begin the planning process by setting strategic guidance, translating the guidance to targets, and disseminating those targets to business units. However, global organizations may want to consider a different approach this year.

While financial markets are globally connected, the manner in which countries are responding to the crisis is not. The speed at which business in China may be able to execute in a business-as-usual fashion will likely differ from that of the US, European, or South American economies. As such, corporate FP&A teams with a global business footprint may be better served by building a planning calendar, where local teams submit ranges based on the likelihood of potential outcomes.

In a normal year, planning is a complex effort. With the instability of the current world, organizations are facing additional challenges in their planning and forecasting processes:

• Constant scenario development and modeling

• Discomfort and lack of confidence in future projections

• Urgent need for decisions and courses of action

• Unclear decision-making framework and ambiguous criteria or triggers for contingencies

• Excessive and resource-consuming manual iteration

Never has the process of prediction been so crucial. In response, CFOs and FP&A leads should look to both take immediate action to mitigate uncertainty during the current cycle and enhance processes over time to develop a more dynamic, effective planning organization. As organizations prepare to plan for FY 2021 amidst the current pandemic, the following strategies can help mitigate uncertainty to yield a more effective, useful financial plan for 2021 and improve the process going forward as well:

Seek feedback from business units prior to disseminating targets

After reviewing the ranges submitted by the local teams, the corporate FP&A team can develop and disseminate targets informed by local conditions to potentially yield a more realistic, effective outcome. Initiative- and driver-based approaches to developing these ranges can help to more directly translate the guidance and targets into actionable plans.

Adopt a probabilistic, range-based planning mentality for scenario planning

Many organizations conduct planning by having business units submit a select number of targeted scenarios (for example, high, medium, and low) before identifying the most likely scenario and finalizing a single set of financial results. Rather than trying to arrive at a single number, organizations should consider identifying a range of possible outcomes with special consideration paid to the bottom of the range or worst-case scenario.

Leading-practice organizations will use observed volatility to bolster ranges with assigned probabilities, allowing leadership to plan for a wide variety of outcomes while considering the likelihood of occurrence. Additionally, factoring in multiple modeling approaches across statistical, driver-based, optimization, and trigger-based contingency models can help an organization be prepared to understand and project impacts across multiple levels of possible performance outcomes.

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How should companies execute annual financial planning during COVID-19?

Leading-practice organizations use driver-based planning logic to tie financial outcomes more closely to underlying economic and organizational drivers. In times of increased volatility and minimal historical precedent, driver-based plans have an inherent advantage over their simpler, trend-based counterparts. While trending may have been sufficient in the past, historical results may no longer be a reliable indicator of future performance in today’s volatile economy.

Organizations should look to expand driver logic, as appropriate, throughout the planning process and rely on input from those in the organization who are closest to each respective driver when establishing scenarios and plan ranges. (Note: This does not mean organizations should try to make every plan item driver-based. Materiality should always be considered—if a line item makes up less than 2 percent of the total plan, even a 200 percent actual-to-plan variance may not move the needle.)

Reviews of financial plans typically take place over two to three staged rounds. During each round, the executive team reviews plan figures in totality. Review conversations and meetings can be lengthy and unproductive. While the figures may change, the questions are often the same. What growth rate did each business unit assume? Why are expenses continuing to grow when our strategic guidance was to keep figures flat? During such dynamic times, an end-to-end review cycle may yield ineffective discussions or lack feasibility from a timing perspective.

Instead, organizations should concentrate each review session on a specific target, motivated by the current operating environment (for example, a shift in focus from profitability to liquidity, portfolio prioritization, and short-term expense management). By focusing the conversation, organizations can have the meaningful, targeted conversations required to execute in a more analytical fashion—something desperately needed in the current environment.

Strengthen scenarios through driver-based planning

An increased reliance on external economic drivers should also be considered during periods when activity is heavily influenced by market forces or economic shocks. For example, setting GDP as an external driver, and given an observed 10 percent decline in GDP, a company can expect the top line to fall within a specific range. As GDP shifts throughout the year, forecasts can be adjusted based on actuals and to validate the predicted ranges. Now more than ever, the plan for next year will be as dependent on external economic drivers as internal ones. Additional approaches to consider can include exploring more logarithmic or exponential trending curves, as well as approaches that bias a moving or weighted average for recency. Modeling based on historic and comparable events can also prove valuable in these instances, even if the macroeconomic event itself may seem unprecedented. In addition to materiality of the line item, reviewing planned items to take an honest look at levels of spend, or considering zero-based approaches, can also yield savings during difficult times.

Enable “stage-gate” review cycles that allow for adjusted focus based on the changing environment

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How should companies execute annual financial planning during COVID-19?

Many organizations are reconsidering the areas and depths to which they are going to plan this year. They are also thinking about the timing of their planning cycles (for example, delaying the kickoff to gain more confidence in the environment before starting), deferring major decisions or allocations, providing higher-level and contingency-laden budget assumptions, and setting timetables to revisit any plans on a recurring basis into 2021, almost in a rolling plan or forecast type of scenario. Given this context, there is an opportunity for organizations to evaluate what activities truly add value, even as part of a steady-state planning process, to streamline and refocus efforts traditionally spent on the iterative planning process to realize a more agile approach that can be used for 2021 and beyond. Acceleration of digital capabilities can also play a significant role in easing the burden of target-setting, scenario analysis, iteration, and any required resetting of the baseline, particularly when technologies that can help ingest new data and drivers, and score their relevance automatically, are deployed as part of the planning capability.

Focus on value-add activity (such as start/stop/continue analysis)

• Leverage the power of a rolling,monthly forecast: Many organizationsperform a quarterly forecast (if theyexecute a forecast at all). Now, the daysof only executing a forecast quarterlyare being challenged. Executives areincreasingly expecting a forward-lookingview of the financials updated on amonthly, if not on-demand, basis toadjust projections and incorporate newscenarios. Organizations should considerforecasting key line items, and underlyingdrivers, on a monthly basis, includingtop-line drivers, revenue growth, andoperating profit. Given changing marketconditions, identifying core driversand metrics by which organizationsevaluate forecast-to-actuals variance ona monthly basis may prove to be a morevaluable exercise for the organizationthan executing a detailed plan. Giventhe greater frequency, it will be critical tolessen the burden to create an integratedbaseline across these metrics, as well asto rapidly pivot and generate new andalternate scenarios.

• Consider the impact that changes tothe financial planning process willhave on incentive compensationplanning: Implementing the strategiesabove may have implications for howcompensation will be tied to actual versus

Organizations should carry these practices forward and layer in the following to help build a sustainable planning process that is more robust, flexible, and shock-resistant.

plan performance—a practice common across many organizations. As changes to the strategic planning and financial planning process are identified, it will be crucial for these changes to flow through to planning and executing incentive compensation as well.

Financial planning, and embracing digital capabilities such as algorithmic and driver-based mechanisms to enable scenario modeling agility, is now more important than ever. In times of uncertainty, identifying and discussing potential scenarios in a scientific manner can help organizations prepare for the future. Enhanced capabilities will likely be necessary to rapidly digest and assign value to evolving sources of information in order to incorporate that perspective within planning and forecasting models in an efficient and scalable way. To successfully deliver, finance organizations should challenge the existing mechanisms by which they are executing their planning and forecasting processes and developing associated scenarios. Targeted efforts using the short- and long-term strategies above can bolster planning capabilities across times of crisis, recovery, and business as usual and unlock the value that is uniquely attributable to financial forecasting and its ability to inform and strengthen strategic decision-making.

What is algorithmic modeling and forecasting?

Algorithmic modeling and forecasting uses statistical models to describe what’s likely to happen in the future. It’s a process that relies on warehouses of historical company and market data, statistical algorithms chosen by experienced data scientists, and modern computing capabilities that can make collecting, storing, and analyzing data fast and affordable. Forecasting models offer more value when they can account for biases, handle events and anomalies in the data, and course-correct on their own. That’s where machine learning comes into play. Over time, forecasting accuracy improves as algorithms “learn” from previous cycles. Deloitte’s own PrecisionViewTM solution combines data science, machine learning, and advanced visualization to help companies accelerate their planning and scenario modeling efforts to more quickly move to action.

How should companies execute annual financial planning during COVID-19?

Contact us to learn more:

Raj ChhabraManaging DirectorDeloitte Consulting LLP rchhabra@deloitte.com

Eric MerrillManaging DirectorDeloitte Consulting LLP ermerrill@deloitte.com

Gina VargasSenior ManagerDeloitte Consulting LLPgvargas@deloitte.com

John HemenwaySenior ManagerDeloitte Consulting LLPjhemenway@deloitte.com

Nic BarnettSenior ConsultantDeloitte Consulting LLPnbarnett@deloitte.com

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