A great deal has changed in how finance and accounting departments operate since the start of the decade. Elevated levels of uncertainty and change, beginning with the pandemic, have forced departments to question and refine their processes and operating methods, which has led to using technology to improve agility and resilience. While these events instill a greater sense of urgency for transformation, skills gaps and technical barriers have stood in the way of adoption of more productive technology. Fortunately, artificial intelligence (AI), generative AI (GenAI) and agents that are skills multipliers are substantially reducing those barriers. Moreover, the broad use of embedded data stores on application platforms (what I call a data pantry) facilitates operations and makes departments more adaptable to events. This is especially true for the financial planning and analysis (FP&A) group because dedicated planning software makes predictive analytics accessible and embeds sophisticated statistical reasoning into forecasts and plans.
Scenario planning has become essential for any enterprise. Two decades ago, I coined the term Integrated Business Planning (IBP) to describe an approach to planning and budgeting that is faster, more dynamic and therefore more accurate and adaptable as events unfold. IBP is a technology- and process-driven approach to planning that connects all the forward-looking activities in which organizations routinely engage, including marketing, sales, customer, supply chain and workforce planning, as well as budgeting, in a unified process using shared, consistent data. It can substantially cut the time spent creating and updating plans, making it possible for FP&A groups to quickly explore different scenarios and rapidly develop detailed assessments of their impact. IBP provides senior executives with the information they need in a short enough time to make planning actionable.
Unlike the steady-state environment that existed in the past, there are many potentially consequential events that now routinely affect an enterprise—its supply and demand, the prices it pays and receives, its regulatory and legal environment—and international financial markets. Some of these, such as exogenous political events, new laws or taxes, are binary because they’ll either happen or they won’t. When, exactly, these events occur is equally important. Unlike planning and budgeting in a steady-state economy, when relatively minor variations of a base-case scenario can be sufficient, planning today must incorporate a wide range of scenarios with very different possible outcomes. Gaining an edge on the competition requires a scenario planning strategy to evaluate multiple contingencies so that the leadership team can better understand ahead of time what their options are and the impact of various trade-offs.
Contingency planning is a great idea, and has been promoted for decades, but most organizations still aren’t yet able to accomplish this in any sort of rigorous way. In many organizations, revising a plan takes weeks, sometimes months, because of the time it takes to develop a full, detailed plan and budget for a particular scenario. And once the budget is assembled, most companies can’t quickly drill back into the assumptions underlying each business silo’s budget.
Contingency planning at enterprise scale requires a process that’s accurate, efficient and fast. To achieve that, an organization must build a planning process around dedicated planning and budgeting software. One of the prime objectives of taking an IBP approach is to speed up the time it takes to complete a full planning cycle. If it takes weeks or months, contingency planning is not practical enough to do more than once or twice a year, which diminishes its usefulness in more turbulent times to support better, more informed decision-making. AI and agents in all their forms will make this approach much more accessible and achievable by automating repetitive work and eliminating barriers to necessary data. That combination makes it possible to shorten planning cycles at scale. It puts an end to “I’ll get back to you with that…” as an answer to “What if…?” because solutions to the question can be produced in minutes, not hours or days.
Contingency-driven cash flow forecasting is a byproduct of these planning exercises. All dedicated planning applications can generate integrated income statements, proforma balance sheets and cash flow forecasts for a given scenario. Especially for midsize enterprises, those that are expanding rapidly or are asset-intense, or that want to avoid “Chapter 22” (going bankrupt again), scenario-based cash flow forecasting is essential to ensure that long-term financial statement requirements and constraints are being met.
It’s worth noting that dedicated planning software addresses a different issue from the cash flow forecasting in treasury management software. The latter serves different purposes, designed mainly to support tactical enterprise cash management operational requirements. These include handling balances in multiple currencies in specific banks and by legal entity. By applying predictive analytics and automatically updating integrated data from sources of record (such as ERP systems and bank feeds), treasury management software is able to achieve useful levels of accuracy in near-term timescales. This supports departmental operations with detailed, multi-dimensional perspectives, even down to day-in account balances. By contrast, dedicated business planning software forecasts cash levels and cash flows at a more aggregated level for longer timescales. Moreover, rather than relying on statistical extrapolation, which is adequate for near-term projections, business planning software enables finance executives and leadership teams to assess the potential impact of specific major initiatives and projects, acquisitions and divestitures as well as different scenarios driven by broader assumptions of an enterprise’s market environment.
Speed breeds agility. Fast planning cycles means that enterprises and individual business units can adjust more frequently and course correct as needed, quickly changing circumstances in uncertain times. Substantially faster planning cycles are achievable. By way of an analogy, look at pit stops in Formula 1 racing today compared to the 1960s. Back then, changing four tires took about a minute, and that was considered competitive. Today, the average time is 2.4 seconds. In other words, if it takes your team a minute to change four tires, you’re out of the race. Improvement of that magnitude requires reducing the time needed to complete processes by applying technology and continual process improvement. Shortening refresh times and using software to support that objective are the keys to speeding up planning and budgeting cycles and achieving agility.
Integrated Business Planning provides a strategic advantage in times of stress and uncertainty by making rapid scenario planning feasible. IBP is also valuable in less volatile times by reducing the time organizations spend on planning and making those subsequent plans more actionable. It also makes budgeting easier for the budget owner. Organizations that have a calendar fiscal year are about to enter their traditional budget season. I recommend that FP&A groups take advantage of current conditions to drive change in how their organization plans and budgets by embracing contingency planning for cash flow forecasting and using technology to make their planning and budgeting processes faster, more accurate and more agile under any circumstances they may face.
Regards,
Robert Kugel