As the world is heading towards a slow recovery, businesses can expect some unexpected events along the way. Therefore, agility needs to be embedded in every business process, including corporate financial planning.
Use the right benchmarks
According to a 2009 Accenture survey, more than 80% of companies used their own historical performance as benchmarks for targets and only half of them used 3 or more major sources of external data for planning. The recommendation is to leverage external information instead, e.g. competitive data, microeconomic reports, market expectations.
Adopt scenario planning
Scenario planning involves devising a course of actions if certain levels for metrics chosen as scenario triggers are reached. Although this is a relatively new practice, there has been increasing recognition of its effectiveness.
Adopt an event-driven approach
Event-driven planning can help organisations respond to change faster and in a more active manner. Here are the steps:
- Choose a set of value drivers based on their volatility and material impact
- Define tolerance ranges and monitor these value drivers
- When the tolerance level is reached, revise the plan and reallocate resources
Get more buy-in from front-line staff
While the finance department still has the central role of building the planning model, they could greatly use the help of front-line operating staff who are tuned to changes in the market.
Fine-tune data collection and analytics
Superior analytics starts with good data, achieved by determining the most important data, then validating and consolidating it. The next step is to derive actionable insights from the data and use them to shape decisions.
Build clear frameworks for capital allocation
An effective capital allocation framework:
- Ensures only projects with a return greater than the capital cost can proceed
- Takes into account non-financial returns e.g. employee satisfaction
- Links capital allocation with the strategic plan
- Incorporates enterprise risk management
Don’t neglect the strategic planning process
Strategic planning needs to be maintained in order to have a healthy balance sheet. While strategic planning deals with strategies and strategy drivers, cash flow and balance sheet planning aid with executing those strategic plans.
Balance sheet planning addresses questions such as:
- What are the expected cash flows from operating, investing and financing activities?
- What are the relevant ratio trends of a strong balance sheet?
Include intangible assets
As intangible assets (e.g. brand, intellectual property) increasingly account for a larger proportion of market value, companies should incorporate this aspect into corporate financial planning. Despite the fact that intangibles are difficult to measure, SG&A costs (e.g. employee training, research) can clearly create value in the long run. Thus, they deserve to be recognised on the balance sheet and amortised over time, i.e. managed strategically.
(*) The ideas expressed in this post are based on an article published on CFOInnovation by Robert Bergström, Sarah Batchelor and George Marcotte (2012)
Interested in improving the quality and speed of your planning, budgeting, and reporting? Find out how a corporate performance management solution suite can enhance enterprise agility and resilience by allowing you to adopt best practices.