By Marc Seewald, Vice President of Product Administration, Oracle
If there’s one factor we’ve discovered in 2020, it’s this: in a disaster, each assumption you’ve made about what you are promoting is unsuitable.
COVID-19 has been a world shock—economically, socially, and psychologically. Client habits, companies, and societies proceed to evolve in methods we’ve by no means seen earlier than. With out historic knowledge and tendencies, how can we create forecasts?
In a disaster, making an attempt to foretell a single final result is a recipe for catastrophe. When every part is unsure, we have to plan for a number of outcomes. That is the place situation planning comes into play. It might probably assist us visualize the longer term, mannequin a spread of potential outcomes, and make it easier to resolve how to reply to every one.
As this disaster evolves, some issues are returning to regular, whereas many others aren’t. You need to ask your self, “Will we return to business as usual, or will we see fundamental changes in our business model, how we serve customers, or gain market share? Will there be new opportunities that arise, and how do we best position ourselves for a post-COVID environment?”
6 steps for situation planning
One of many largest benefits of situation planning is that it might clearly exhibit cause-and-effect relationships, exhibiting how every potential situation may have an effect on your budgets and forecasts. Let’s take a more in-depth take a look at the six steps concerned in situation planning:
1. Outline scope, points, and time horizon
Not like your long-range plan (LRP), situation modeling focuses on the close to time period—the following six to 12 months. One to 2 years out may nonetheless be related, relying in your trade, however in a disaster the place survival is paramount, it is best to focus in your fast wants.
2. Outline key drivers
Conventional strategic plans use key enterprise drivers (akin to market share) to mannequin gross sales. In a disaster, assumptions by buyer section or trade is perhaps extra applicable. Related variables may embrace entry to capital, workforce productiveness, or provide chain stability. If there’s a authorities stimulus bundle, the dimensions and timing will have an effect on workforce retention, capex, and your revenue tax technique. Ask your self: What’s essential proper now to assist maintain us working? Isolating a very powerful drivers for what you are promoting will likely be key to profitable situation planning.
3. Accumulate and analyze knowledge
Accumulate each quantitative and qualitative knowledge to assist your key assumptions. Mix info from each inside and exterior sources. For instance, there’s a variety of free knowledge out there from sources like Harvard Enterprise Overview concerning the macro-economics of previous pandemics.
4. Develop situations
Preserve the situations to a manageable quantity—not more than 5. The variety of situations you mannequin will depend on your group’s knowledge and patterns, nevertheless it’s essential to determine which of them are most essential to you.
5. Apply situations
Take a look at your situations by figuring out what the downstream impacts will likely be on gross sales, money circulate, capex, and so forth. Establish metrics and KPIs you need to monitor. Contemplate the thresholds that may require motion—for instance, if money readily available dips beneath X, we must always take a look at loans and/or deferred funds. Finally, you’re making a company-wide plan. It should be actionable, and accessible to all elements of the enterprise.
6. Preserve and replace
Monitor the plan often. Report typically so you possibly can reply rapidly to adjustments in KPIS. You may want to enhance your present bottom-up forecasting to make sure that the enterprise is monitoring in direction of key assumptions.
Your mannequin ought to allow you to simply examine situations side-by-side. If one situation mannequin throughout geographies, whereas one other fashions throughout product strains, evaluating the outcomes will likely be a problem. With the right scenario planning software, you possibly can simply duplicate your first situation—together with all the important thing drivers—after which alter the inputs so that you’re evaluating apples to apples, fairly than apples to submarines.
You can too consider threat and carry out stress testing throughout every situation utilizing a kind of knowledge modeling generally known as Monte Carlo simulation. This system permits you to rapidly discover a spread of outcomes throughout a number of variables. It may be massively priceless when there’s a excessive diploma of uncertainty in assumptions.
Money is king
In a disaster, it’s crucial to focus in your stability sheet. Contemplate impacts akin to funding the enterprise, buyer fee delays, and financial institution covenant ratios. You can too complement top-down situation planning with bottom-up re-forecasts. For instance, you possibly can accumulate a bottoms-up short-term weekly forecast on makes use of and sources of money, that can assist you validate your top-down assumptions on liquidity. All of those capabilities can be found in Oracle Cloud Fusion EPM.
The worth of situation planning
The purpose of all this isn’t to obsess over doable outcomes. It’s to assist put together your group for no matter may occur. When you have got a plan for a number of outcomes, you possibly can talk these plans to staff, prospects, traders and different stakeholders, instilling confidence in your group and its finance management. Your group can play a crucial position for C-suite leaders in search of higher decision-making, insights, and related info to assist them navigate a disaster.