Traditional financial controlling is not fit for the next 10-18 months

For finance teams and controllers, the coronavirus pandemic is particularly concerning. Uncertainty makes forecasting a difficult task, and the pandemic has increased it to historic level.

Global financial volatility, at a historic peak in mid-March, has yet to descend to pre-crisis levels, and US economic policy uncertainty has been similarly record-breaking in recent months. In Germany, business confidence has fallen precipitously, with the ifo Business Climate Index collapsing in March and April, before only marginally increasing in May. Even macroeconomic GDP forecasting has been greatly affected – single-figure percentage forecasts are being replaced with large, imprecise ranges – German GDP forecasts by Sachverständigenrat for 2020 vary from -2.8% to -5.4%, and 1% to 4.9% for 2021.

These sorts of statistics, their variances, and the ongoing and unresolved nature of the pandemic, indicate the huge challenges now faced by finance teams used to well-established and honed approaches to business forecasting. Old baselines are largely useless, and structures and processes are proving too slow, rigid and long-term-focused to respond to the rapidly changing landscape. To build resilience, survive and recover, forecasting departments need to quickly change their approach.

Thankfully, there is a guiding blueprint of action you can follow, based on a four-phase performance management best-practice approach developed by BearingPoint with extensive input from our clients: Shock, Cost-Saving, Restructuring & Consolidation, and Restart.

Corona crises may consist of four phases...

To not be a take over candidate within the consolidation phase and be in a good start position, effects and measures need to be planned and permanently adapted, immediately.

Weather the Shock phase with transparency and frequent planning

The first phase of performance management in the crisis is very much underway. For planning and forecasting, the primary emphasis within the Shock phase is to provide transparency, thus affording decision-makers with the information and data they need to rapidly react to the unfolding events and threats to liquidity.

The first phase of performance management in the crisis is very much underway.

For planning and forecasting, the primary emphasis within the Shock phase is to provide transparency, thus affording decision-makers with the information and data they need to rapidly react to the unfolding events and threats to liquidity.
 

  • Increase planning frequency – Instead of mid and long-term forecasting, ensure your teams and controllers implement weekly or bi-weekly forecasting and reporting. This means speeding up planning and forecasting operations with agile processes, using reduced data sets.
     
  • Adapt forecasting methods – Forecasting must be based upon the pre-crisis baseline and consider immediate effects and measures (profit and loss, for example). From here, your forecasters can create a weekly or bi-weekly COVID-19 scenario for your business. This can then be stress tested against worst-case stressors (50% revenue loss, for instance) and trigger points (both financial and pandemic-related), then analyzed to define the level of revenue loss your business can withstand. This provides insight into the short-and-mid-term adaptation of planning actions and structures required.
     
  • Postpone non-crucial tasks – While in the Crisis phase, tasks with a mid or long-term focus (such as premises, strategic planning, year-end reporting, budgeting and so forth) may need to be postponed to free up time and resources for short-term forecasting.

These steps should be overseen by a Crisis Management Committee attended by leaders from all parts of your firm (typically 15 to 30 experts). This committee analyzes effects and measures, allowing the right courses of action to be implemented rapidly.

Adapt planning, budgeting, and forecasting to enable effective Cost-Saving

Many businesses are currently or will soon be entering the second phase, Cost-Saving, which builds on the approaches introduced in the Shock phase. Here, you must convince your finance managers to adapt to new ways of planning, budgeting, and forecasting to manage continuing levels of high uncertainty.

As has been the case with many clients we have advised, you may need to begin discussions into forgoing budgetary activity that would usually be conducted over the summer and presented in the autumn. This is due to the need to pivot towards short-term forecasting capacity, but also because budget processes poorly suit the nature of the current crisis. There is a significant likelihood of the circumstances of the pandemic changing after your budgets have been finalized; an event that would require them to be quickly and expensively re-budgeted and presented to your supervisory board. In many cases, this can be replaced with an effects and measures-based rolling forecast.

This change of focus is not revolutionary. Controlling effects and measures, and agile project and planning structures have long been a potent weapon within financial forecasters’ arsenals. Normal forecasting activity should certainly resume once the crisis abates; however, it is imperative you adapt for the short term, now. A lack of transparency and understanding of effects and measures will leave your business exposed for the subsequent Restructuring & Consolidation phase, and in poor shape to take advantage of the final Restart phase.

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