How To Prepare for Financial Risk With Continuous Planning

How To Prepare for Financial Risk With Continuous Planning

A CFO should do everything in their power to avoid events that would damage their company’s finances. Yet, many CFOs are risk-averse to a fault. Ernst & Young’s 2020 DNA of the CFO survey revealed that finance teams in private organizations “are seen as too risk-averse and cost-conscious.”

These risk-averse CFOs often shy away from new opportunities for growth and expansion. They view themselves as gatekeepers who need to protect the company entirely.

The reality is, companies can’t avoid risk altogether. But it’s possible to manage financial risk while simultaneously taking reasonable chances to propel the organization forward.

As a finance professional, you’re in a unique position to help make calculated decisions with higher odds of being beneficial to the organization. A powerful financial planning and analysis (FP&A) platform that supports Continuous Planning can help you place—and hedge—your bets.

Adapt to Market Risk With Rapid Scenario Planning

To survive in fast-changing times, companies need to know how to adapt to market shifts.

“For business, it is more important than ever to understand what is driving their customer and then look at their strategy and business model to determine how they need to adapt to keep pace with shifting customer demands,” says Jennifer Samuel, director of global communications at KPMG.

This flexibility is especially important following a market crisis like COVID-19. Consumers switched from in-store to online shopping due to stay-at-home restrictions, so businesses had to quickly change their models.

“You must be able to put a new plan and budget together—and the quicker, the better, particularly if you’re strapped for cash,” said Cindy Jutras of analyst firm Mint Jutras.

Scenario planning and analysis help you predict market shifts and plan accordingly—the key to recovering from or preventing setbacks. Even if the market doesn’t change as expected, companies can prepare to handle that, too, with scenario planning.

With an FP&A platform like Planful, finance teams can conduct scenario analysis and provide answers to business leaders quickly to guide their decisions. This way, organizations can optimize the current market trends and inform future plans and strategies. And if things don’t go according to plan, you can also course-correct at a moment’s notice. Once you input the changes in data, you can see the potential consequences reflected in various scenario models automatically.

Planful also automates data collection and aggregation, so you can analyze every option instantly. You can understand the impact of different decisions without spending hours on data entry and model building.

Carta, a technology company specializing in capitalization table management and valuation, used Planful for scenario analyses.

“More than anything, Planful has allowed us to transition into a strategic finance function.”

With Planful’s help, scenario analyses that previously took the company up to a week could now be done in minutes. Carta’s finance team could provide the company’s executives with data and metrics quickly.

“More than anything, Planful has allowed us to transition into a strategic finance function. We finally have a seat at the table as strategic advisors who help decision-makers across the entire company think through the impacts of their decisions,” says Kevin Zell, strategic finance manager at Carta.

Anticipate Credit Risk Through Speedy Financial Consolidation

Ideally, finance teams are able to prevent credit risks—threats incurred from extending credit to customers or from liabilities with suppliers. This risk management helps finance teams maintain enough cash flow for the business’s obligations and long-term goals.

The reality is, companies don’t have complete control over whether they’re being paid on time by customers. The best you can do is anticipate credit risk, if not eliminate it. Advise business leaders to take measures to address credit risk problems before they happen.

So, how can you anticipate this financial risk? First off, consider the customer’s “five Cs” to evaluate their level of credit risk before offering them credit:

  1. Credit history
  2. Capacity to repay
  3. Capital
  4. Conditions of the loan
  5. Collateral

These five Cs can help you decide how much risk the company will be taking on by lending to the customer and if another less risky customer levels it out.

If an existing customer poses a credit risk, look at your company’s financial consolidation. Check if you’ve received the projected income on time and if the company has excess cash flow or assets to cover the risk. If not, prepare for the possibility of the company going into a cash crunch because of continued non-payment.

When it comes to this consolidation, McKinsey found that “data and analytics capabilities are proving essential to the solution” of “managing and monitoring credit risk after the COVID-19 pandemic.” Why? Because traditionally, financial consolidation has been time-consuming due to manual data entry using Excel.

The cycle time for monthly close typically takes five or more calendar days, depending on the organization. This lengthy process doesn’t leave much time for FP&A and anticipating risks.

Use a Continuous Planning FP&A platform to get insight into potential cash flow issues quickly so the company can get ahead of problems before they happen. The platform speeds up the close and consolidation process by automating repetitive tasks, such as data collection and inputs. After switching to Planful, PS Logistics reduced its monthly close from four weeks to one week.

With a platform like Planful, finance teams can make informed decisions in real time and intervene quickly to prevent and manage credit risks.

Minimize Operational Risk Through Data Integration

Today’s CFOs aren’t blindly optimistic about the future. Many see the potential for operational issues over the next few years that could seriously disrupt their company’s finances.

According to a study by FM Global, almost 70% of finance executives are “concerned that their revenues or earnings will become more vulnerable to operational risk over the next two years.” Nearly 60% say “the need to manage operational risks will make it more difficult to meet revenue and earnings targets over the next two years.”

So, how can finance leaders mitigate or manage operational risk? By adopting technology that allows them to efficiently collect and analyze high-quality data from multiple sources. With accurate information easily at hand, finance teams are better able to predict and mitigate operational crises.

Planful can automatically integrate data from every company department to eliminate silos and reduce errors. Unlike other FP&A platforms, Planful lets you collaborate with various business divisions right on Planful’s dashboard. Users can view the source of every entry, assign tasks, and track information changes.

Planful helped Bickford’s Group Australia create a unified view of its diverse set of businesses. With our platform, Bickford’s finance team was able to keep its finger on the pulse of operations and inform financial and management decisions accordingly.

“Our key focus was forecasting volumes because that’s what drives our (beverage) production scheduling. That then feeds into our financial budgets and forecasting, and then management reporting,” says Ashlee-Louise George, project accountant at Bickford’s Group Australia.

Prepare for Financial Risk With Planful

Businesses will always face financial risks, but with the help of Continuous Planning and Planful, you can stay ahead of these risks and set the organization up for success. Interested in learning more about how Planful can help your organization plan for risks? Let’s connect.

Related Posts

All Posts
5 + 5 = 10 Tips CFOs Can Use to Put AI in Finance to Work Today

In 2018, McKinsey reported that CFOs who didn’t adopt digital innovations like artificial intelligence (AI) were in danger of falling behind their counterparts in IT and marketing. When the COVID-19 pandemic hit two years later, it forced businesses to prioritize digital to stay afloat. By one estimate from McKinsey, just the first 9 months of ....

Read More
All Posts
Dissecting the 4 FP&A Personas on the Being Planful Podcast

Our Being Planful podcast has become a great forum for conversations about the people, processes, and purpose of finance, accounting, and FP&A. If you haven’t checked it out yet, you can scan our growing list of episodes here and subscribe using your podcast app of choice.  One of my favorite aspects of Being Planful is ....

Read More
All Posts
For Less Pain During Annual Planning, Be Like Dave

  Nothing saps the joy out of the holiday season like the daunting task of annual planning. It’s that time of year when you take the c-suite’s wishlist of goals and, after a month or two of late nights and stressful meetings, turn it into a complex amalgamation of forecasts, spreadsheets, emails, models, presentations, budgets, ....

Read More