COVID-19 left many leaders uncertain about their capital allocation model. In fact, 56% of CFOs worldwide said, “their capital allocation strategy needs to be completely rethought” following the pandemic.
After an unexpected crisis like COVID-19, it’s tempting to approach capital allocation decisions as quick fixes. Your expenditures are based on the short-term fires you need to put out.
But as the world enters the new normal, CFOs can focus on building a long-term strategic capital allocation framework. This approach doesn’t mean forming a spending plan you’re glued to for years. It means building a foundational capital allocation model that serves as your bedrock yet is flexible enough to leave room for adjustments.
Many CFOs make corporate capital allocation decisions on a yearly basis. But when you only think about the company’s capital allocation model annually, it can be hard to evaluate if the investments are paying off, or just as difficult to quickly course-correct when needed.
Consider the impact of COVID-19 last year. Many businesses had to completely rethink their annual capital allocation methods to adapt to the sudden market changes.
The healthcare industry had to invest in telehealth technology.
Banks delayed or suspended dividend payments to preserve cash.
Product-based businesses and manufacturers had to shift to local versus global supply chains.
Businesses of all sizes had to rethink digital investments in the transition to remote work.
Agile finance teams, for example, shifted to cloud-based FP&A platforms like Planful to support remote work and cross-functional collaboration.
With the help of data. When you can easily assess investment performance and alternative choices, you can course-correct quickly in response to market changes or less-than-expected investment returns.
Finance data is more accessible across your organization when you invest in a robust FP&A platform. This technology can help you keep track of numbers and respond to unplanned changes. Thanks to its integrations, Planful allows finance teams to collaborate with other departments on the platform and view data in real-time to make capital allocation decisions.
The point here is that numbers on their own have little value to finance teams until they’re transformed into structured information. Planful helps you convert finance data into information, and then into knowledge based on context and trends to help you make better, data-driven capital allocation decisions.
Companies can get stuck in a rut when finance leaders make the same investment decisions because they seem safe. With the uncertainty of the pandemic, CFOs can’t determine if now is the time to make drastic changes to investments relative to pandemic levels.
Diversifying investments and allocation can benefit the organization and produce more returns. According to a study by McKinsey, companies that have diversified investments will be worth around 40% more than companies that don’t.
We recommend three steps to take smarter risks when it comes to your capital allocation approach:
A comprehensive FP&A platform like Planful offers tools for finance teams to perform scenario analyses and understand potential impacts in minutes, instead of the days or weeks it would take by manually performing the capital allocation process.
“Our forecast system was error-prone and time-intensive. Now, we can create multiple scenarios, and we have immediate visibility,” says Tim Zue, EVP & CFO at Boston Red Sox. “What used to take us days now takes us minutes with the click of a button.”
A good capital allocation model empowers companies to anticipate outcomes that could impact the company and plan accordingly. This foresight is even more relevant in light of COVID-19, which blindsided finance teams.
Businesses are better able to prepare for the unexpected when they include a wide range of people brainstorming possible scenarios and offering input. On the flip side, capital allocation choices are susceptible to biases when few people are involved in the decision making. If one or two people dominate the conversation, allocation will be limited to their experiences and ideas.
Research backs this up. And, according to BCG, capital allocation decisions are prone to cognitive biases such as:
A fair governance process for the company’s capital allocation model can help reduce bias and add more voices to the investment decisions.
By having a variety of voices shape capital allocation, your company is better equipped to choose expenditures that support the company’s growth and resilience—even in the face of black swan events like COVID-19.
There’s no need to make capital allocation decisions solely on an annual basis. As COVID-19 shows, the world can quickly change in ways that upend year-long plans. With today’s financial planning technology, it’s easier than ever to revisit your investment decisions frequently and adapt as needed.
Find out how Planful can help you create better capital allocation models with agile continuous planning.
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