No organization or finance professional can perfectly predict the future, including the scenario in which we now find ourselves. While many organizations are undoubtedly confronting a worst-case scenario in the COVID-19 crisis, this does not negate the importance of planning for the future—In fact, doing so even now is a critical step for organizational survival. Below, we discuss two tools in the FM toolbox that enable organizations to imagine and plan for situations like COVID-19: Scenario planning and business continuity planning. Further reading on these topics can be found in APQC’s Risk and the Finance Function collection.
DEVELOPING EFFECTIVE SCENARIO PLANNING
In the midst of the COVID-19 crisis and in a world that was already uncertain and unpredictable before that, it is in every organization’s best interest to be prepared for a wide range of different scenarios and have a plan in place for each. Effective scenario planning includes four key steps:
1. Identify potential scenarios your organization might face. Finance expert Steve Player
recommends starting with 4-7 key scenarios, including one extremely bad scenario and one extremely good one.
2. Think through issues and opportunities. It may feel difficult to imagine an “extremely good” scenario right now, but crisis often brings opportunity. The exercise of thinking through what could cause different scenarios provides a foundation to begin developing action plans to respond should these scenarios occur.
3. Look for leading indicators. An organization that has spent time thinking through the issues and opportunities that cause a scenario to occur will be better able to identify leading indicators, track them, and use them to anticipate the scenario’s occurrence. Even now, scenario planning can be a source of competitive advantage that helps an organization act more quickly in response in response to disruption or opportunity.
Build your game plans. The true value of scenario planning lies in the action plans that an
organization develops in response. Player said that it is critical for organizations to develop a series of ‘playbooks’ that include a collection of concrete plans and strategies for how an
organization will respond in the event of a scenario’s occurrence. Even if the organization
encounters a scenario it never anticipated, it may already have elements of a successful
action plan within the plans it previously developed.
FORMING A FINANCIAL CONTINGENCY PLAN
As part of a larger risk management approach that includes risk identification, scenario planning, and broader business continuity plans, APQC recommends three core steps for forming a financial contingency plan. These steps are not only applicable to the COVID-19 epidemic but also other signals of an immediate downturn or significant market disruption.
1. Conduct explicit financial contingency analysis. Organizations should fully leverage their FP&A toolkit and analysts, along with external expertise, to gain insight into current operations, the market, and the likelihood of varying scenarios. This includes looking at costs, market strategy, cash flow, mergers and acquisitions, and strategic alliances. An organization should also examine its financial vulnerabilities and any operational vulnerabilities affecting finance. In the case of COVID-19, this could include things
like a supply chain that is dependent on only one or two regions.
A concerted analysis with stress testing and dynamic forecasting tools may reveal over-reliance on specific resources or a lack of backup options for specific scenarios. In determining what necessitates a financial contingency plan, the likelihood of events should be placed in the context of their detriment to the organization’s financial stability. This is a good opportunity to leverage lessons learned during the 2003 SARS outbreak, during which many organizations learned the importance of accounting for worker absences,ii planning for dips in customer demand,iii treating clients well during a crisis, maintaining resilient supply chains, and tracking risk exposure to regional events.
2. Create an inventory of liquidity options and prioritize resources. For financial contingency planning, the key concern is maintaining a sufficient level of liquidity.
To create an inventory of liquidity options and prioritize resources, organizations should begin by looking at assets that can be liquidated, planned outflows that can be reduced, and available purchasing power or lines of credit.
The mobility of these resources can be categorized and leveraged as instant and negotiable, and the organization should decide how large its reserve of these resources should be. The uncertainty posed by COVID-19 suggests that it may be prudent to retain some resources in order to respond to new circumstances with greater agility. T
o prioritize these resources, the organization can itemize operational essentials (e.g., equipment, top performers, and vendors) that support the organization’s core profit generation.) Building this inventory is critical for crafting the action plans an organization can take in a significant downturn like COVID-19, whether that means leveraging cash reserves, scaling down production, divesting assets, restructuring, seeking new lines of credit, or renegotiating existing ones.
3. Have a strategy for moving those resources in response to downturns. With a hierarchy of financial resources and inventory of liquidity options, an organization can set a strategy for allocating capital and leveraging resources. Some contingency plans, such as the
liquidation of an asset, will need their own contingency plans if the sale does not go through. Different options may be more (or less) desirable given the amount of time available to act, but even the most controllable sources of cost reduction (such as layoffs) should be on the table in the context of long-term financial goals and sustainability. The goal, after all, is to protect the organization’s earning power in difficult times.
When well-designed, pre-emptive analyses and resource prioritization can inform a thoughtful, sequenced plan that maximizes the options available to senior management instead of pursuing the path of least resistance in a state of marketplace confusion. The plan should group actions by function or division so responsibility is clearly outlined.
Accountability is a critical success factor for contingency plans,viii and a project management office may be required to keep senior management informed and adhering to agreed-upon procedures.
This article is written by APQC in the document COVID-19 ORGANIZATIONAL SURVIVAL GUIDE, Featuring insights and strategies from APQC’s 5 major research areas.
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