Financial Scenario Planning and the Budgeting Process

In a fast-changing business environment, companies and organisations need to be able to quickly monitor their financial situation and make changes in their plans going forward. Financial Scenario Planning (Financial Modelling) is an important part of the work. It's used to estimate possible changes in the value of a company or in its cash flow, especially when favourable or unfavourable events could potentially impact the company.

Scenario Planning is an analytical tool and process that makes it possible to examine and evaluate possible future events or scenarios, and to predict possible outcomes. This can be done at a strategic or purely financial level, and can have a significant impact on budgeting and forecasting work.

In normal times, budgeting process is a consensus process based on a common view of the future that guides a company’s investments and revenues. However, there is a risk that the budgeting process may not agile enough if important preconditions change.

Alternative Financial Scenarios

Working with Rolling Forecasts (such as rolling 12-month forecasts) and/or working with Alternative Financial Scenarios can make it easier for you to act quickly when faced with unforeseen events.

According to Hypergene’s partner PWC, the right forecasting tool “must be sufficiently flexible to be able to deal with recession scenarios. The modelling must be able to demonstrate the effects of fixed, variable and fluctuating costs as well as problems with sales and production."

PWC emphasises that “you must have accurate and up-to-date factors in your model in order to be able to accurately estimate and communicate the expected effects on your business. Communication is an important part of the process since it gives everyone involved in the forecasting work the same starting point and the same frame of reference. A clear dashboard can enable and facilitate communication.”

Earmark risk levels in financial scenarios

According to McKinsey, CFOs and Financial Managers can and should earmark risk levels in order to know whether a contingency plan is needed for that particular scenario and, if so, when it should be implemented. They can follow the development of events in the same way and inform the management continuously, even after a new plan has been activated.

The new plan does not have to affect the whole company; it could be used by a subsidiary or department, for example. The affected part of the business may then need to develop and apply new budgets and review risk strategies, capital allocations and financing.

McKinsey also considers that a valid way to evaluate financial scenarios is quite simply to look at what happened in reality, and to what extent, and judge how the outcome of the strategic initiative compared with the level achieved in the scenario. This is complicated by the long-term approach on which Scenario Planning is based.

A successful example during the COVID-19 pandemic is how supermarket chains managed to reallocate resources to e-commerce. They were then able to evaluate whether or not they should have allocated even more resources to online sales.

Tools for understanding the future

Digital tools for planning, reporting and analysis are strategic tools that enable us to understand whether or not the right prerequisites exist for us to achieve a desired result. The goal is to integrate everything into the other internal solutions, in order to get relevant information to the right people as quickly as possible.

The tool should also have external connections so that your information can be enriched by data from other sources. Here, visualisation, automation and user-friendly systems are crucial.

However, it is not enough just to gather information. You must also be able to draw the right conclusions in order to translate data into informed decisions.

Financial Planning has acquired a greater internal focus for many organisations in the context of tools, and it has developed to include KPIs and data from all parts of the operation.

Today, it is no longer enough to rely on Excel models or solutions that do not deal with changing preconditions. This approach was relatively common just a few years ago – even among larger listed companies – but changing conditions and an increasingly uncertain business environment have put the issue of Forecasting Systems high on the agenda of management teams and boards.

Hypergene's software provides Decision Support through the collection and presentation of business data to management teams, managers, and those who need to stay on top of Operational Management. Hypergene helps you make decisions, steer towards goals, and achieve higher levels of performance and efficiency.

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How is the Controller Function Affected by Digitalisation?

Professor Lukas Goretzki at the Stockholm School of Economics, is researching this question, since the Controller Function is certainly affected to a significant extent. ”The only constant in the Controller Function is change,” Goretzki says.

What is Strategic Planning?

Strategic Planning forms the basis for setting goals and priorities, and for ensuring that an organisation’s plans are going in the right direction. When the plans of different departments are unified and in line with the overall goals, the company has established a common direction.

What is Business Intelligence?

Business intelligence (BI) is an umbrella term that refers to data-driven methods and processes for improving business understanding and decision-making.