The famous Scottish poet and lyricist Robert Burns once said “There is no such uncertainty as a sure thing”, and in this current economic climate that is something we can absolutely be sure of. The challenges facing Financial Planning and Analysis (FP&A) practitioners and their internal customers are numerous. At any given time after the creation of plans and budgets, effectively they are rendered obsolete due to any combination of supply chain disruptions, macro-economic factors, and geopolitical challenges that cannot be predicted in advance.
One process that has become ever popular in the Planning and Analysis space is that of extended planning and analysis (xP&A) which SAP customers use to breaking down silos between finance and every other department – and the ability to connect and synchronize plans across the entire organization across an integrated application.
This past fall, SAP had the pleasure of hosting the FP&A Trends Board Meetings across North America where FP&A leaders discussed the extended planning & analysis (xP&A) process and the challenges the finance function faces in their current planning and analysis process. Consistently across these many meetings the common theme that arose was that of dealing with data, and scenario planning and simulations. While data is a unique challenge unto itself that I’ll cover in a later blog, lets discuss why scenario planning and simulations are so important.
I pointed out earlier that impact that the different factors of supply chain, macro-economic and geopolitical are having on the global business community. Businesses are challenged with dealing with these issues daily with a whipsaw like turbulence with little ability on how to handle their impact. On a simplified bases some of these issues translated to real world problems include:
- Rampant inflation with no end in sight for either consumer price index (CPI) or the producer price index which this past September 2022 was at 8.5% on a yearly basis.
- With so much of the worlds producers and suppliers tied to China for the flow of goods and supplies, there’s the constant threat of COVID-19 related shutdowns which impact the uncertainty of supply chains.
- The conflict in Ukraine continues to cast a shadow on the world with primarily the levels of human suffering, but also the energy crisis it has cast with oil and gas, and energy costs that impact people and businesses.
Dealing with these crises require a responsive business and financial planning team. No longer can FP&A be left to plan in a scheduled manner with traditional budgets drawn out over the course of multiple months, followed by static updates and monthly forecasts performed as an exercise for the sake of the activity. As McKinsey pointed out in 2020 FP&A departments must be turbo charged and finance overall must develop scenarios to provide strategic guidance to the overall enterprise. While this piece might seem dated, its relevance has never been stronger. Modern finance departments are equipped with the tools and solutions to consume and analyze enterprise-wide data, collaborate across business functions, and build valid and pro-active scenarios that can be relayed to leaders and their internal customers to help not just with decisions but a recommended course of action. This means the reliance on spreadsheets is over.
Modern planning solutions at the bare minimum allow access to data fully integrated in real time from their ERP and operational systems, to optimize the insights to action. Additionally, the use of predictive forecasting features and machine learning that help recognize trends and provide insights that minimize human biases. With the combination of available and trusted data along with predictive insights, planners can easily assess the impact of all the scenarios. Armed with modern planning tools planners with just a few clicks can assess the impact on inflation in relation to their pricing, producer prices and how that impacts their costs, play with different supply chain models and channels and other factors that will ultimately highlight the strength of finance as a strategic leader to help guide organizations to safe harbours and potential opportunities during these times. The ability to run simulations on the impact of these external factors and create best or worse case scenarios or plan for upside or downside and the correct path forward has never been more important, and nor has it been easier. To learn more about FP&A related trends and analysis please see the 2022 FP&A Trends Survey where finance leaders share their common challenges. For more information on SAP’s approach to planning and analysis please see SAP solutions for extended planning and analysis.