Strategic CFOs and Scenario Planning


The world is an uncertain place (especially for small businesses). So how does a business owner or CEO (with help from their CFO) plan for uncertain times? The answer may surprise you.

A recent article by an experienced CFO and CEO in CFO Magazine states that that the best CFOs must continually plan a variety of business scenarios in good economic times or bad economic times.

“For all CFOs, planning for these conditions is a critical part of the job. However, all too often multiple scenario planning is primarily done as a reaction to a bad quarter or down projections.”

In our experience as an outsourced CFO to a variety of companies in the San Francisco Bay Area, we often see dangerous complacency by CEOs and business owners in their business planning that sales and profit growth will always continue as in the past.

This is particularly true with private companies that do not having public reporting requirements with investors and other stakeholders. Yet, continuous scenario planning is of even greater importance for small businesses as they are usually more at-risk with changes in the business environment.

“Because private companies are not always required to subscribe to that level of financial discipline, scenario planning often falls by the wayside, which can have serious side effects. Because of their small size, cash position, or sales pipeline, private companies are often more vulnerable to even small business changes. Scenario planning is therefore just as critical for private companies as it is for their larger, public counterparts.”

More than ever, real-time data, analysis, and insights are crucial to dynamically adjusting to changes in the business environment. Strategic CFOs develop and revised business plans based on the ever-changing input of data and analysis from a variety of company functions (e.g., sales, marketing, production, operations, etc.) in addition to the traditional financial statements (i.e., P&L, Balance Sheet, Cash Flow Statement).

The article recommends the following best practices for the scenario planning process:

  1. “Be proactive and realistic.”

Too often, strategy development with solid financial analysis is done haphazardly (especially for small businesses). Developing a flexible, business and financial model that is consistently updated with various scenarios is important.

“Instead, every business should have flexible models that enable it to constantly engage in scenario analysis. That way, if your organization encounters unexpected performance results, it will be able to quickly respond and adjust.”

2. “Understand that not every trend will impact your company.”

Not every macro trend will be relevant to your business. In addition, certain trends and events will affect public companies differently than private companies

3. “Pair hard data with soft skills.”

“When asked what business attributes were most beneficial to the performance of modern CFOs, 65% of survey respondents said technical and analytic skills were the most important. Additionally, 78% cited the ability to apply financial data analysis as providing the most strategic value to their organization.”

Clearly, financial data analysis plays a huge role in the driving strategic insights and value for any company. Too often, crucial strategic and operational decisions are made without the objectivity of actual data and analysis. However, financial analysis is not enough without the required interpersonal skills critical for a well-functioning team.

Read the full article

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