Steering your budget amid coronavirus uncertainty

Organisations that have agility built into their budgets are better equipped to pivot when needed, as when major events such as the spread of the coronavirus occur. They also will be more prepared for the next crisis, according to Steve Player, CPA, CGMA, the owner of consulting firm The Player Group. “This won’t be the last pandemic we face,” Player said. (This podcast was recorded on Thursday, March 19.)

What you’ll learn from this episode:

• Key focus areas for companies in the near term.
• The value of having a pandemic provision included in scenario plans.
• Why organisations need to be more like motorboats and less like ocean tankers.
• Why the traditional annual budget can hold companies back.
• Advice for forecasting for the rest of this year and beyond.

Play the episode below or read the edited transcript:

For more news and reporting on the coronavirus and how management accountants can handle challenges related to the outbreak, visit FM’s coronavirus resources page.

To comment on this podcast or to suggest an idea for another podcast, contact Neil Amato, an FM magazine senior editor, at Neil.Amato@aicpa-cima.com.

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Transcript:

Neil Amato: Steve, welcome to the podcast. Thank you for being here.

Steve Player: My pleasure, Neil.

Amato: In the short term, what, if anything, can organisations do from a budgeting or forecasting standpoint to mitigate the business consequences of the state we’re in with coronavirus?

Player: Well, the No. 1 thing is what we need to do immediately. Every business should be taking an immediate look at cash-flow forecasting. So the first thing you’ve got to do is really just understand as much as possible about the current state of where you are and what the go-forward looks like, and the most critical thing for every company is cash. If you take a look at the number of businesses, and particularly here in Texas, we’ve been hit hard, because in efforts to shut this thing down, the county judge and several of the mayors, they’ve literally asked everybody not to gather in groups of ten or more.

All restaurants, bars, health clubs, etc., have closed, except for takeout service. So immediately, if you’re a restaurant and you were living on the nightly take, all of a sudden, that’s radically changed and you’re shifting over to only living on takeout business, and if you’re not geared up for takeout business, that’s a lot harder conversion for some than others. So immediately, everybody needs to take a look at what their burn rate is, how much the cash outflow is, and how much cash reserves do they have on hand to know just exactly how much runway they have.

So this is not much different than a startup in this kind of situation, so you really got to get arms around cash-flow forecasting and that needs to be a weekly, and sometimes even daily, basis. Because if you’ve got to do some radical things, the quicker you can realise that, the more time you have to kind of put those things in play. So cash-flow forecasting, everybody ought to be doing immediately.

And then looking at more of an operational forecast, looking out in essentially short term, almost like a sales demand forecast. Get a picture for volume in terms of what’s happening and what these new, unforeseen activities or curtailments are doing to you, and then you’ve got to figure out what the path forward is. So start looking at that like you’re on a ship, facing heavy seas, or icebergs, or danger. What can you do to assess where your ship is, where it’s progressing, and how you need to steer and navigate to move.

And in that regard, in most cases, the annual budget that you did at the end of last year, as Bjarte Bogsnes’ article in FM magazine pointed out, a lot of that is out the window. If I wanted to make the perfect case for this is a good time the case for annual budgeting being too static and too obsolete, this is the perfect case for it. Those were guidelines. Now we’re in reality, and we’ve got to quickly shift to something that’s going help us navigate through these waters ahead.

Amato: You mentioned icebergs. You mentioned Bjarte Bogsnes. We will get back to both that topic and that expert in just a bit. Do companies’ annual budgets — they probably don’t all have pandemic provisions. I mean, really, did they ever? When H1N1 was prevalent more than ten years ago, but maybe those concerns kind of slipped away over the years?

Player: What we see, Neil, is extremely well-developed FP&A functions will have gone through, in addition to a rolling forecast or forward-looking plan, maybe even an annual budget, in addition to whatever annual planning is happening, really forward-looking organisations, really good FP&A functions, also accompanying that with scenario plans. So you never bake in a pandemic because you never know when it’s going to come, but really good companies, based on the history, and we certainly have had a lot of pandemics before this, H1N1, you mentioned, SARS. There’s a history of these kind of things, and this COVID-19, while deadly and as devastating as it is right now, this won’t be the last pandemic we face.

And so most companies that are doing this well have scenario plans and will have a playbook. If they’ve thought this through, they’ve already shifted over to their playbook. What a scenario plan does is before the crisis hits, it allows you to think through if it did, what would the likely things happen that we’re seeing today, and therefore, what plays could the organisation run in terms of having cash reserves, in terms of shifting to other approaches, in thinking about what happens if restaurants shut down or clubs shut down. How would you shift your business? What would you do? What could you do with your employees, and so forth? Those sets of playbooks are what a good scenario plan would have in place.

Now if your organisation hasn’t done that and you find yourself in the middle of the pandemic, well, then you’ve got to scramble. You’ve got to create your playbook on the fly, and you’ve got to put it together as quick as possible, and you can’t waste time looking at that annual budget, because that annual budget was based on a bunch of assumptions that have turned out to be wrong. And so we’ve got to have our organisations create a much better sense of agility to be able to pivot and move through this thing, and that’s really what’s required of finance is that we become part of creating that agility, not something that’s rigidly adhering to an old tool from the 1920s that’s long since run its course in terms of usefulness.

Amato: So Steve, your Twitter handle is @MrForecast. Clearly, you are an advocate of more flexible forecasts than static budgets. I guess, unfortunately, right now the state we’re in, that’s one of the reasons that you push for more flexibility, more agility.

Player: Well, the thing we push for, it’s a real subtlety there. I use the @MrForecast handle on my Twitter account in homage to the book I wrote with Steve Morlidge called Future Ready: How to Master Business Forecasting, and that’s a very good, practical guide to how to do forecasting, because forecasting, frankly, gets confused. A forecast is merely your view of what you think is most likely to have happened. It is not a control plan. If you take your forecast and start overlaying a bunch of control things into it, you start trying to manipulate the forecast. What you want to do in the forecast is just really reflect what you think your best guess of what’s going to happen is and then when you overlay counter measures, you overlay your playbook.

You overlay your action plans. Then you interpret how you think those action plans are going to play against the environment that you’re operating in. But you’re constantly looking forward, and the reason I use the @MrForecast is I want businesses and finance functions in particular to always be thinking about what’s coming ahead. You add value when you anticipate and understand what’s coming ahead and then help the management team position the organisation for a better outcome, figure out what to do, or not do, or to do differently to take advantage of what’s coming or to protect and defend against what’s threatening you. For finance, we spent too long on the back of the boat.

We spent too much time staring at the past recording what has happened and using that to manage the business. This COVID-19 is a prime example why we have to turn around and start looking forward and then start saying, all right, what’s going to happen, and then we start working our playbook. We start working, how do we optimise that. How do we defend? How do we take advantage of? I mean right now, for all the downsides happening, there’s parts of the economy that are up.

I mean grocery stores are having sales through the roof. Why? Because people are hoarding. Now they going to realise that at some point, that’s going to come down, but for now, Amazon’s hiring like crazy because everything’s shipping. So like any good chaos, any time there’s a downside, there’s also an upside. You just need to help your organisation steer to what’s most advantageous for what you’re trying to do.

Amato: As big a deal as coronavirus is for the world, is it possible that organisations could lose sight of some of those other icebergs in their path, like the oil price war, or climate change, or any number of other obstacles?

Player: Well, you bring up a good one right there. Here’s a situation where COVID-19 is happening, but the price collapse in the oil and gas industry is not so much a COVID-19 fact. It is that Russia and Saudi Arabia are basically at odds over supply. They couldn’t agree on restricting supply because they both needed money, and when one said, “I’m not going to hold back,” the other said, “I’m not going to hold back, either.” And what happens is you’ve got way too much supply of oil flushing out there, which is dramatically dropping the price out of it.

Now everybody else that’s in the oil and gas business had got to deal with that, because when elephants dance, everybody else gets trampled. So a lot of our fracking business and things like that become much less economic when oil and gas is about $25 a barrel or less. So that’s a completely different thing, but they’re happening concurrently. You have to see how these forces work together.

[In March,] the state of Utah had a major earthquake. Things like earthquakes, tornadoes, and floods, and things like that, those things are still going to come. So the fact that we’re dealing with one major thing doesn’t mean the other things aren’t all happening simultaneously. So it’s just the complexity of the world that we live in now. We have to figure out how to deal with multiple variables.

That’s the reason, again, coming back to the forecast thing. The reason I think the only way you can do is focus ahead because there’s so many things happening that if you’re focused on an old annual budget, and looking backwards, and trying to think about what you thought was going to happen in the middle of last summer, and what you wound up negotiating as a result, all that backward thinking doesn’t help people make quick decisions about where to go today.

Amato: Your colleague at the Beyond Budgeting Roundtable, Bjarte Bogsnes, who we’ve already mentioned, he said recently, and I quote, “Forecasting is often about compensating for a lack of agility. The slower you are, the more you need to predict what could lie ahead. Too bad, you will often be wrong.”

What’s your reaction to that? How does that apply to companies these days?

Player: It very succinctly states the problem. The objective is not to perfectly predict. When Steve Morlidge and I wrote the book about Future Ready, we at one point in time, thought about calling Future Perfect. We thought that would have been a great title and would have sold lots of books. I woke up in a cold sweat one morning thinking, “What happens if the future isn’t perfect?” And we came to the stark realisation you cannot perfectly predict the future. No one can.

If anybody could, if I found the guy that could perfectly predict the future, I’ll try to figure out whether the stock market’s going to go up or down in the morning, and make some bets, and make enough money to retire, and get on my island, and see if I can ride this out elsewhere. The reality is nobody’s that good. There’s just a tremendous amount of uncertainty out there. So the best that you can do for that is to try to deal with it.

Now where forecast horizon, Bjarte talks about the ability to see in the future, the forecast. If you can’t change very fast, if your organisation is slow, and hidebound, and stuck on an annual budget, it’s real difficult to get people to change, you’re like an old ocean tanker out there. You’re very slow to turn and you lose to an organisation that’s much more like a motorboat. All our organisations in the 21st century need to operate more like motorboats, and by that, I mean we’ve got to get more agile. We’ve got to increase our ability to change. We have to increase our culture, and that requires trust and a whole lot of things that we don’t have time to talk about today. But the more agile your organisation is, the less dependent you are on forecasting.

If I’m an ocean tanker and it takes me a long time to change, I have to have a forecast that sees a very, very long horizon, because I have to see problems and opportunities way in advance because my ship doesn’t turn nearly as quickly. And if I become more nimble, if I become more agile, if I’m quicker to change, all of a sudden, I’ve got a lot more flexibility and a lot more moves I can make simply because I change faster. So the watch word for all organisations is we have to become more agile. We have got to become quicker, and that’s the reason annual budgets, to me, they’re out the window because they’re based on an annual plan and nothing operates annually anymore. Everything is operating in a far faster window than that.

Amato: You led in very well to the next question, which is kind of on agility but also about that annual plan thinking. What’s your advice to organisations now trying to plan for 2021 and beyond?

Player: Well, if you’re an organisation trying to plan for the rest of 2020 and 2021, beyond, or whatever your fiscal year criteria are, I would urge you to think about the whole premise of an annual plan. The world is moving constantly. I have seen some of the software vendors begin to shift to this phraseology, “Move to continuous planning”. A different way to think of your organisation is back to my analogy of a ship. Every organisation is like a ship out on the ocean in that it’s based on thousands of decisions we made in the past, and those thousands of decisions created capabilities to produce revenues, to provide services for customers, and to meet the market demand, and each of those structures that we did to build those capabilities come with a cost structure.

Now hopefully, our cost structure is less than the revenue generating capability and we can make a profit and therefore earn a return for our investors and have a reason to live. In lots of worlds, our world changed, and what used to be a profitable venture is not. So we’ve got to rapidly redefine and reconfigure the ship so that we can move. But that whole ship analogy is not based on an annual plan. It’s based on a continuous movement. If you think about your operations: Operations operate continuously. They don’t magically shift when you go across the end of the year.

It’s not like sailing across a line in the middle of the ocean. There are no lines in the ocean. You operate continuously. So if our businesses are going to operate continuously, it seems to me and many of us in the Beyond Budgeting movement, you have to have a planning process that operates continuously, so we need a continuous plan in terms of what’s out there. And that plan starts, you go with a rolling forecast at a reasonable period of horizon, but you want to constantly be updating that plan. And so don’t get stuck into an annual mode of annual capital authorisations.

Think about that on a continuous basis because the ship you’re operating operates continuously. So if you will radically change the way you think about your enterprise and think about it being a continuous enterprise, then it makes sense to have a continuous operating ship. So rather than do an annual budget or come back and do something shorter, which is certainly an option, I would urge you to shift to moving to a consistent rolling horizon, rolling forecast, saying what’s happening, and then as you begin to change, as you begin to improve your operation, you blend that in as fast as you can make it happen, because that’s the challenge.

Constantly, there’s going to be a constant pressure down on your prices, on your revenues, and so forth, and so you’ve got to be constantly redefining your structure, your cost structure for providing those services, and constantly working to improve your efficiency, improve your service and your offering, and therefore continue to earn a margin in the marketplace. As things like COVID-19 come and hit us, that’s just another environmental factor that we’ve got to figure out how to work around and figure out how to deal with.

I was working with some young people yesterday. These were some actors. One of our support staff person is also an actor, and basically with all the COVID things, their business got wiped out. Basically, the play they were in stopped. The play for the next month stopped, and essentially, a lot of people instantly out of work. Well, I was counselling them, what can those folks do?

Well, you need to go find a job in this environment that replaces that. So you can’t go into restaurants or bars, which is what out-of-work actors usually do, so you have to think about it. Amazon’s hiring 100,000 people to handle this surge. There’s a tremendous amount of cleaning going on. The healthcare professions are needing people to work areas there. So I just went through the list of upside opportunities that the current crisis provides.

If you’ve got a business and it’s all of a sudden hit, I urge you to think about moving swiftly into something that is able to take advantage of the current situation. Pivot to a place where you can take your skillsets and make them available in a way that the economy needs. And that’s what we’ve got to constantly do is always be reinventing ourselves in terms of what’s out there.

So from a planning purpose, never try to plan further than you can really see, because at that point afterwards, you’re just doing math, and frankly, in about an hour or two, I could do all the math I need to do to say, OK, this is the kind of returns that we’re going to make. Those things are fairly simple. The hard part is coming up with the products and services that people need that actually generate the margin. The math part is pretty easy, and as financial people, we can remind people of that, that, hey, as a business, we’ve got to return these things, so let’s look at our investments to see which ones are going to have the highest returns.

But you’ve got to be constantly working on improving the ideas and improving the opportunities as people move forward, and turn your planning in to just as far as you can see and keep pushing out till you get the horizon long enough based on what your organisation is doing. Now if your organisation can become more agile, if it can become more like a motorboat, it doesn’t need to see nearly as far, and so keep that in the back of your mind as you work toward figuring out how to work your way through this.

Amato: We’ve talked about lessons learned, maybe some agility thoughts, and being able to be more flexible. What would you like to say in closing?

Player: Well, the most important message that I want everybody that’s out there that’s reading or listening to this is realise, yeah, it’s a scary time, but you’re not alone. We’re all in this together, and as you make these conversions, it may be scary to move away from that annual budget that gave you the illusion of control and made you think like you had control of things. The reality is you probably never did. This is a time we’ve got to work together and keep focused on what do we do differently, so let’s think about how we create good forecasts of what’s out there. How do we shift a driver-based thing so we’re not just guessing about what the numbers should be but seeing the physical things and looking to see what leads and orders are there. How do we get much more thoughtful? Because if one thing we could do with this is use this to convert finance into a more forward-looking organisation, I think we could come out of this helping our organisation survive and prosper much more than they have been able to do.

We can get through this. I mean, we will come out the other side, and I look forward to that day when we can all physically get back together again and have that conversation.

Amato: Steve, thank you so much.

Player: Thank you, Neil.