We have seen many crises in our working career including the 9/11 attack and the 2008 financial crisis, but the financial disruption caused by the coronavirus (SARS-CoV-2) is unprecedented. Unprecedented times call for unprecedented action. We can call it a once-in-a lifetime event, but it has impacted the global economy leading to uncertainty and turmoil. Most of the organizations operate on budget plans and the COVID-19 pandemic has introduced massive uncertainties about the future and made scenario planning increasingly difficult.
There is always an opportunity to look for positive scenarios. Organizations that respond quickly via astute scenario planning can stay ahead of the curve. Scenario planning has been around for many years and is not a new concept. In fact, we see scenario planning in our daily lives—new movies are being released on streaming platforms instead of theaters, schools are delivering online classes, exams are being proctored online. The biggest question is whether we will bounce back to the pre-COVID situation or acquaint ourselves to a new normal.
From a large organization's standpoint, we need to understand and appreciate how a tool—such as a sophisticated enterprise software such as Oracle EPM cloud,—can help in strategic modeling, understanding the role of finance, what approaches and methodologies to apply, and what best practices are available to support the needs. We must understand how best these financial modeling tools can be used to recover from this crisis and look to a better tomorrow.
The current situation
- There is a liquidity crisis, as with demand and consumption going down, there is a loss in revenue and a delay in cash collection.
- Forecasting and budgeting challenges are prominent in the absence of clear timelines for a COVID-19-free world.
- Collaboration with operations and executive teams, which is of paramount importance in driving the business, is losing traction, with 90% of the workforce working from home.
- Other challenges include the lack of availability of accurate data and excessive focus on a single scenario.
How it can be addressed
Strategic modeling is a perfect tool in these circumstances. It will help plan for an uncertain future and enable companies to react with greater speed and confidence. By simulating different scenarios, we can understand the cause-effect relationships better and, thereby, understand the impact of the various decisions made. Strategic modeling is different from conventional budgeting and planning exercises in that it is top-down and strategic in nature. It can handle all aspects of long-range financial modeling.
The process of strategic modeling
- Defining the issues or key decisions that need to be evaluated
- Agreeing on a time horizon for the scenarios
- Identifying the key drivers that are likely to impact the scenarios—drivers are critical assumptions related to business, which creates models for both “worst” and “most-likely” case scenarios
- Collecting data for the last couple of years
- Testing the model under each scenario and the impact on the financial statements—balance sheet, cash flow statement, and income statement
- Offers a strategic and long-term view of the financial statements
- Allows flexible what-if scenario analysis to determine the impact of various assumptions
- Helps leverage the pre-built industry templates
- Goal seeker, integrated financial statements, embedded Excel functionality
- What will happen to the cash flow if the raw material being imported from China has a price increase of 40%?
- What is the implication of social distancing on the revenue of a restaurant business?
- What would be the impact on the revenue if a company decides to stop selling in certain countries?
- What would be the impact on our business plans for the next three years if oil prices reduce by 50%?
Business users require powerful modeling tools to analyze the effects of unprecedented events such as COVID-19 and other such uncertainties inherent in long-range financial forecasts. Many finance departments rely on customized spreadsheets to do financial modeling and impact analysis for these forecasts. Such customized spreadsheet solutions are challenging to manage, lack data transparency and integrity, do not integrate with operational plans, and are not efficient in handling financial modeling activities.
At the Oracle Practice of HCL Technologies, we believe that we have the right offering addressing this need—EPM in a Pod in two different variants: COVID-Silver and COVID-Gold. HCL’s EPM in a Pod will help in quickly onboarding the client to a cloud environment.
Key features of HCL’s EPM in a Pod
- Streamlining business processes per industry standards aligned to a cloud environment
- Adoption of preconfigured artifacts
- Leveraging HCL’s tools and accelerators
- Utilization of configurable templates
There are, of course, challenges in strategic modeling, especially in collecting internal and external information. Business drivers are continuously changing, and the absence of historic data can prove to be a hindrance. However, the question of when the economy will go back to normalcy remains to be answered and, in such uncertain times, we cannot afford to have only one view. In a global economy like ours, we must be prepared to respond to different scenarios and strategic modeling is crucial in this regard.