Peering into the future: financial planning in an uncertain world

It’s always been necessary for firms to plan for their future in order to be a success. On a simple level this involves budgeting for the year(s) ahead. More difficult are the longer range forecasts needed to appraise investment projects, plot marketing campaigns and come up with accurate human resource plans.

So how can firms manage this when the current business climate is so turbulent?

A recent Economist article picks on some interesting ideas. They quote the former boss of American industrial giant GE as saying, “not to beat around the bush, but the budgeting process at most companies has to be the most ineffective practice in management.” Many firms that put their 2009 budgets together at the end of last year will no doubt agree with him. Loads of plans drawn up in 2008 will be in tatters by now.

Evidence suggests that finance chiefs say that the struggle to produce accurate forecasts now tops the list of things that keep them awake at night. Companies are finding their standard budgeting and forecasting of little use. What can they do?

One suggestion in the Economist article is for firms to make greater use of “scenario planning” alongside their financial models. Lego, the Danish toymaker, generated a number of different scenarios as part of its 2009 budget, the first time it had used such an approach. It has developed contingency plans for each scenario so that it can react swiftly whatever the coming months throw at it. Lego has also been using a monthly meeting of senior managers, known as the operations board, to pool knowledge of what is happening in its various markets. At each get-together, the firm’s executives not only discuss what has been going on that month, but also make their best guess about what is likely to happen in the 12 months to come.

Managers also need up-to-date information about what is happening to their businesses, so that they can change course rapidly if necessary. Some firms have invested heavily in the technology needed to generate such data. It must be a big help for senior executives to track exactly what orders are coming in from sales teams around the world, and identify emerging trends in each region and market segment.

Smaller firms face bigger problems and bigger risks. And everyone may have a long wait before the economic fog finally lifts.