Three Steps to Moving from Static to Dynamic Financial Planning in 2021
By: Brandon Metcalf
Tags: Financial Planning, Forecasting

While 2020 was tough to go through, we might look back on it as a time when we learned some important lessons. In our personal lives, perhaps this has forced us to grow, appreciate what we have a little more, and do more for each other. But in business too, there are ways in which we will never go back to the way we used to work.

Many business leaders have had to get accustomed to working in new ways — ripping up plans and budgets, and then having to do the same again a few weeks later. Some seem eager to return to what they consider normality — making an annual plan and then sticking to it.

But perhaps it is time to move away from the old idea of a static budget that took weeks to put together and became a kind of totem — and to the idea that departing from the plan was some kind of failure.

Instead, business and finance leaders need to grasp the opportunity to move towards dynamic planning. Dynamic planning adapts and adjusts — it is a success, not a failure when the plan changes. It is also democratic — rather than a top-down plan which belongs to the people in the C-suite, a dynamic plan brings customers and employees into the process. Everyone is watching the horizon and when something changes, the plan is altered to take account of that new reality.

Here are three tips to moving towards dynamic planning

Democratize the Data

In the Financial Transparency and Employee Confidence survey we conducted recently at Place Technology, we found that the vast majority of employees believe they could contribute more effectively to their companies if they had up to date financial data on how the business is performing.

Technology makes it possible to give people tools that allow them to access up to date data where and when they need it. That makes it easier for them to assess their own contribution and decide what to prioritize. It also sends a powerful message to employees that they count, that they are valued members of the team.

And it is the people at the sharp end, the people who actually work with customers who are in a position to notice immediately when what is happening in practice is different from what the plan says. Democratizing the data is also about creating a business culture where people are invited and enabled to share the information they hold.

Bring Financial Data into Operations

Financial data is sometimes seen as the property of the accounting department. That is probably a hangover from the days when financial information was difficult to collect and disseminate and was mainly used to get the accounts in order. But dynamic financial planning flows this information into operations.

To support this, the finance team has to move out of the back room and into the arena. There, they can assist various operating teams to build a picture of how they are performing against the plan. They can drill down into the reasons behind divergence.

Doing this orientates the business more towards the customer. Measuring the commercial aspects of ongoing business yields insight into changes in customer relationships. For example, a technology product or service is costing more to deliver than previously. Perhaps that is because something has changed about the delivery or about the way customers are making use of this? The data creates a basis to ask important questions.

That stronger grasp of what is happening in practice, which financial metrics bring, can make it easier to spot at an early stage where trends in the market or business performance are heading.

Bring Financial Data into Strategy

Dynamic planning is like trimming a sail in a yacht to make the best use of the prevailing wind, When there is divergence, the plan is adjusted and refined to take account of that. As soon as the business is either outperforming or underperforming the plan, the idea is to make a new plan.

But as well as trimming the sails, financial data can be used to set the course. The finance team is integral to the process of making choices and decisions about where the best opportunities lie. What are the propositions, products, and services that the business should be looking to develop? What are our existing and prospective customers likely to find valuable in six months or a year?

There are some aspects of the forecast and budget that are best looked at in the short term, but there are other areas such as proposition development and recruitment where we need to look further out. So in abandoning a fixed annual budget it is important to keep looking ahead at those further horizons.

It is also vital to keep honing and developing the underlying model that produces the forecasts, checking assumptions, looking at different possible options for the business, and making decisions about which route to take.

As we emerge blinking from 2020, it is impossible to predict what the situation will be like by the end of the year. That lack of certainty is challenging for business leaders. Drawing on historic data to create an annual plan is unlikely to be helpful — last year’s numbers may have little to tell us about the coming year.

Instead, in the dynamic model, everyone works together as a team to bring together all of the available information about what is happening today and what is likely to happen tomorrow. The plan and the underlying forecasting process are continually honed and realigned to take account of current understanding. Organizations that adopt this rolling replanning method will be better placed to adapt, survive, and even thrive going forward into 2021. Happy New Year!