Blog: Shaking Up The Scenario Analysis Process
Updated: Nov 17, 2020
(Written for Prophix)
Creating a scenario analysis without the correct tools can feel like you are shaking a Magic Eight Ball, hoping for “Outlook Good” instead of “Reply Hazy, Try Again.” For most companies, making these types of predictions is a challenge. In a recent survey of FP&A leaders from companies of all sizes across the globe, only 10% of companies reported that they find it easy to perform scenario analysis, and 21% found it very difficult.
While relying on the “wisdom” of the Magic Eight Ball is not recommended, there are recent technological advances that can help — if companies are willing to make the investment. However, according to the survey, improving finance technology isn’t a huge priority for most organizations. Fifty percent (50%) of companies are mindful of technology but seldom upgrade, and another 28% are not looking or unlikely to upgrade.
Scenario Analysis: Finance Thought Leaders Weigh In
Why does technology matter? How can companies improve the process to create a meaningful scenario analysis? To help answer these questions, we gathered some insights from FP&A visionaries.
Embrace Technology? Signs Point to Yes.
Peter Chisambara, Founder and Principal Consultant of ERPM Insights, notes that “Within many finance functions, manual processes, fragmented data, incoherent systems and unnecessary effort being spent on data collection and validation are all impeding real-time analysis.”
Chisambara believes this significantly impacts a company’s capacity to perform an on-the-fly scenario analysis. “Manual processes limit the ability to introduce last-minute changes to decision-making models,” he says.
To this end, Chisambara is keen to leverage new FP&A technology in all its forms as a way to streamline data collection and automate as many processes as possible.
“CFOs need to leverage modern digital solutions, automate routine processes and create more time for strategic analysis and insightful decision support.” Specifically, he notes that “Finance needs to embrace predictive analytics, driver-based planning and consolidation solutions with near real-time reporting accessible via various channels such as desktops, laptops, tablets, mobile devices and other smart devices to allow on the fly what-if analysis on a particular variable.”
Partner For Better Systems? Without a Doubt.
For Gabrielle Luoma, CPA, CGMA, Founder & CEO of GMLCPA, a strong partnership between Accounting and Finance is essential to taking FP&A to the next level.
“Accounting and Finance must work together to create systems that will help Accounting deliver relevant and accurate information and Finance will need to communicate what information is needed,” she says. “Communication is key.”
In establishing systems, Luoma says companies should evaluate a variety of data across numerous sources. “Relevant and accurate data makes for the best what-if analysis results in any financial department,” she says. “Historical data, which could be just days old, will be the best indicators of how your key business strategies are playing out and how you can make quick changes to predict the future.”
Scenario Analysis: Outlook Good
A timely and comprehensive scenario analysis is an invaluable business tool. By streamlining data processes and improving communication across the FP&A function, companies can come closer to having the ability to create an on-the-fly scenario analysis. The good news? The cost of technology is declining and becoming easier to implement.
Read the Defining the Evolution of FP&A: Benchmarks, Challenge & Opportunities survey to learn how technological immaturity is limiting FP&A success.