How Finance Departments are Dealing with Coronavirus

The one thing we know for sure is that our budgets for this quarter will be wrong. So we have two options for managing this situation: one reactive and one proactive.

Reactive: Let's explain afterwards what happened

This is what most companies will do. They will wait for the data to come in and then explain to the people inside their company and to their outside shareholders that it was a black swan event, something previously unimaginable that was outside the company's control. Most companies will be explaining bad news ("we missed our forecast by this amount") but there will be some companies that will be explaining why they're outperforming expectations (Gilead, Clorox, Kroger, Humana, Campbell Soup...).

If you're going to go down this path, there are two things you must do:

1. Monitor the data as it comes in. In a perfect world, you'll have real-time dashboards showing information as it comes in: volumes, shipments, customer counts, sales, spending, pipeline, everything. Real-time monitoring allows your company to respond immediately rather than wait until month-end when it's too late to respond. It's also important to have ad hoc analysis capabilities to instantly drill down to root causes. During situations like coronavirus, time is of the essence and our analysis has to lead directly to a physical action.
2. Narrative reporting to quickly explain variances. As actual numbers begin coming in and they're way off from the budgeted numbers, you need a quick & automated way to collect commentary. That commentary should be shared internally to get a dialogue started about what you want to explain to the outside world, the external shareholders. Note in case it's not obvious: email and Excel are not effective place to do narrative reporting.

There is nothing wrong with this reactive approach and it's what your average company has been doing for most of this century from 9-11 to the Great Recession to today. When there's something they didn't plan for, they explain afterwards how they didn't plan for it.

If you are going to take the reactive approach, just make sure you monitor your information and have your explanations ready so you're not caught off guard when the outside world demands to know why your numbers are off.

Proactive: Let's plan for what might happen

Some FP&A organizations are already prepared. They know their numbers from the start of 2020 are going to be wrong, so they've created alternate scenarios, different forecasts for however this might play out, and they have those plans ready-at-hand.

If you have a planning system that lets you quickly create alternate forecast scenarios, here are the two you need to create now:

1. Localized Panic. In this scenario, people are concerned short-term but the governments around the world are able to control the spread. Some industries suffer (energy, transportation, health insurance), some industries thrive (grocery, health care, home entertainment, remote meeting technology, whoever makes Purell), and any impact to business and purchase patterns is over in 1-3 months. This scenario involves modest changes to the original budget and no long-term changes to your organization.
2. Global Pandemic. In this scenario, the virus goes world-wide infecting 40-70% of the world population. Travel will be banned, schools will be shut-down, public gatherings will be limited, whole cities around the world will be quarantined, and millions will die in levels not seen since the Spanish Flu. This scenario involves major changes across the board to revenue, expenses, hiring, borrowing, you name it. Even if this doesn't lead to a global recession, it will fundamentally reshape your business, and you had better plan for how you'll respond before it's too late.

Frankly, we're all hoping that this ends up being the former scenario, but you must prepare for the latter, and in reality, it may end up falling somewhere in-between. But at minimum, make the two scenarios above (and if you don't have a planning system that lets you make a new forecast in 40 hours or less, stop everything you're doing and implement one immediately).

Once you have the two forecast scenarios ready, FP&A has to share those forecasts across the organization, and the rest of the company has to figure out what physical actions they'll take in the next few months and beyond. As soon as it's clear whether it'll be scenario #1 or #2 (or something in the middle), you have to share your numbers and your plans outside the organization, to proactively let our shareholders know that you're on top of the situation and have plans ready to go.

Where do we go from here?

You can have a panic without there being an actual pandemic and you can have a pandemic without everyone panicking. The secret to keeping everything under control and making sure your company survives (and emerges stronger) is information.

I'm expanding on the information above on a webcast on March 11, 2020. Join me and let's stay informed together:

https://www.interrel.com/oracle-events/coronavirus-scenario-planning/?invitation=Edward