More robust data and better techniques to plan, forecast and model different scenarios are key to more effective management of capital an uncertain environment

Building competitive advantage: three key ways for effective management of capital agenda

• Adapt and improve planning, budgeting and forecasting to enhance control, discipline and flexibility. Boards are looking at changing both the frequency and way they ask operations to plan and forecast. Innovations we are seeing include:
  • Rolling forecasts and rolling trend analysis to improve visibility and eliminate inevitable bias or optimism that outturn-only incentives schemes may encourage.
  • The use of leading indicators instead of relying simply on outputs and financial results (e.g., customer demand, production volume, capacity utilization etc) to link business drivers to planned performance. This has particular relevance to organizations looking to drive greater efficiencies through the supply chain or assessing the effects of alternative restructuring/cost reduction strategies.
• Implement short-term cash and working capital planning that enables early warning and intervention:
  • Short-term cash and working capital planning and forecasting helps establish a better line of sight into business operations and support intervention.
  • Many companies still struggle to produce robust medium-term cash, debt and funding forecasts because of the lack of a fully integrated P/L, balance sheet and cash flow forecasting capability -this has become a minimum requirement in building stakeholder confidence in forecasts.
• Upgrade strategic decision-making tools and capabilities to enable speed and adaptability. The downturn has made many boards realize that they simply don’t have the right information readily available to support the decisions they need to make:
  • Far greater levels of automation and functionality are needed in strategic planning tools to meet the demands of the current environment if boards are to be able to respond quickly enough. They need to be able to consolidate numbers almost instantly, be able to ask “what-if?” and see the results.
  • Invest in more capable “best-of-breed” data analytics tools to support decision-making. These tools help improve confidence in the quality and speed of the boards decision making capability.
  • Develop scenario planning and strategic options modeling capabilities to enable stress testing of plans and capital adequacy against potential changes in market conditions, and to evaluate alternative options for both strategy and capital structure.

New approaches to strategic decision-making

The “burden of proof” to justify a major strategic investment decision is substantially higher than it has ever been.

A striking finding of our barometer is the extent to which strategic decision making processes are evolving to adapt to the uncertain environment. Under increased scrutiny from stakeholders, companies are having to enhance their processes in a number of key areas.

The level of data and analysis that is being produced to support decisions has either increased or significantly increased for 60% of our respondents.

Substantially more work is going into options and scenario modeling — with a significant increase in sophistication of assumptions that drive forecasts — enabling risk and uncertainty to be quantified and flexed to a changing environment.

With respect to your strategic
decision-making, what do you expect
will be the impact of the financial
crisis in each of the following areas?

Finally, the overall rigor of the decision making process itself has increased significantly as cautious stakeholders demand greater visibility and assurance that key decisions are well supported and carefully considered.

All of this could be read as adding time, complexity and bureaucracy to a process where speed is increasingly a critical success factor. For those that fail to develop their capabilities and tools in this area, that will almost certainly be the case. Others will see the imperative and invest in developing their systems and processes accordingly.

Those adopting these practices early and most effectively are likely to gain an edge on their competitors.