Five criteria for selecting a strategic financial planning tool


Richard Barrett

Content Creator

Thirty years ago when I did my MBA, management was still aspiring to be a science and long-range planning was a core part of the curriculum. We were crammed with a host of numerical techniques based on time-series analysis and regression analysis for forecasting the future – a bit like the rage for predictive analytics today. It was all very seductive, but I’ve never used any of it. The real world never worked like that even back then – and it certainly doesn’t today.

Planning horizons shrank from 10 years to five or less, corporate planning teams were disbanded, and companies focused more on the annual budget, which they knew and understood. Not looking sufficiently far ahead certainly caused some household names to go into meltdown. More often than not their fundamental error was to ignore emerging technologies that subsequently resulted in seismic shifts of consumer needs that rendered their corporate capabilities obsolete. I can think of Kodak and Polaroid just in imaging, but my guess is that every company has instances where they spectacularly misread the future. They just aren’t as public as they were well diversified or had ample cash reserves to absorb the hiccup. After all, no one is infallible all of the time.

Strategic planning today

Today, the emphasis for longer-term strategic planning software has switched from prediction to scenario analysis as companies recognize that it is the discontinuities, rather than trends, that largely determine the future of their organizations. In my experience, finance folk sometimes fail to appreciate this and approach strategic planning as simply an extension of the budgeting process. That is certainly not the case. Forecasting what external markets are going to look like in 5 or 10 years, and what capabilities and technologies will be needed to satisfy them, involves lots of assumptions. There are greater risks to be quantified and uncertainties to be addressed, and in the absence of hard data, judgement calls are often the only alternative.

That means finance needs to work with corporate leaders and senior executives to identify and understand the full financial impact of the strategic choices that confront them in developing their business, making increasing use of assumptions about such things as market sizes, market shares, average selling prices, input costs, and the possible impact of alternative technologies as one gets further into the future. The fact that many of the numbers in a strategic plan are speculative can lead finance folk to treat the exercise more lightly than they do the annual budget. But get a strategic plan directionally wrong – i.e. misaligned with the way markets unfold – and there is more at stake than a couple of quarters’ results.

The criteria by which key stakeholders will be assessing the strategy include the following:

  • Whether the strategy results in sustainable differential advantages that deliver market shares capable of generating adequate profit margins and returns on investment.
  • How much free cash the existing businesses are generating to fund planned growth; whether addition sources of capital are required over time; and how such funding choices impact the P&L account and balance sheet over the period of the plan.
  • Whether the net after-tax contribution can be improved by taking advantage of geographic inconsistencies in tax regulations.
  • Which parts of the strategy make a positive bottom-line contribution on a risk-adjusted basis and which fail to reach the company’s value-added goals.
  • Whether the company has the appetite, ability and financial reserves to live with any uncontrollable risks inherent in the strategy.

Typically, the strategic plan will be global, involving multiple divisions and subsidiaries, various production locations, numerous currencies and tax regimes, and cover the entire gamut of business strategies from organic growth, through acquisition, and disposal. This results in a large amount of data to manipulate and analyse so it is important to choose the right tool for the task.

Five criteria in choosing a solution for strategic financial planning

Today there are essentially two options when carrying out long range financial planning. Either use spreadsheets, which involve a huge amount of time and effort building sophisticated financial logic from scratch, are error prone, and not at all conducive to collaboration. Or use a packaged application where the functionality is inflexible, and typically focused on the built-in financial reporting and analytics rather than the modelling of revenue streams. So what would be my criteria for selecting a tool for strategic financial planning today?

  1. Owning a solution that can be self-managed by finance users so they can build and maintain models themselves. They should be enabled to manage the complex and overlapping relationships between the changing business entities over time themselves, and quickly update key variables such as cost of capital, depreciation methods, taxation rates, exchange rates, etc.
  2. Being able to quickly integrate data from other parts of the business, to see the recent history of the key drivers that underpin the longer-term strategic planning model, e.g. average selling prices, free cash flow, etc.
  3. Making sure that the solution makes creating and testing new scenarios and different assumptions quick and easy – measured in minutes rather than hours.
  4. Being able to easily share information across a community of senior executives who are typically not everyday consumers of enterprise software.
  5. And last but not least, being able to get up and running without having to install software.