How financial modeling and scenario management can provide clarity in uncertain times
The current business climate is tough for all business leaders; uncertainty abounds, and trying to figure out what the future will bring is almost impossible. The reality is that uncertainty is always with us and takes many forms, whether that be political unrest, war, natural disasters, climate change, trade union turmoil, or a global pandemic; organizations that learn how to best plan for uncertainty and disruption will come out on top.
Weathering the storm is essential and requires tough decisions to be made. A good start is planning for multiple outcomes, with strategies for each, on a regular basis. It may be looking for new revenue streams or diversifying services. It may be looking to technology to improve productivity. It may be looking for new ways to improve brand perception or new ways to boost employee morale – all of which will help to steer your ship through a crisis.
Optimizing decision-making in uncertain times through financial forecasting models and scenario management provides a firm foundation that objectively underpins medium and long-term business plans. The right forecasting models enable organizations to better understand the impact of variances in key business and value drivers on financial, operational, and commercial KPIs.
What is a financial model?
A financial model is created to forecast an organization's financial performance over time. Models have typically been built using complex Excel spreadsheets, with historical data used to help forecast how an organization might perform in the future. Financial models play an essential role in helping organizations make critical financial and operational decisions.
Financial models are used to forecast future financial performance, and then the forecasts can be used for multiple purposes, including company valuation, assessment of projects, and investment and acquisition decisions. The forecasts will be evaluated internally by company accountants, analysts, and planners and also externally by bankers, investors, and anyone who might benefit from understanding the future financial performance of an organization.
Scenario management
Scenario management is a similar activity to financial modeling used in financial planning and analysis (FP&A) to help guide companies through uncertainty, contemplating various paths of possibilities. Despite best attempts, forecasts will have inherent errors; actual results will deviate from the figures organizations had anticipated hitting. Circumstances constantly change, so rather than just create possible scenarios, it's prudent to simulate how changing assumptions and drivers may impact certain results. This allows the organization to contemplate how the direction of the business may change, and while this is wise, actual tracking is also extremely important.
By tracking ongoing performance, it becomes evident whether any of these scenarios are likely to come to fruition. When the company knows how it is fairing versus its expectation, it can pivot and refresh its scenarios. The most capable and successful companies can recalibrate their scenario management model in real time when circumstances trigger a change.
Financial modeling templates
Financial modeling templates are designed to be flexible and help organizations perform various kinds of financial analyses based on assumptions, historical data, and reliable market and industry metrics to build different financial models to forecast future performance. A good financial model is one that is easy and efficient to use, review, and understand and one that creates insights and outputs that are most relevant to the organization.
Financial modeling and valuation are not new concepts, but what is new is the availability and volume of data. Suddenly, with the rise of digitization, organizations have access to more data than ever before. And data is essential for good decision-making. Data availability is one thing; using it and understanding it is also key. Unfortunately, too many companies still rely on outdated legacy systems to provide their data and error-prone spreadsheets to carry out their financial modeling.
Excel Spreadsheets can be hard to follow, and with vast volumes of data, they become virtually impossible to manage, maintain, or follow and can regularly be filled with errors.
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A new way to get financial modeling right
There are plenty of modern forecasting, planning, and analysis tools, such as Unit4's FP&A, available today that move us away from the pain of spreadsheets. Data integration and automation of tasks save time and money and improve efficiency, freeing people from low-value tasks to focus on the high-value activities that increase productivity and, ultimately, revenue.
A dedicated FP&A solution goes way beyond Excel, transforming reporting and planning through:
1. Single source of truth
When all your accurate data is stored in one place, you always have the correct facts and figures you need at your fingertips and never have to worry about reliability or version control.
2. No data entry
Manual data entry can be time-consuming and tedious and is inherently error-prone. Modern FP&A tools integrate seamlessly with your data sources, such as ERP, and automatically bring it all together.
3. Improved decision-making
With accurate data available at the touch of a button, critical decisions can be confidently made in super quick time, allowing organizations to jump on opportunities without delays.
4. Visualization and storytelling
Bringing financial models and scenario planning to life with powerful data visualizations that allow you to tell the stories behind the data can better equip business leaders to make sound, informed financial decisions based on data presented in a compelling, easily understood way.
5. Mitigate risk and seize opportunities
Financial modeling and scenario planning capabilities let FP&A teams build financial models that can be tested, looking at all the possible challenges and outcomes before they happen, allowing them to plan for disruption and grasp opportunities with confidence.
How can Unit4 transform your financial modeling?
Harness the power of fully aligned teams with Unit4's integrated FP&A software to drive success. Our solutions help you by combining automated, AI-infused financial planning and analysis, budget management, and financial forecasting with highly interactive dashboards and powerful, pre-configured models.
Our integrated ERP and FP&A software solutions free your teams to spend more time delivering insights and creating value for the business. We help you understand the numbers more deeply and then turn that insight into action for better business results and accurate consolidation.
Our cloud FP&A software solution gives your people better, faster ways to put the numbers to work — through smarter planning, budgeting, forecasting, reporting, visualization, and analytics. As a result, your organization can take a flexible, integrated approach for all your organization's financial planning needs, whether planning cash flow, managing operational budgets, or forecasting sales, costs, and revenue.
Organizations can better manage their operations with industry-leading software for Financial Planning and Analysis (FP&A), Enterprise Resource Planning (ERP), and Human Capital Management (HCM).
