The financial-planning process for 2021 presents an opportunity to turn hard-earned lessons from the COVID-19 pandemic into an enduring exercise in linking strategy to value.
Scenario and assumptions
When kicking off the 2021 budgeting process, CFOs will need to revisit and pressure-test the scenarios, assumptions, and decisions that were made (or not) during the COVID-19 crisis. That review is critical, as different parts of the organization will have similar questions related to crisis response and recovery. Everyone will need to be on the same page. Teams in sales and marketing, for instance, must have a common understanding of when the economic return and the next normal officially start—and therefore how to budget for travel and expenses.
Finance teams will need to determine which of the economic scenarios they projected actually materialized and then systematically examine how various strategic initiatives launched during the crisis have affected corporate performance (in revenue, pricing, sales volume, and competition). Consider the case of a vertically integrated retailer. When its brick-and-mortar stores needed to close in April 2020 as a result of COVID-19, the retailer quickly invested in an e-commerce platform and a logistics partnership to facilitate sales.
Reimagine the business from a zero base
Traditionally, business leaders have balked at using zero-based budgeting as a means to understand the critical drivers of a business. The approach—in which expenses must be justified for each budget period—is too arduous, they have argued, involves too much micromanagement, and poses countless other challenges.
Many of those objections evaporated, however, in the wake of the COVID-19 crisis—probably because business leaders no longer faced the base decision about whether to shift spending but rather the more urgent choice of how much and where. For example, a mining company now force-ranks large capital- expenditure projects along a spectrum of potential
returns and risks, while a major hospital chain has reallocated conference and travel budgets toward telemedicine and work-from-home capabilities.
Hold back some spending centrally
In most companies, budgets are typically fixed for the year, but in response to the COVID-19 crisis, many businesses have had to be more flexible, confidently shifting resources as needed to survive. To monitor the situation in real time, for instance, they have deployed spending control towers, cash war rooms, and dashboards. And they are using different kinds of key performance indicators (KPIs), such as the cash-burn rates of suppliers and distributors and the growth rate of COVID-19 cases.