One cannot predict the future, but corporate financial planning must provide the most accurate and consistent forecast possible for a given period. A way to achieve this is by applying the narrative model for financial planning which goes beyond worst- and best-case scenarios and period-based forecasting, and offers a dynamic, event-based financial planning process.
Nowadays, the operations of corporations tend to get more and more complex in the ever-changing global environment, which demands faster financial planning schemes that are able to react to unexpected events. It is a constant challenge for business leaders to plan ahead: they must assess coming events that concern the business and the outcome of such events, as well as the anticipated consequences of any measures taken to prepare for the future.
The financial planning process used by the majority of companies is slow, labour-intensive and often tends to produce rigid, inflexible plans which do not adapt sufficiently to the volatility of the world. In addition, they usually only forecast the future of a business from a single perspective – maybe sometimes including worst- and best-case scenarios - which is difficult to update on the fly according to changing events.
To avoid the pitfalls of traditional planning methodologies, we must apply a new approach to our financial planning strategies. Although technological solutions are necessary to implement this approach, the emphasis is not on the use of software, but rather on the implementation of a few simple principles:
We plan for unique events in our financial planning process, in a form that they are easily integrable into the planning model and may be perfectly combined with one another. We don't focus on measurement parameters (such as revenue, profit etc.) but the factors that affect these events. Then, we have the option to elaborate on the effects of each event at any level of detail, depending on the available resources and level of importance of that particular event.
We imagine the future as a series of interconnected events (all of which have causes and effects), and not just a series of measurement points.
It is just as important to plan external events and factors as it is to plan the internal drivers of the company. In addition to planning our own sales, we must also model the behavior of other players on the market, as well as the broader environment of the company (albeit not with the same level of granularity as we model internal matters). We can make sufficiently flexible and realistic forecasts only if we consistently attend to and make predictions on these external matters in our financial planning model.
We display the higher levels of the planning models in the most easily understandable form. Tables are perfect for the quick inputting of bulk data while graphs can be used to produce a neat overview of the temporal variation of specific variables, however, underlying events tend to get overlooked in the profusion of detail allowed by these tools. It is much better to illustrate high-level processes in a simple, transparent interface.
Financial models must be easy to handle so that business leaders can learn to "play" with them. Examining the effects of certain events must be done in real time if we want to have meaningful discussions about the effects of future events in the business. If it takes the analyst team days to analyze the effects of every suggestion or idea then decision-making will inevitably be slow, staggered and expensive.
It can be used to prepare for an infinite number of possible outcomes: we don't just forecast a few individual scenarios, we can arbitrarily combine these to create an infinite number of dynamically changing futurescapes. This is much more realistic, as in reality, events are never fully predictable.
This makes the plans easier to interpret. Essentially, narrative planning conforms to the ways natural human thinking: an event-based approach is moreover consistent with the human mindset than period-based planning, where variables are organised into tables and assigned values for each period.
By integrating external events beyond our control into the models, financial plans can track the changes in the external environment (such as the market activity of competitors, exchange rates or wider economic indicators) in a dynamic manner.
Resources used to modify and update financial plans can be greatly reduced: the lengthy and costly work of financial planners can be performed automatically with the right modelling software. Highly skilled (and remunerated) analysts only have to create the base plan and events, which can then be integrated onto a visual interface, and "played out" effortlessly into an endless number of versions. Moreover, it ensures genuinely consistent financial planning, foreclosing false data originating from computational errors.
We get a financial plan that's updated in real time: when narrative financial planning schemes are paired with the appropriate software infrastructure, it allows plans to be continuously updated according to events occurred and the factual data derived thereof.
As a whole, the implementation of narrative planning methodology allows the financial planning model to be examined and - if necessary - modified dynamically and easily prior to making decisions, and interpret the results in real time, in an easy-to-understand manner. Consequently, business leaders can better prepare for business risks and opportunities and are able to examine problems from more perspectives than is currently available to them.
Necessarily, narrative planning methodology requires an adequate IT system which can perform complex calculations related to corporate financial modelling tasks but offers a sufficiently flexible and user-friendly interface at the same time.