DEFCON Planning

How to Navigate through Financial Uncertainty

"A vaccine against fuzzy thinking" - John Doerr

This article is about implementing flexible scenario-based forecasting in the midst of uncertainty.

It’s dedicated to the business owners, division managers, and chief financial officers who must make tough decisions right now, to lead their organizations through uncharted waters - typically with incomplete and imperfect information.

The DEFCON* approach as applied to Finance can be summarized in three steps:

STAGE 1: Confront Reality - Quickly get real by envisioning your worst realistic scenario. Calculate your baseline by adding up all cash reserves and short term assets, then subtract your committed expenses and liabilities. Next, identify cash preservation or cash augmentation measures you can take (these can be lines of credit, other forms of financing, or terminating non essentials). Acknowledge your situation, take a moment for negative feelings, but don’t dip into despair. Timing is important. Facing reality early gives more time to carve pathways forward. 

STAGE 2: Brainstorm (im)possibilities -  Quickly transition into understanding your position and explore / quantify possible paths forward. Distinguish between what you can and can NOT control. Develop multiple scenarios starting from your baseline. Use flexibility and rich creativity to develop those scenarios with the best potential to improve your cash runway. Here especially, having an experienced CFO/ Controller or CEO mentor to guide you in this process, and flexible tools to support you, will be essential for success. 

Explore with an open mind what your opportunities are to meet the pressing needs of your stakeholders while preserving or augmenting cash. Tweak your drivers and assumptions up & down, on & off, top down & bottom up. For each scenario, measure your cash runway. For example, simulate pushing some product lines or geographies up or down; assess whether you can make it with or without certain essential expenses; assess the possibility of shifting or tweaking investments. At all stages, communicate and collaborate intensely internally / externally to learn from your stakeholders what is most and least valuable or feasible for them. 

This does not have to be a long drawn out process; however do not stop developing different scenarios until you start seeing a clearer picture emerging of possible landings. This is an essential skill to hone, including when your business is small.

STAGE 3: Formulate Strategies: While step 2 is about building strength and agility from your tools, skills and mindsets, Step 3 is about building solid communication channels in preparation for prompt execution. 

Select 3-5 possible triggers (for example cash levels, bookings levels, revenue levels, other milestones) and spell out extremely clearly what specific actions at each trigger level would bring your cash burn and profitability to the desired target level, in other words, right sizing.

Table-1 - Simple  3 Columns DEFCON Template: Menu / Trigger / Readiness Action

Remember, you don’t really have a plan until you have something executable. Use step 3 therefore to test your communication & collaboration abilities, as well as your internal processes; these channels will be crucial to enable execution and quick adaptation to subsequent plan adjustments that will surely be needed.

Here are a few additional guidelines:

• Communicate problems early.
• Communicate often.
• Measure what matters. If it can't be measured, most likely it won't be managed.
• Confirm that your plan continues serving the most pressing & valid needs of your stakeholders (internal and external, short and long term). 
• As you will most likely need to reallocate resources from endeavors deemed less strategic to most critical ones, acknowledge to yourself and others what your plan entails. You may have extremely painful choices and trade offs to make, even ethical ones. 
• Continue looking for unlikely but welcome collaborations and innovations and possible reprioritizations that may come out from this crisis. 
• Ensure that the focus at each DEFCON level continues reflecting your core values and goals.
• It takes courage to plan for the unknown, it takes even more courage to right size operations. Doing step 1-3 well will bring your organization much needed clarity and peace in the midst of uncertainty. Becoming good at this, you will be able to leverage this approach to adapt to and overcome both downturns or upturns, regardless of size and economic acceleration.

Here again you will benefit from the guidance and support of an experienced CFO/Controller or financially literate CEO mentor. Step 3 may be impossible to implement if you do not have the means internally to easily break down your revenues, expenses and unit analytics into tiers, and reprioritize the elements within your financials. However I encourage you to at least think through steps 1-3. Even if you do not have modeling tools in place or if you know nothing about the incremental budgeting approach (which is a best practice for this type exercise), you will benefit from the guiding principles presented in this article.

As my dear husband once said, “the best time to start exercising an approach like this is well before a crisis. The second best time is during the crisis: there is no time like the present”. By jumping into scenario forecasting and DEFCON modeling with both feet, you will relatively quickly learn to apply this technique to your advantage. I hope you will see how your business, no matter how small or large, will benefit at all times from the tools, skills and mindset that this article promotes.

TOOLS & RESOURCES - Unless you have the tools and skills already built in, you may need to augment your resources from the outside. We list below some of the software and resources we know that can assist with scenario based forecasting. 

It is our hope that you will help us grow this list of resources. Our intent here is to help. We believe this approach is the best one can find. We therefore want to partner with anyone who is willing to help disseminating this technique. At stake for us is saving our economy - for the greater good. 

Financial Forecasting Softwares

This below is a list of apps we know that can help small businesses with scenarios based financial forecasting (alphabetically):

Jira, Liveplan, NetSuite PBS, OnPlan, Vena.

Financial Forecasting Services  

Any CFO / Controller who has experience of FP&A and has implemented this technique successfully in leading companies should be able to guide you. 

We are currently offering free 30 minutes phone call consultations to help you figure out how to do this – Sign up via this Calendly link to speak with Brigitte, or book a time  via OnPlan for a formal demo of DEFCON with David and Brigitte; we will do our best to accommodate your schedule. Also, stay tuned for webinars and additional material that will help you implement this.

UFO works with CEOs, COOs, other CFOs using several of the above mentioned softwares. We are currently formalizing our DEFCON approach with the Onplan.co software. Click here to request a demo of the DEFCON approach using OnPlan. And please, do not hesitate to contact Brigitte for comments, suggestions or questions regarding this method.

Notes:

* DEFCON planning is originally a military term: Defense Readiness Condition - you can Wiki it here .

** This approach aligns with the overarching principles of OKRs. "[OKRs] are not a substitute for a strong culture or a stronger leadership, ... but when these fundamentals are in place, they can take you to the mountaintop." (John Doerr) - Click here for John Doerr’s 2018 Ted Talk about setting the right goals.

*** I (Brigitte) learned this DEFCON approach as it applied to Finance at Applied Materials, under the leadership of Jim Morgan and Jerry Taylor at the time. 

Applied Materials was then (and still is) a leading manufacturer in the SemiConductor industry - which is quite a roller coaster of an industry. Since then, I have not seen a better way to manage financial cycles, and I challenge anyone to come up with a better approach than this. Since I have no credit for creating this approach (I learned it from the best), this is my way to pay it forward.

It is my belief that the DEFCON financial planning approach will radically augment your chances of success once you master its mindset, tools and processes. In a crisis, it will increase radically your chances of staying in business; it will also assist you in thriving where the opportunity exists. It is therefore my wish that you will either recognize in this method a set of skills, tools and mindset that are worth honing and keeping, or at least, if you are not already doing this, be intrigued enough to want to start practicing this for your business. 

Brigitte, Austin April 5, 2020

Brigitte Benquet / +1 (512) 250-0975 (Mobile) / bbenquet@unified-finance.org/ www.unified-finance.org. Click HERE to schedule a private appointment with Brigitte.

David Greenbaum / +1 (917) 370-4495 / dgreenbaum@OnPlan.co / www.OnPlan.co. Click HERE for an OnPlan demo.