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Scenario Planning

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In January 2019, how many of us could have envisaged the type of difficulties which have hit our businesses in the last few months? Scenario planning helps you to review what you can control and what you cannot – Dick Cheney’s famous “Unknown unknowns”. It helps you to test and challenge the assumptions you make about the future shape of your business – even more important when there is a global pandemic!

A starting point is to try to define what you don’t know about the future and consider which issues would have the biggest impact on your business.

Go Back To The Basics

REVENUE – Customer numbers, what might affect supply, can you satisfy likely demand?
COSTS – How to price changes, impact of changes to credit terms.

Don’t make it too complicated – too many uncertainties will drive you mad!

Have Current Information

CASH FLOW – Accurate forecasts -both weekly and monthly are an essential tool.
SENSITIVITY ANALYSIS – Changing the key drivers in your cash flow forecast will show how the shape of your business could change.

Develop Your Scenarios

Don’t just plan for the worst – it’s good to know exactly how things could be if your assumptions are sound.
Is that “Ideal World” a serious possibility in the current environment?
If not – how might Covid-19 affect your assumptions? In that case, what do you need to do to achieve an acceptable outcome?

Best Case

What does that “Ideal World” look like? What needs to change and are those changes within your control (e.g. how to control customer numbers!)
Use your cash flow as a basis to change policies and procedures to support the “Ideal World”.
Never forget – it’s still going to be an unpredictable world, so conserve cash to be able to deal with a sudden reversal.

Medium Case

Planning what’s between the “Ideal World” and your worst case (so arguably what’s most likely to happen!)
If your business looks unlikely to survive a medium case, now is probably the time to seek some restructuring advice (and perhaps reconsider the components of your medium case scenario!)

Reconsider the basics – for example:

If you only have 75% capacity, can you break even?
Can you introduce other cost savings?
If not, then…

Worst Case

Less likely if you can recognise early, but you know what it looks like!
Where would be the point of no return? This probably depends on cash reserves, creditor and banking relationships, asset position, etc.
A wind-down reserves calculation is invaluable – what is the minimum cash required to pay all the businesses liabilities and avoid needing an expensive insolvency process.
If you have any concerns, insolvency advice is best taken early, before insolvency seems inevitable.

Scenario Planning is a valuable means of assessing your business and could be considered as important a part of regular review as examining the P&L and Balance Sheet.

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