Scenario planning: why you need to forecast different models

10th Jun 2020
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As lockdown slowly begins to ease and some businesses take the first tentative steps towards returning to work, finance teams will be facing the challenge of piecing together a revised financial strategy that better reflects the ‘new normal’.

When companies up and down the country closed their doors, longstanding forecasts, budgets and strategies went out of the window, as we were engulfed by an unprecedented trading climate – a situation that few saw coming and hardly anyone was prepared for.

Businesses have been doing all they can to deal with this incredibly difficult time and making tough decisions every day. At the time of writing, 935,000 companies have sadly furloughed 7.5 million employees, which is around a quarter of Britain’s workforce. In addition, more than 304,000 companies have accessed almost £15bn of emergency financial support via the government-backed rescue loan schemes. If you’d seen those figures 12-months ago would you have believed them?

It’s all in the data

One thing is for sure, the COVID-19 pandemic has made us all too aware of the need for enhanced scenario planning in business. Hindsight is a beautiful thing but being prepared is an even more attractive proposition. So, what should finance teams be considering when it comes to creating multiple models and how can this approach help a business to implement the right financial strategy?

A major challenge is the fact that many companies won’t have a great deal of data to hand to accurately assess financials moving forwards. Lockdown may seem like it has been going on for an age, but the reality is that most firms will currently only be able to view the financials for the latter part of March and the whole of April and May. That’s actually not many touch points to be able to build budgets for the next three-months, let alone the next year.

It’s not exactly like we can look back on similar historical scenarios to make comparisons, as none of us have lived through anything like this before. ‘We just don’t know right now” has become the staple response to many questions.

Throwing shapes

Now is the time for finance teams to spend time formulating more rounded responses. They need to be asking how they can help to show the shape of the recovery ahead. What will it look like if it’s a V-shaped recovery for example, or a U-shaped one? How long and how quickly will it take the business to recover within these different scenarios and what are the factors that need to be taken into account?

Everything is about variables right now. You will have a Plan A, you certainly need a Plan B, and even a Plan C is currently prudent. It’s about mapping out the most likely scenarios based on the data you have to hand at the moment, constantly reviewing that data over the coming months and streamlining and adapting those plans as the road to recovery slowly starts to become clearer.

Habitual changes

Of course, one of the major variables for all of your scenarios is going to be the impact of COVID-19 on customer habits. One thing we do know is that major global events can lead to significant changes in buying patterns and spending.

It’s extremely difficult to put forward a realistic forecast based on predictions of likely customer habits but this is where more frequent reporting is going to be essential. Right now, it would be wise to switch reporting to daily or weekly, if that’s not the way you work already. It will create more frequent and trackable touch points that will give you a much better sense of momentum. And, that really is the key word of any business recovery – ‘momentum’. But, how do you spot it and how do you fuel it?

By breaking down the numbers from monthly to daily reports, you can begin to work out patterns in the financials to see where the shoots of recovery might be. In turn, this can really help to create a forecast and influence the different shaped scenarios that we discussed earlier. Keep a closer eye on elements such as cash collections and order intake, as all of this data when brought together, gives you a much clearer picture of the whole situation.

Tech will be the key

Technology is going to play a huge part in all of this. Many companies have realised that they either need to invest more in tech or at least upgrade what they already have to assist with reporting, forecasting and planning. In the coming months and years, there’s certainly going to be a faster adoption of technology to support teams across businesses. From finance, to HR and customer services, the way we do things will be transformed.

But, for now, that’s further down the line when there’s time for reflection and learning what we need to do differently to enhance business continuity plans. At this moment in time, many are still dealing with desperately difficult circumstances. Business recovery is quite rightly the focus and by mapping out the different possible shapes, you’re much more likely to find the right fit to plug the gap that COVID-19 has created.

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covid-19 in business - a guide for finance department leaders