Plan for different scenarios

What is the issue?

In these fast changing and challenging times, businesses are facing an uncertain future and conventional business models may no longer be viable. Many management teams will need to re-assess their operations and consider a number of possible scenarios.

Nobody can predict what is likely to happen to the overall economy, or indeed the impact a downturn may have on a sector or on a particular corporate. There are likely to be a range of outcomes, but to survive, management teams need to plan for the potential eventualities.

Managing through a downturn is all about being flexible, anticipating and reacting quickly to changing circumstances. This helps mitigate risks, while also positioning companies to seize any opportunities which arise.

Investing management time in planning for different scenarios is not a luxury – given the challenges of the current economic environment, it is a necessity.

However, proper scenario planning requires the full engagement of a company’s board and senior management team. It is predicated upon the availability of reliable financial and operational information.

What questions should I ask myself?

• How will my business be impacted by an extended economic downturn?
• What industry sectors and geographies does the company operate in? What are the likely repercussions for those sectors and geographies?
• To what extent have we stress-tested our forecasts to account for changes in performance and outlook?
• Have we stress-tested forecasts over different time periods to reflect a potentially extended economic downturn?
• How good are management reporting and information systems at highlighting potential issues?
• What areas need to be monitored carefully?
• What are the key vulnerabilities in the company’s business model? Is my model flexible enough to allow us to adapt quickly to a new environment?
• What is my long-term financial position? How significant would a material loss of revenue be?
• Even if my products are non-discretionary, could customers find a cheaper option?
• What are my competitors doing and are there opportunities for organic growth in the sector?
• How bad should performance get before we face a covenant/facility breach?
• Am I appraising the board regularly on performance and scenario planning/management?