Scenario planning

In these fast-changing and turbulent 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 the current 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 in 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 volatility of the current economic environment, it is a necessity.

Scenario planning is a group process which requires knowledge exchange between members of the Board and the senior management team. It requires business intelligence on the external environment and an objective assessment of internal situation. A common assessment of the divergent scenrios help the company identify the actions to be taken today in order to mitigate the negative impact or take advantage of the opportunities offerred in the future.

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?