Scenario Planning for Finance During Unprecedented Times

November 16, 2020
The C2FO Team

In moments of uncertainty, detailed financial planning and analysis are more important than ever, regardless of the size of your organization. 

Remember the plans and projections you had for your company in January 2020?

That seems like a long time ago, doesn’t it?

The coronavirus pandemic and the economic chaos that accompanied it have sent many businesses scrambling. Navigating the ups and downs of what is looking more and more like a “W” economy (as opposed to a “U” or a “V”) has required incredible dexterity and resilience. 

Among chief financial officers, optimism is growing about the pandemic and the US economy, but few expect a return to “normalcy” in the near future. In a recent survey of CFOs by Duke University and the Federal Reserve banks of Atlanta and Richmond, only 25% of respondents expect a full revenue or employment recovery for their companies before June 2021. 

For financial professionals, that means more challenges in trying to map out the coming months or even the coming weeks for their companies. If you’re in finance, chances are good that the forecast you wrote in January is long forgotten, due to the events of the past several months.  

Scenario planning as it was in the idyllic days of 2019 is unlikely to return. Here are some tips on how to quickly provide detailed planning and analysis for your company during coronavirus and beyond: 

Ask the right questions

Scenario planning — the process by which companies contemplate and plan for the future — is sometimes mistaken as something only big organizations do. But companies of all sizes can benefit from methodical and frequent planning for the future. 

At times when the future is unclear, the questions you ask on the front-end of scenario planning are especially critical. Those questions should be high-level and open-ended: 

  • What’s happening to our company, and the world at large, from a macro- and micro-economic level? 
  • What uncertainties will have the greatest impact on us? 
  • What impact will a disruption to our supply chain, or the scarcity of materials, have on our business and customer satisfaction? 
  • What are the most likely scenarios our company will face in the near future? 
  • How will each scenario affect the company, and what are key metrics and KPIs to effectively measure our performance during that scenario? 

These questions provide the groundwork for anticipating and measuring your company’s future growth and performance. Ask the wrong questions, or get too granular in your thought process, and your organization may be ill-equipped for future twists and turns in the economy.

Plan at a faster pace

With so much change happening so rapidly, the traditional quarterly forecast just won’t cut it anymore. 

In the pandemic era of scenario planning, quarters become months and months turn into weeks. Some of your peers may actually be asked to provide daily reports to the rest of the C-suite, depending on their industry and how it’s affected by current events and economic instability.  

A quicker turnaround time on scenario planning may also be expected by your CEO and executive team. As a CFO, it’s important to manage expectations and devise an agreed-upon schedule for updated scenario plans. 

And don’t expect this process to return to the way it was pre-COVID-19; the demand for more frequent planning and analysis may become the norm, even after the pandemic subsides and the economy stabilizes. 

Provide more scenarios 

Until recently, mapping out two likely scenarios for the executive team was effective and perfectly acceptable. The uncertainty of the pandemic and what lies ahead now requires creating five or more scenario plans. At the very least, you should plan and set priorities for these three possible outcomes: 

  • The worst-case scenario (example: customers have shut down and business is drying up).
  • The okay-but-not-so-great scenario (demand remains strong, but customers are taking longer to pay).
  • The best possible scenario (orders are coming in, and the company’s cash position remains stable).

This approach helps management establish parameters for company performance — from a four-alarm sense of urgency to sustainability to an actual growth scenario. Providing a broad range of potential outcomes can lead to better decision-making and fewer surprises.

“No doubt, you’ll put steps in the playbook you’ll never take, and you’ll probably omit things that you will end up doing,” Frank Friedman, COO and CFO for global consulting firm Deloitte LLP, said in an interview with The Wall Street Journal. “But in a period of crisis, having something like that to lean on is a tremendous advantage. You’re not taken by surprise if ever there is a crisis.” 

Take a comprehensive look at cash inflows and outflows

Start by looking at the cash your company has coming in. What are your key sources of cash flow, by customer and industry? How will those categories be affected by a dip in the economy, social unrest or another government-mandated shutdown? What will this mean for the volume of your business?

As we’ve learned in 2020, economic shifts affect different businesses in different ways. When forecasting future cash inflow, examine how each of your key customers will be impacted by different scenarios. 

Your next step is to break down cash outflows into categories that help your leadership assess risks and make decisions. What are your variable and fixed costs? What are some discretionary costs (for example, investments in new technology or business travel expenses) that can be delayed or cut in the event of an adverse scenario?    

In an unpredictable environment, breaking down cash outflows and inflows, and applying them to each possible scenario can help you anticipate shortfalls and understand how to course-correct. 

Engage everyone in the business 

While the questions your scenario planning asks are high-level, the data you collect to answer them should be granular. 

That means engaging key stakeholders across every part of the business. Financial planning can no longer take place in a finance bubble. Collaborating with and collecting information from sales, marketing, operations and other team leads will add depth and perspective to scenario mapping. 

This is an area where the CFO should be looked upon as a key strategic advisor for the organization. If your company culture is one of transparency and collaboration across different functions, you’ll find it easier to engage everyone in the scenario planning process. 

Examine cash flow solutions 

In preparing for your worst-case scenario during uncertain times, you’ll need some Plan Bs on where and how to access working capital when you need it. Some possible solutions to alleviating a cash crunch include the following:

  • Identifying expenditures that can be delayed or cut. 
  • Renegotiating invoice payment terms with your suppliers. 
  • Tightening inventory management to reduce the costs of holding too much product.
  • Asking your lender to defer loan principle or interest payments until conditions improve.
  • Researching alternative financing solutions that give you, your customers and suppliers more control over working capital
  • Exploring government funding options like the Paycheck Protection Program or the SBA’s Economic Injury Disaster Loans program. 

Use tools that can be updated in real time 

Since it’s likely that your CEO wants to see your latest scenario planning report yesterday, it makes sense to compile and update your data on a secure, cloud-based, shareable platform that you can update in real time. Static spreadsheets saved on your desktop may include mistakes or outdated information.

There are many ways to facilitate this flexibility, ranging from Google Docs to SharePoint to Excel. Here are some of the more popular tools available today for scenario planning:

  • Excel’s Scenario Manager, which enables you to input as many as 32 components of your cash flow forecast.
  • The Monte Carlo Simulation Technique, available on Excel, which can convert a static spreadsheet into a Monte Carlo simulation, a mathematical model for creating random variables measuring risk and uncertainty.
  • UpBOARD’s online scenario planning collaboration tools, which allows any of your team members to access and use templates and input forms. 
  • There are also several free scenario planning templates available for you to download. 

In summary

The uncertainty of the pandemic era has heightened expectations for finance professionals to provide planning and analysis more frequently and for more possible scenarios. 

That also means crafting a scenario plan that asks the big questions about an organization’s future, while also collaborating with key stakeholders on the most detailed information possible. Fortunately, many software tools are available to help conduct scenario analysis in real-time, with greater accuracy and frequently enough to satisfy your executive team.

Need working capital solutions to address any scenario? Learn more about C2FO at https://legacy-site.c2fo.com/enterprises/our-platform/

Working Capital. Working for Everyone.

C2FO provides working capital solutions for you, your suppliers and your customers.

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