Five tips for effective scenario planning
This guide, created by the ICAEW Business and Management Faculty, shares five practical tips finance professionals may wish to consider when preparing forecasts and planning for the future.
Businesses are used to feeling the tension when it comes to focussing on the here and now and the ‘what if’ scenarios but COVID-19 has shown that in a matter of days business activities can grind to a halt. To what extent should you prepare for business disruption? Should a business plan for all eventualities? This guide sets out five areas for finance professionals to consider.
The information in this guide is intended to be practical and helpful in these difficult times, but because every business is different in so many ways, the guide shares general guidance only and you should take appropriate professional advice on the circumstances of the business.
1. Plan for a range of scenarios
Plan for possibilities at both ends of the scale. Most businesses prepare for well-known risks such as cyber-attacks. But what about less likely, high impact events? ‘The next catastrophe’ in The Economist, June 25 2020 highlights the risk of charged particles ejected by the sun causing power outages lasting months. This would require a different business response than COVID, where virtual working and on-line commerce reduced the impact. One approach is to categorise events such as natural disasters, technological emergencies, health events (eg COVID) and have a plan in place for each. It is important to drill down and consider how such an event would really affect your business eg, flooding might not pose a significant risk to an online business but a breach in data security would severely impact its operation. A business should also look further afield, for example, if you operate within a global supply chain, what are the risks if one of the links breaks due to sanctions on exports, for example. Are you prepared for that eventuality? A simple SWOT analysis (strengths, weaknesses, opportunities, threats) is always a good place to start in identifying key internal and external issues.
2. Data is key
Up to date data is key to ensuring your forecasts are robust. Every forecast needs a solid base from which to start so make sure management information and business records are up to date, and if possible, digitise them. A strong set of data will enable the business to respond to change in an agile way, with senior management confident that the numbers are reliable.
If possible, use a range of information sources to inform your forecasts, for example:
- Internal data – management accounts
- Near time data – table bookings, room bookings, order books
- Market research
- Government and institutions – www.gov.uk, IMF, OECD, central banks
- Press and media
3. Apply sensitivity analysis
Forecasts and scenarios can be further flexed by applying sensitivity analysis. Even robust forecasts under stable conditions are subject to uncertainty. Sensitivity analysis is a good tool to demonstrate how a change in one variable eg revenue, rent costs or floor space etc, will impact your forecasts and highlight the pinch points for the business.
4. Periodic review
Circumstances change. Scenario planning and forecasts should evolve with the business, its environment, and changes to the wider economy. Periodic reviews are essential as otherwise forecasts can be rendered ineffective. Sometimes scenarios can be tweaked to reflect new information, but do not be afraid to develop new scenarios if necessary.
5. Collaborate and listen
Consider who provides input to the forecasts and who reviews them. Involve colleagues from operations, finance and procurement for example. An inclusive approach will provide different perspectives which might help shape future strategy of the business should disaster strike.
You can find more guidance on scenario planning in this short video presented by Rick Payne, Technical Manager, Business and Management Faculty: