Business stability is not something on which the average entrepreneur can rely. This is especially true in the present economic climate, where businesses are anticipating another recession year. Meeting these existential challenges requires forward planning, which many start-ups make the mistake of skipping beyond aspirational milestones. Financial scenario planning, then, could be the answer.
What is Financial Scenario Planning?
Financial scenario planning is, quite simply, a framework by which a business can evaluate its future from a financial perspective. The plan involves the drawing-up of various potential situations and financial states, based on empirical data from prior performance and market speculation.
Together, this broad field of knowledge, information and intuition can draw up a broad array of potential business events and outcomes, which themselves can be used as springboards for preparatory action or shifts in business planning. But how exactly is this form of planning useful for the average business?
How is it Useful?
To illustrate the usefulness of financial scenario planning, it may be helpful to use something of a case study. Many businesses already utilise financial scenario planning without realising it, when addressing their product or service launch plans for the coming months and years.
The roll-out of a new product, update or range does not happen in a vacuum. It happens in response to market movements, competitor pressure, new emerging regional or industry gaps and the financial health of the business at a given time. If something fails, the plan doesn’t continue as usual; a B plan is implemented.
It is exactly this methodology that justifies financial scenario planning in other aspects of a given business. Put simply, what happens if a recession eats into your positive cashflow figures? And what if your sales improve? Having a useful answer for both questions is the only way to guarantee longevity that isn’t based on luck. How, then, should you approach financial scenario planning in this more considered sense?
How to Design a Financial Scenario Plan
Approaching financial scenario planning can be daunting, particularly if you have a blank canvas to start with. A great way to think about creating these scenarios is to think about some basic what-if questions for your business; from here, you can use research and speculation to draw up roadmaps and to-do lists for each eventuality.
As an example, you might wonder what would happen if staff started leaving the business at a quicker-than usual rate, raising staffing costs considerably. The solution would involve addressing root causes for staff dissatisfaction, and enacting solutions – such as investment in HR software to make onboarding easier and information more transparent.
Of course, broader questions about industry statuses and competitor advantages bear asking too. These are less simple to answer, and can raise more questions themselves. Internal and external factors need to be considered, and potential outcomes narrowed down – partially through the flow-charting of potential remedial measures.