The ongoing global pandemic is making one thing clear: businesses must be ready to adapt to rapid changes or risk getting left in the wake. But despite advances in technology, the Nostradamus School of Management still doesn't exist. Business executives can't predict the future with certainty, yet the ability to accommodate unforeseen changes in the market is crucial to survival.
How would another prolonged business disruption affect your organization? What would it mean for product sales and revenue? Your employees? Scenario planning can answer these questions. Scenario planning uses data and strategic thinking to help organizations anticipate and rehearse how they would respond to potential trends. It is an essential tool for strategic planning.
Answer the "what ifs."
Scenario planning helps to identify future barriers, disruptions or hurdles an organization might face, and determine what the response to those situations could be.
Scenario planning can be particularly helpful for treasury and finance professionals who want to better prepare for potential variables that could negatively – or positively – impact company goals. Armed with the right data, it enables informed projections that can be used to develop multiple, differentiated occurrences and possible outcomes. Some examples include:
Developing responses to micro- and macroeconomic trends.
Estimating cash flow changes that occur as the result of external pressures such as supply chain disruption.
Responding to sudden market changes like a competitor going out of business or multiple competitors joining forces in a merger.
Scenario planning goes beyond forecasting.
Many planning methods focus on a single desired or expected outcome. An organization then develops a vision and plan of action based on that single outlook.
Unfortunately, these approaches don't account for one very significant element: uncertainty.
In the early days of the pandemic, businesses were plagued by uncertainty. They lacked insight to understand the economic environment at that time, as well as what to expect in the months to come. This led to an increase in forecasting activity, which isn’t helpful when the future is unknown. In the face of ambiguity, forecasting simply reworks existing models to reinforce what we think we already know.1
Using a variety of drivers, scenario planning seeks to paint multiple pictures of what the business environment might look like. In this way, scenario planning can help an organization become more agile when faced with rapid change.
Oracle reports the pandemic led to a 71% increase in business customers who use scenario planning in their forecasting. They tested factors such as cash and liquidity outlook, revenue estimates and risk mitigation to better position their teams for positive business results.
With the foresight scenario planning offers, treasury and finance leaders can establish financial targets, allocate resources, and communicate plans and rationale to stakeholders.2
Create a plan in five simple steps.
Scenario planning, while comprehensive, needn’t be laborious. It typically involves five steps.
List driving forces. What external and internal factors could impact your business goals? Use the PESTLE approach to identify the key political, economic, social, technological, legal and environmental shifts that will affect your organization.
Identify critical uncertainties. Which driving forces are you least familiar with? Which are likely to have the greatest effect on your organization? Carefully examine these.
Develop a range of plausible scenarios. The objective here is to identify and assess trends that are most likely to occur and have the greatest potential to affect your organization. These become the basis of the planning process.
Examine the implications of each scenario. Ask yourself how your organization might react to the factors and possibilities you uncovered in steps 1-3. Consider good, better, and best responses, as well as what a bad response might be. Also ask what immediate, interim, and future responses could be.
Build a plan of action. After examining all the possibilities, you’ll need to detail how your organization will prepare for and respond to each scenario.
Uncertainty is a fact of life. While you might not know what to expect when change comes, scenario planning will help to discover the possibilities and develop a realistic plan to address them.
Contact Synovus Treasury and Payment Solutions, your Treasury Consultant, or Relationship Manager to see how we can help your organization prepare for the unexpected.
This content is general in nature and does not constitute legal, tax, accounting, financial or investment advice. You are encouraged to consult with competent legal, tax, accounting, financial or investment professionals based on your specific circumstances. We do not make any warranties as to accuracy or completeness of this information, do not endorse any third-party companies, products, or services described here, and take no liability for your use of this information.
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