In last week’s article, we considered how CFOs are reevaluating their financial strategies in the face of a contentious presidential election and an uncertain economy. That’s because, according to a recent Duke-Fed Q3 survey, 30% of CFOs are scaling back investments due to political uncertainty.
You can read the full article here, but the short version is that while caution is understandable, risk and uncertainty also present an opportunity to leverage scenario planning techniques to fortify financial resilience. By preparing now, CFOs can not only safeguard their companies against potential disruptions, but also position themselves to seize growth opportunities once the political and economic landscape stabilizes.
But the natural next question is, how? In this article, we’ll be getting into the specifics. We’ll explore the tools and techniques CFOs can use to strengthen financial resilience through scenario planning and why this approach is essential for managing uncertainty and driving success beyond 2024.
The Long List of CFOs Uncertainties
Obviously the whole point of uncertainty is that it’s…uncertain. You can’t know for sure how different events are going to impact your organization, and the list of risks can get very long. Even so, it’s possible to plan for a range of different scenarios. For example, you won’t know whether the US dollar will rise or fall post-election, but you can forecast and prepare for both outcomes.
Here are a few key scenarios CFOs should consider incorporating into their planning:
Political shifts
We’re starting with the obvious one we’ve already mentioned, because changes in administration often lead to shifts in tax policies, regulatory frameworks, and government spending priorities.
CFOs should be preparing for multiple political outcomes by modeling the potential impact of adjustments in corporate tax rates, tariffs, and sector-specific regulations. Understanding how different policies might affect costs, cash flow, and investments can ensure companies are better positioned to respond quickly once the election results are clear.
Be sure to remain as analytical as possible and see through the election spin — which can be challenging!
Interest Rates
Interest rates have arguably an even bigger impact on the economy than government policy, especially in the short to medium term. The Federal Reserve has already signaled potential interest rate cuts, with another possible reduction expected in November.
While lower interest rates can reduce borrowing costs and stimulate growth, CFOs must also prepare for the possibility of fluctuating rates that could affect capital structures, debt repayments, and investment plans. Modeling the impact of further rate cuts — or, conversely, an economic environment where rates rise again — will allow CFOs to adjust their financial strategies accordingly.
Slow Global Growth
The global economy remains unpredictable, with a mixed bag of forecasts for the next 18 months. The IMF projects that GDP growth in the US will fall from an expected 2.6% in 2024, to 1.9% in 2025. At the same time, the Eurozone is expected to improve from 0.9% to 1.5% over that same period, while the UK and Canada are both projected to see healthy increases.
CFOs need to understand how these different economic conditions will impact their own financials, running scenario models to assess the effects across their supply chains and active markets.
Currency Fluctuations
Currency volatility is an obvious one when talking about uncertainty. CFOs should be preparing for fluctuations in exchange rates, which could affect everything from supplier payments to revenue streams.
By building scenarios that account for both the appreciation and depreciation of the US dollar, CFOs can identify risks and implement strategies to hedge against currency movements, mitigating the impact on the company’s financial health.
Supply Chain Disruptions
We’ve seen in recent years how major supply chain disruptions can occur. Right now, there are many notable geo-political risks worth monitoring, which could easily flow into supply chain problems.
CFOs should consider scenarios that factor in rising input costs, transportation delays, and supply chain bottlenecks.
4 Scenario Planning Techniques for Building More Accurate Forecasts
Forecasts and scenario plans are only as good as the data and techniques that support them. Here are some key techniques CFOs should use to build stronger, more accurate forecasts:
1. Dynamic scenario planning
Dynamic scenario planning involves creating multiple forecasts based on different potential outcomes — such as election results, economic slowdowns, or market volatility. CFOs can use this technique to simulate how various external factors will impact cash flow, liquidity, and financial health. By comparing best-case, worst-case, and middle-ground scenarios, finance leaders can identify the risks and opportunities associated with each one.
For example, if interest rates drop further, scenario planning can model how this will affect capital expenditures, debt servicing, and investment strategies. This approach helps CFOs stay agile, ready to adjust their plans as new information comes in.
2. Rolling forecasting
Instead of relying solely on annual or quarterly forecasting, CFOs can benefit from rolling forecasts, which provide continuous updates based on the latest financial data. This technique allows CFOs to adjust projections throughout the year in response to changes in the market or internal company performance.
By revisiting cash flow forecasts more frequently, CFOs can ensure that their forecasts remain accurate and actionable in fast-changing environments. Rolling forecasts also make it easier to shift priorities when new opportunities or risks arise, allowing for more agile financial planning.
3. Sensitivity analysis
Sensitivity analysis examines how changes in key variables — such as revenue, costs, or interest rates — affect cash flow and financial performance. By adjusting these variables in their models, CFOs can see how sensitive their forecasts are to fluctuations in key areas. This technique helps finance leaders identify which factors are most likely to impact the company’s financial stability and liquidity.
For instance, CFOs can model the effects of fluctuating exchange rates on international revenue or the impact of rising supply costs due to inflation. Sensitivity analysis provides clarity on which risks need closer attention and helps prioritize areas of focus in the forecast.
4. Stress testing
Stress testing pushes financial models to their limits by simulating extreme adverse conditions. CFOs can use this technique to assess the resilience of their cash flow, liquidity, and capital structure under scenarios like sharp revenue declines, rising costs, or prolonged economic slowdowns. Stress testing provides CFOs with a realistic understanding of how much strain their financials can handle and where vulnerabilities might exist.
By applying stress tests, finance leaders can refine their contingency plans and ensure they have the liquidity reserves necessary to weather prolonged periods of uncertainty or financial shocks.
The Right Tools for Scenario Planning and Forecasting
To effectively execute scenario planning and cash forecasting, CFOs need access to the right tools. They need the ability to streamline data management, improve accuracy, and provide real-time insights.
Here are some key features CFOs should look for in scenario planning and forecasting tools:
Real-Time Cash Visibility
Accurate forecasting begins with a clear, up-to-date view of your company’s cash positions. Tools that provide real-time cash visibility across all bank accounts give CFOs a single source of truth, for more precise cash flow forecasting and liquidity management.
CFOs should seek platforms that offer direct connections to banks and automatically consolidate data into one comprehensive view.
For example, Trovata provides this real-time visibility, pulling in cash data from multiple banks and normalizing it for easier management. This enables CFOs to quickly assess liquidity levels and make informed decisions about where to allocate resources.
Automated Forecasting and “What-If” Scenarios
Manually creating cash forecasts and running scenarios can be time-consuming and prone to errors. Automated tools that allow CFOs to build dynamic cash forecasts and easily run “what-if” scenarios offer a more efficient and accurate way to model different outcomes.
These tools can simulate various potential impacts and provide CFOs with a clearer picture of how these variables might affect cash flow and overall financial health.
Data Integration and Automated Normalization
Accurate scenario planning requires data that is both reliable and consistent across all systems, with seamless integration into your existing data infrastructure. One of the challenges CFOs face is dealing with fragmented financial data coming from different sources, such as various banks, ERP systems, or departments.
Tools that offer automated data normalization can aggregate and clean financial data, ensuring that CFOs have a single source of accurate information to work with.
This is where platforms like Trovata add major value, by automatically normalizing data from multiple accounts and banks. Reducing manual inputs helps CFOs eliminate errors and discrepancies, improving the accuracy of forecasts and scenario models.
AI-Driven Insights and Analytics
As more organizations turn to AI and advanced analytics, CFOs should seek tools that leverage these technologies to enhance their forecasting capabilities. AI can process vast amounts of data quickly, identify patterns, and generate insights that might not be immediately apparent through manual analysis.
AI-powered tools can also help CFOs refine their scenario planning by factoring in more complex variables, such as economic indicators or market shifts, allowing for more nuanced decision-making.
Build Resilience in Uncertain Times with Trovata
In times of uncertainty, robust scenario planning is essential for CFOs to navigate risks and prepare for future growth. By leveraging the right tools and techniques, CFOs can strengthen their organizations’ financial resilience.
And resilience isn’t just about survival. With proactive planning, companies will be well-positioned to seize opportunities when the economic and political landscape stabilizes.
With Trovata, CFOs gain access to real-time cash visibility, automated forecasting, seamless integration into existing data systems, and sophisticated AI and machine learning functionality. All this adds up to faster, more efficient, more accurate cash management and financial forecasting, while spending less time and with fewer errors.
Recommended: Learn how Krispy Kreme scaled their treasury operations, improved forecasting, and fortified resilience with Trovata.
If you’d like to see how Trovata could help your company build greater resilience and flexibility, book a demo today!
