If you are a business owner or follow any finance professionals on LinkedIn, odds are that you’ve seen the phrase scenario planning thrown around. Especially when the economy hits a rough patch, this topic surges in popularity.
So you’ve heard the term, seen it on your feed, but what does it actually mean? The Economist describes scenario planning as, “a structured way for organisations to think about the future.”
Scenario planning is a combination of meticulous data collection and a series of targeted forecasts. These forecasts are then used to prepare for everything from supply chain disruptions to managing an enterprise’s cash and liquidity. These scenario-based forecasts help organizations answer basic, yet essential questions such as:
- Are we able to pay creditors and employees?
- How long can we continue to make these payments?
- What are our operational expenses?
- How can we optimize our use of cash?
Why this sudden interest in scenario planning and modeling? According to the Wall Street Journal, the C-Suite is adopting scenario planning to increase their organization’s competitive edge. “For CFOs, especially those embracing a greater strategist role in their organizations, using scenario-based planning for a wide variety of events can enhance a company’s competitive position, according to Frank Friedman, CFO, Managing Partner of Finance and Administration of Deloitte LLP.”
Businesses are also seeing increased pressure from both internal and external stakeholders to develop scenario based forecasts. But, for many organizations, these forecasts arose out of necessity, as they braced for the financial turbulence that resulted from the COVID-19 pandemic.
“COVID-19, oil price shocks, and travel bans are all creating uncertainty regarding the current business environment. And as the impact of COVID-19 becomes more permanent, it is important that businesses are proactive in assessing their capability to withstand disruption and the options they have to identify, and respond to, potential opportunities.”– Deloitte
Every scenario plan looks different and the focus of these plans can vary widely in scope. Whether that means circumventing breaks in the supply chain, minimizing expenses or adapting to an online sales market; these specialized forecasts can be used to quickly create and implement an action plan.
If you want to create your own scenario plan you first need to identify the areas of concern, collect data in each area of interest and apply your financial forecasting models.
The biggest question when it comes to cash forecasting is, can your forecast properly project the potential pitfalls? Accuracy in forecasting requires extensive amounts of data and finely tuned predictive analysis. This is why it is no surprise that the Corporate Finance Institute describes scenario planning as “…a demanding and time-consuming process that requires high-level skills and expertise.”
While the process can seem overwhelming, Trovata makes it simple. Our automated cash forecasting models can help businesses easily create accurate forecasts tailored to their needs. Trovata leverages proprietary machine learning algorithms to increase forecast accuracy. Trovata also uses APIs to connect to your banking partners, aggregate and normalize your data.