Every business encounters risk at some point. Scenario planning is a way that you can plan for potential problems in your business before they cause a cash crisis.
What is scenario planning?
Sometimes you might want to model different hypothetical situations that could impact your business. You might want to know ‘what happens if we hire a new employee?’ or ‘what if that invoice doesn’t get paid on time?’. Doing scenario planning will help you understand how various different situations will affect your business.
Scenario planning allows you to see the future of your business by taking into account the impact of certain variables.
Specifically, scenario planning is about identifying critical uncertainties and goals in your business.
Failing to plan for certain scenarios may not always lead to disaster but if not done, you leave the door open to increased risk and missed opportunities. As the saying goes, if you fail to plan then you plan to fail.
With scenario planning, you create a risk profile for each potential variable.
What scenario planning can do for you:
A stress test is a plan put in place to determine a business’s response to financial crises. Stress testing will help your business to minimize any potential pitfalls and instead seize available opportunities.
Scenario planning can be used as a stress test against your business’s current strategic plans. It can be used to test the robustness of your current plans against a variety of alternative scenarios.
Knowing your best and worst case scenario can also be a good way of stress-testing your business. If you know where you want to be and where you absolutely don’t want to be then you can begin to strategise accordingly.
Create an agile business
By understanding the possible outcomes of variables in your business you can plan for multiple eventualities. This means that your management systems become more adaptable to change.
Having an agile business means that you will respond rapidly and effectively to internal and external changes. Some plans won’t need a scenario to predict viability, but others may be more scenario-dependent, and risk-intensive. Creating scenarios means that you can be agile when organising your business strategy.
With an insight into the cash impact of your potential plans, you can more effectively prepare for potential pitfalls and confidently move forward with tried-and-true plans.
Grow your business
By forecasting different scenarios you will build a larger picture of the future of your business. In doing this you will be able to better identify opportunities for growth and expansion.
Whether it’s the knowledge that you have enough working capital to expand into different geographical territories or invest in new offices, scenario planning can help you to sustainably grow your business with less risk.
Additionally, new business could mean an increase in staff costs, overheads, or freelancer fees. Scenario planning for positive changes to your business is just as vital as taking a pessimistic view.
Gain the trust of your investors
With agility and an insight into multiple scenarios, comes the ability to show stakeholders and investors the various journeys your business may take. Scenarios can be used to explain strategic decisions and help to build support internally and externally.
An early warning system
You can use scenario planning as an early warning system for potential pitfalls in your business. Mapping out scenarios for a decrease in sales, losing a project, or late payment, can help prevent a cash crisis.
Advanced warning of a cash gap gives you the time you need to take steps to avoid it.
Scenario planning can also show you whether a potential future situation could cause a cash crunch, giving you time to make contingency plans if necessary.
Strategic monitoring of your business’s finances and future plans will allow you to make essential adjustments to avoid disaster.
Retaining and recruiting staff
Onboarding new staff members is not just a one-off expense. Overtime, your business will change, costs and sales will fluctuate, but you still have to pay your staff. Scenario planning allows you to monitor and shape your team with confidence.
A scenario plan will help you understand whether you are overstaffed or understaffed. Both can cause problems in your business.
Overstaffing can mean a struggle to make payroll each month. But understaffing can mean fewer sales, lapses in customer service, and a tarnished brand.
Scenarios can help you to weigh up the difference between the additional cost of new staff and the return on investment.
Scenario planning is an important tool in your business’s management system; designed to help you plan for a more confident future.
How to simplify your scenario planning
Float helps you to simplify, visualise and speed up the process of scenario planning. By pulling through your bills and invoices directly from your accounting software, Float uses them to populate your forecast with actuals.
Sign up for a free trial today!
You can see more about how to create a scenario layer in Float here.
Or sign up for a free webinar to learn more about scenarios and how Float can make you a cash flow champion.
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