This article explains how a business can use scenario planning and modelling to make it through the pandemic period successfully and become a stronger business on the other side.
We face one of the biggest challenges to business since the Second World War. We all expect that the extreme disruption we’re all dealing with could last for six months or even more. It’s a fact that many businesses will not survive this period. There will be a mix of luck and natural selection that will determine which businesses survive and thrive.
The luck element refers to the fact that the pandemic is impacting on different industries in different ways. If you are unfortunate enough to be in the most severely affected industries, you will be more exposed to the possibility of business failure.
The natural selection element refers to the fact that the strongest businesses within each industry are most likely to survive and the weakest businesses are most likely to fail. The weakest businesses will be weak due to many reasons including, being poorly managed, being undercapitalised, having weak supply chain structures and so on.
Modelling to become a stronger business on the other side
One of the keys to managing your business through this period is how well you plan your strategies for doing so. Planning includes doing detailed financial modelling of your strategies. This includes scenario planning so you can test a range of alternative strategies and so that you can fully understand the cash position of the business through this next 6 months or so.
Essentially, all businesses need to see their future as negotiating three separate phases to become a strong business in the post-coronavirus period. These three phases are:
- Scenario planning to negotiate the current period of disruption
- Understanding the post-coronavirus environment (it will be different) and developing strong financial plans to be successful in the changed environment
- Consolidating your position as a stronger competitor within your industry or market sector
So, what is involved in each of these phases?
Scenario planning to negotiate the current period of disruption
We are all aware of the government stimulus offers and aware of the finance options that we can now access. But what is our plan for getting through this period?
- How far will our sales fall, and for how long will they remain low?
- What level of excess resources do we have in the face of reduced demand?
- What is our plan for reducing costs through this period?
- What will be our cash holdings throughout the disruption period?
- When will government stimulus funds be available and how much will we receive?
- If I go to the bank, how much will I need and how can I demonstrate how I determined our need?
- When we get to the end of this and sales start to ramp up again, will we be able to fund the big increase in working capital that is likely to follow?
The financial models to test these variables need to be constructed and senior management will need to spend time testing the various scenarios. You need to understand what levers you can pull and when you need to be using them.
Those businesses who place a lot of focus on this activity are the ones that are most likely to negotiate the current period.
Understanding the post-coronavirus environment (it will be different) and developing strong financial plans to be successful in the changed environment
It is unlikely that we will get through this period and see everything go back to how it was before the coronavirus pandemic. Many things will be different. There will be more focus on security, whether that be food security, energy security, supply chain security or military security. Many businesses may have developed productive working environments where remote working is a much stronger part of the workplace. That will have an impact on the way business is managed. The entire business supply chain could see significant changes with a greater and more urgent focus on automation and online transactions.
It is also likely that there will be major support to help businesses get back to the levels that were being experienced before the pandemic. But that support must only be an enabler.
Those businesses who will succeed in a changed environment will, once again, be more focussed on understanding their changed business environment and planning how they operate competitively in that changed environment.
Alongside change there will always be uncertainty. Businesses need to undertake detailed financial modelling to test how their decisions are likely to impact on profitability and, more importantly, on cash reserves.
Consolidating your position as a stronger competitor within your industry or market sector
The theory of natural selection dictates that those businesses who survive will be the strongest businesses and therefore, that industry sector will be stronger than before the pandemic. Having negotiated your way through the pandemic period, it is now time to reinforce the strengths of the business and continue to reduce the weaknesses.
In this environment it becomes even more important to invest in your business. Solid financial modelling is the bedrock on which to build the development programs of your now more competitive business.