How Scenario Planning Can Help Your Business
Scenario planning for the ‘what-ifs’ is a hugely important part of planning for any business. But now that coronavirus-related restrictions are putting many businesses around the world at risk, we’ve found our biggest ‘what if’ to date. Scenario planning has never been more vital for all businesses.
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 know ‘what happens if we lose a client?’ 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 on your cash.
Failing to plan for certain scenarios may not always lead to disaster, but it can leave the door open to increased risk and missed opportunities. As the saying goes, if you fail to plan then you plan to fail. In today’s economic situation, creating different ‘what if’ scenarios may be crucial to your business’s survival.
When will you run out of cash?
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.
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.
Grow your business
By forecasting different scenarios you will build a clearer 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.
Managing your staff
Onboarding new staff members is not just a one-off expense. Over time, 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.
If you’re struggling right now and you want to build a scenario around whether making layoffs can help your business stay afloat, you can do this really easily in your chosen cash flow forecasting tool.
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.
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.
How to simplify your scenario planning
Float is a cash flow forecasting and management add-on that can help 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. Meaning less stress, and more confidence in your plans.
How to do scenario planning in Float
Scenario planning is a huge part of business planning. Understanding the cash impact of different decisions is vital to making sure that your plans work out and that you achieve your goals. On the flip side, building scenarios for what could happen if you lose a client or get paid late will help you make plans to guard against a cash gap.
Float is more than just a cash flow forecasting tool, it also provides essential business and cash flow management features that help you and your business on the path to success.
Watch this video to see how to create a scenario in Float:
Scenarios can be created for any alternate reality that you’d like to see in your business. What you change in a scenario will never be reflected in your base, or official, forecast. So there’s no limit to what you can do with your potential plans and you can let your imagination run wild.
Hiring a new employee
Most businesses don’t just have the cash in the bank to hire a new employee without having to factor in the additional expenditure without a worry. So, when it comes to making a hiring decision, it’s always important to factor that into your cash flow.
When looking to create a scenario for hiring a new employee, here are the basic changes you’ll need to make to see it accurately represented in the scenario:
Go to your Salaries/Payroll line.
Choose the cell for the month you’d like to make the hire.
Enter a new budget for the salary and then choose when in the month it will be paid.
Don’t forget to add on taxes related to payroll, such as PAYE and National Insurance if you’re in the UK.
Hopefully, with a new employee, you’ll expect more cash in, (potentially after a probation or training period) so don’t forget to update that line, too.
Planning for a new hire into the business means that you can secure sustainable growth.
A Decrease in Sales
If you have a client that you think you may lose, it’s good practice to forecast for a decrease in revenue from that particular client to understand the impact on your cash.
To do so, go to the accounts in your Cash In section where revenue for that client flows in.
Simply click on the cash in account in question, find the Budget(s) you want, and exclude them.
Depending on how significant a dip in sales you wish to plan for, you should exclude as many budgets as you think necessary.
This won’t exclude any budgets in your base scenario.
A best-case scenario
Looking on the bright side of life in business can seem a bit naive. After all, not every business always runs smoothly.
But, it can be a good idea to get an insight into what would happen in your business if everything went from good to great.
So why not include a scenario budget for additional sales, or investment you’re hoping for, and see what the future may look like if all your plans for growth worked out.
A worst case scenario
Sometimes, it’s good to get an idea of what would happen if things in your business took a nosedive.
Whether it’s all of your invoices are paid late, ten projects fall through at once, or all of your equipment suddenly breaks and you have to buy more, it’s good to see what the impact would be on your business.
If you’d like to see how your current trajectory measures up to either your best case or worst case scenario, then you can go to our Scenario Comparison Report in your Insights tab. Here, you can view multiple scenarios at once and get a real-time view of where your business is heading in comparison to your potential roadmaps.
Whatever your future may hold, it’s always good to get a plan in place to see what may happen.
So, whether you’re looking to grow, or simply wanting to check out your options, it always makes sense to plan for the future – whatever it may hold.
Start scenario planning for your business using Float (floatapp.com)
You can see more about how to create a scenario layer in Float here.
Or sign up to a free webinar to learn more about scenarios and how Float can make you a cash flow champion.