If you are always looking in the past, you will limit the insights you can gain. Forecasting switches your focus; it encourages you to take a forward-looking view of your business and to look down the road to identify your future threats and opportunities. This enables you to proactively create a plan for your business’ future.
Forecasting enables analysis of your business finances so you can project sales, cash, revenue and profits. This enables you to have control of your business. But how can you forecast accurately when no-one knows when a vaccine will be available or when businesses will be able to re-open?
Even pre Covid-19, we were living in a world which was facing rapid change and uncertainty, markets would move simply because Trump had put out a tweet about trade agreements, there were elections, BREXIT and fast pace changes in technologies.
Forecasting can help you to understand where your business will end up if you do not take action. If you do not pivot, create revenue streams, reduce costs, delay costs or seek assistance from the government or banks. Where forecasting falls down is that we are in uncertain times and how can we possibly forecast what we don’t know? This is where scenario planning is really useful.
Scenario planning goes one step further than forecasting, it provides a structured away to identify a range of possible outcomes, then estimates their impact and identifies actions. This can lead to risk planning, where the business considers the likelihood of an event happening and the impact if it happens. By doing this, businesses can begin to understand how they can mitigate the risks or mitigate the impact if that risk does occur. I.e. pre covid-19 a company which had a good cash balance and crisis plans in place they would have been able to react quickly to the situation. No business would be fully protected but with a solid cash reserve they would have felt more comfortable than other businesses.
In this time of incredible uncertainty, here are tips on how scenario planning can provide key insights.
Scenario planning will let you run different scenarios with different drivers, so you can see how the business may change over time. You can compare options such as when your business may re-open or what is the impact on revenue if capacity is restricted to 30%, 50% or 60%. This will be invaluable information when defining your next strategic move.
From the scenarios the business will identify actions it needs to take, this could be in the form of a plan that they can follow if a certain risk comes to light. Or it could be an action they take now to reduce the likelihood of a risk happening or the impact if that risk did occur. I.e. they may take out insurance against a break-in or employee injury themselves at work.
Understanding the potential actions:
If the management had a crisis plan or business continuity plan, they could have swiftly in acted that plan. This may have involved what needs to happen so employees can work from home, how best to contact employees and what key employees are needed on site to secure assets.
A sense of confidence can be gained by having a structure in place, sometimes people may panic but by having the structure in place it may calm employees and ensure the correct actions are taken. Hot-headed or panicked decisions will most certainly not lead to the desired outcome.
Understanding how to restart:
Businesses can identify actions required to restart the business. They will be more likely to identify different actions and prepare us for having to take a different course of action to the one we assumed we would take.
If a business is seeking funding such as CBIL’s they will need a forecast to demonstrate that they can afford to loan and have considered the impact of repayments on their future business. A scenario plan will re-enforce that the business has considered different options and can still afford the loan even if different situations arise.
Talk to us about the benefits of scenario planning
If you want to get in control of the future of your company, come and talk to us at Southbourne Accountancy. Forecasting and scenario planning will help to identify the future threats and opportunities – and create a proactive strategy to improve the performance and stability of your business.
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