It should be no surprise that many businesses are being negatively impacted by COVID-19, which can naturally lead to cash flow issues as income stalls. The businesses that are able to plan and effectively manage their cash flows during these unprecedented times will be well-positioned for a quicker recovery and may also be able to capture market share from their less-prepared competitors. Proper financial planning and analysis can not only help businesses survive the downturn, but also empowers business leaders to make better-informed decisions regarding growth initiatives, cost/expense controls, staffing decisions, investments in capital expenditures, and financing, among other key financial decisions – not only during these times, but as a best practice in any environment. One crucial aspect of sound financial planning and analysis is to consider a variety of potential outcomes (not only a ‘most likely’ scenario – which is a good start – but also alternative, less likely scenarios that could push your business to its limits). These scenarios may already be obvious to you or could be uncovered in connection with a broader enterprise risk management (ERM) assessment. Learn more about black swan events such as this here and RubinBrown’s ERM services here.
The American Institute of CPAs (AICPA) and Chartered Institute of Management Accountants (CIMA), by way of their joint Chartered Global Management Accountant (CGMA) designation, recently published some very helpful guidance entitled “Scenario Planning: Providing Insight for Impact.” We have summarized a few of the invaluable takeaways from that publication, below:
What is Scenario Planning?
Scenario planning is a management tool that is designed to allow organizations to evaluate the efficacy of strategies, tactics, and plans under a range of possible future environments. Scenarios are a way of understanding the forces at work today (e.g., demographics, globalization, technological change, environmental stewardship and biotechnology) that will shape the future. Scenarios can be organized into four broad categories:
- Social (e.g., What are the implications of increasing obesity, or the widespread efforts to combat it?)
- Economic (e.g., What is the effect of slower growth of the Chinese economy on global markets?)
- Political (e.g., What is the likelihood and impact of European Central Bank measures to improve the uneven economic recovery?)
- Technological (e.g., What will be the impact of the “Internet of things” on the rate of change in an industry or particular business?)
Scenario planning can serve as a powerful educational tool for managers who participate in the process by increasing awareness of the impact of uncertainty and allowing them to envision how their behavior and decision-making will change under different conditions.
Steps to Scenario Planning
Another helpful illustration that you as business stakeholders can, and should, consider when scenario planning (as excerpted from the CGMA publication) is depicted below:
Source: Figure 1, CGMA Tool: Scenario Planning: Providing Insight for Impact.
While some businesses may possess the expertise to tackle the somewhat complex task of financial planning and analysis in-house, the exercise may be a foreign concept to others. As you continue to push through these challenging times, and as you emerge stronger in the future, RubinBrown’s Business Advisory Services group has a talented team of individuals with a variety of backgrounds and expertise that can help your business solve a whole host of challenges, including financial planning and analysis. Some of the specific services that we are well-equipped to assist with are as follows:
- Scenario planning / sensitivity analysis (e.g., Monte Carlo simulation);
- Financial statement forecasting (i.e., income statement, balance sheet, and statement of cash flows);
- Cash burn analysis and weekly/monthly cash inflows vs. outflows;
- Debt service forecasting (including debt covenant ratios);
- Capital budgeting analysis (NPV, IRR, etc.);
- Benchmarking analysis;
- Buy vs. lease analysis;
- Valuation; and
- Enterprise Risk Management (ERM) consulting services.
For a more in-depth conversation about how RubinBrown can help your business, please contact your RubinBrown advisor.
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