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August 28, 2020

How to Use Scenario Planning to Navigate a Crisis

By: Guest Author

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By Marc Seewald, Vice President of Product Management, Oracle

If there’s one thing we’ve learned in 2020, it’s this: in a crisis, every assumption you’ve made about your business is wrong.

COVID-19 has been a global shock—economically, socially, and psychologically. Consumer behavior, businesses, and societies continue to evolve in ways we’ve never seen before. Without historical data and trends, how can we create forecasts?

In a crisis, trying to predict a single outcome is a recipe for disaster. When everything is uncertain, we need to plan for multiple outcomes. This is where scenario planning comes into play. It can help us visualize the future, model a range of potential outcomes, and help you decide how to respond to each one.

As this crisis evolves, some things are returning to normal, while many others aren’t. You should ask yourself, “Will we return to business as usual, or will we see fundamental changes in our business model, how we serve customers, or gain market share? Will there be new opportunities that arise, and how do we best position ourselves for a post-COVID environment?”

6 steps for scenario planning

One of the biggest advantages of scenario planning is that it can clearly demonstrate cause-and-effect relationships, showing how each potential scenario might affect your budgets and forecasts. Let’s take a closer look at the six steps involved in scenario planning:

1. Define scope, issues, and time horizon

Unlike your long-range plan (LRP), scenario modeling focuses on the near term—the next six to 12 months. One to two years out might still be relevant, depending on your industry, but in a crisis where survival is paramount, you should focus on your immediate needs.

2. Define key drivers

Traditional strategic plans use key business drivers (such as market share) to model sales. In a crisis, assumptions by customer segment or industry might be more appropriate. Relevant variables might include access to capital, workforce productivity, or supply chain stability. If there’s a government stimulus package, the size and timing will affect workforce retention, capex, and your income tax strategy. Ask yourself: What’s important right now to help keep us running? Isolating the most important drivers for your business will be key to successful scenario planning.

3. Collect and analyze data

Collect both quantitative and qualitative data to support your key assumptions. Combine information from both internal and external sources. For example, there’s a lot of free data available from sources like Harvard Business Review about the macro-economics of past pandemics.

4. Develop scenarios

Keep the scenarios to a manageable number—no more than 5. The number of scenarios you model will depend upon your organization’s data and patterns, but it’s important to identify which ones are most important to you.

5. Apply scenarios

Test your scenarios by identifying what the downstream impacts will be on sales, cash flow, capex, etc. Identify metrics and KPIs you want to monitor. Consider the thresholds that would require action—for example, if cash on hand dips below X, we should look at loans and/or deferred payments. Ultimately, you’re creating a company-wide plan. It must be actionable, and accessible to all parts of the enterprise.

6. Maintain and update

Monitor the plan regularly. Report often so you can respond quickly to changes in KPIS. You might need to augment your current bottom-up forecasting to ensure that the business is tracking towards key assumptions.

Comparing scenarios

Your model should let you easily compare scenarios side-by-side. If one scenario model across geographies, while another models across product lines, comparing the outcomes will be a challenge. With the right scenario planning software, you can easily duplicate your first scenario—including all the key drivers—and then adjust the inputs so you’re comparing apples to apples, rather than apples to submarines.

You can also evaluate risk and perform stress testing across each scenario using a type of data modeling known as Monte Carlo simulation. This technique allows you to quickly explore a range of outcomes across multiple variables. It can be hugely valuable when there is a high degree of uncertainty in assumptions.

Cash is king

In a crisis, it’s critical to focus on your balance sheet. Consider impacts such as funding the business, customer payment delays, and bank covenant ratios. You can also complement top-down scenario planning with bottom-up re-forecasts. For example, you can collect a bottoms-up short-term weekly forecast on uses and sources of cash, to help you validate your top-down assumptions on liquidity. All of these capabilities are available in Oracle Cloud Fusion EPM.

The value of scenario planning

The point of all this isn’t to obsess over possible outcomes. It’s to help prepare your organization for whatever might happen. When you have a plan for multiple outcomes, you can communicate those plans to employees, customers, investors and other stakeholders, instilling confidence in your organization and its finance leadership. Your team can play a critical role for C-suite leaders seeking better decision-making, insights, and relevant information to help them navigate a crisis.

Learn how to chart a path to growth with scenario planning.

This is a syndicated post, view the original post here

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