13 Aug 2020, 10:30 — 9 min read
Businesses that can effectively anticipate threats and opportunities are likely to be more resilient. They outperform their rivals and especially so during times of extreme turbulence.
As management teams move on from the initial firefighting period of the coronavirus disease 2019 (COVID-19) pandemic, attention is starting to turn to how their companies can survive and emerge from the crisis to thrive. Organizations must now turn to the risks that lie ahead and new opportunities that will arise from the situation. Businesses should be looking at how they can best leverage high-quality market intelligence and analytics to shape future strategy and decision-making.
In such circumstances, it is more important than ever to have a robust plan that addresses various scenarios. Companies need to demonstrate that they are ready to respond effectively and immediately to different situations. Data, lead indicators, and trigger points are management’s friends in a time of crisis, and scenario planning relies on all of these.
Scenario planning is one of the most effective management tools during periods of volatility. Scenario planning is vital in both identifying and mitigating possible risks and putting businesses in the right position to seize growth opportunities when they arise. It also helps increase the resilience of companies in times of uncertainty.
Also read: COVID-19: A change of direction for MSMEs
While scenario planning is highly useful when trading conditions are benign, they come into their own during a crisis. Grant Thornton’s scenario planning framework takes a systematic approach to help organizations build much-needed resilience in the months and years ahead:
Any risks and opportunities for each part of your business should be defined as precisely as possible so the impact can be assessed more accurately. Use numerous specific risks rather than a single generic risk: this will enable the company to make more accurate risk-impact assessments. An example of a risk would be delays in customer payments by an average of two weeks. An example of an opportunity, on the other hand, would be a competitor facing severe financial difficulties.
How likely are these identified risks and opportunities to emerge? When might they do so, and will they have a material impact on a significant part of the business? The likelihood of payments being delayed may be rated “high” due to a current emphasis on cash retention. The lead time will be “short,” while the potential impact could also be “high,’” mainly if sales are concentrated on a handful of customers.
For our opportunity in a competitor facing financial troubles, the likelihood of a competitor going through such difficulties could be “low” due to current government support mechanisms. The lead time for this opportunity could be “medium,” depending on how long this support remains. The potential impact could be “high” due to the opportunity for significant growth through an acquisition.
Having a financial dimension to your scenarios will help target your action plan more accurately. Be specific in terms of cash and profit impact. Set out timescales for when any changes in your cash situation and profit or loss may materialize. What might the position be after three months? After six?
How does this apply to the risk and opportunity we have discussed? For our delayed customer payments example, the impact is likely high, with cash reserves already under pressure. For the opportunity seen in a competitor facing financial difficulties, the potential impact of a competitor struggling would also likely be high. The demise of a core competitor could present a significant opportunity to grow rapidly through mergers and acquisitions or organic market share.
Data becomes an asset when transformed into usable information that results in intelligent decision-making. What data will provide the earliest possible indication that a particular scenario is emerging? Lead Indicators need to be early warning signals to give the organization time to take action quickly. Use sources such as employee surveys, intelligence from customers or suppliers, or information provided by trade bodies or market analysts. Closely monitoring your daily cash trend data could indicate slower customer payments. Market monitoring and accessing intelligence from customers could provide a warning that a rival is in difficulty.
Ensure that activities are detailed, and address each risk or opportunity. Each action step should be set out along with its schedule. If payments are slowing down, you could immediately contact existing customers, implement a payment on order policy, or offer prompt payment discounts.
Ensure you have ready access to the data required and can monitor it easily. However, data management, integration across systems and functions, and alignment with business strategy are also essential elements in enabling data and analytics to support scenario planning. Do you have ready access to the data identified as crucial? Is this data reliable and easy to update? Is it monitored systematically?
Businesses should carry out a red/amber/green (RAG) rating of each indicator to set out if action is needed (red), if it may be needed soon (amber), or if no action is required at present (green). A further RAG rating exercise can be carried out to assess the effectiveness of any immediate steps you take. Because the risk that clients delay payments and the potential financial impact are seen as “high” and potentially imminent, this risk should be marked red. As business distress may be mitigated due to government support packages, this opportunity would possibly be marked green.
Potential scenarios and planned responses can be shared with stakeholders from staff and owners to regulators, lenders, and, if necessary, customers. This information includes the range of outcomes and impact on profit or cash, the level of investment required (capital and time) and source of funding, the peak cash requirement, the effect on lenders’ working capital covenants, the action plans, and the resourcing needs. Stakeholders will be impressed by a more rigorous approach to planning, rather than merely revising outdated forecasts.
Scenario planning is an ongoing process, especially during turbulent times. Action plans should be regularly assessed for effectiveness. Risks, opportunities and potential impacts should be continuously updated. Amend action plans following these reassessments. Finalize new action plans and communicate them with stakeholders.
Take this opportunity to build resilience. For many businesses, the current downturn in economic activity means scenario planning is more critical than ever.
Successful scenario planning is not merely about identifying threats and new ventures. It also provides practical solutions that allow businesses to mitigate risks that ensure they are in the right shape to take advantage of those opportunities the moment they emerge.
With scenario planning, businesses could address new considerations such as investment opportunities, emerging growth markets, evolving cross-border trade, opportunities from regulatory decisions, and the lasting impact of short-term change on work environments. Use scenario planning for managing in and beyond the immediate crisis. Stakeholders will be more impressed with a plan than a “guessed reforecast.”
Article by Mai-Sigue Bisnar
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Posted byYusoph Aquino Maute
Yusoph is a senior manager in the Audit & Assurance Division of P&A Grant Grant Thornton. He is concurrently designated as senior manager of the Firm’s Technical...