The UK has endured historic upheaval over the last decade. The nation’s departure from the EU, the economic aftershocks of reduced trade, government missteps, a global pandemic and ongoing geopolitical tensions on the other side of Europe have all contributed to an unusually rocky period of time for households and businesses alike.
Even with the relatively steady hand of a new Labour government, concerns abound regarding the future of interest rates – particularly with respect to Chancellor Rachel Reeves’ austerity-steeped prospective October budget. The truth is that there’s no telling what the future will hold for businesses in the UK, an uncertainty which can lead to vacillation amongst management. As a business leader yourself, you may be wondering how best to tackle the uncertainties of the coming years. The answer, at least in part, is financial scenario planning.
What is financial scenario planning?
But what, exactly, is financial scenario planning? In short, it is an undertaking by which a business can prepare for multiple different economic or industry eventualities. More accurately, it is a process by which contingency plans are created for different potential scenarios, and potential outcomes theorised. The plans are then tested and evaluated for efficacy, and re-tooled accordingly. Another way of looking at financial scenario planning is, quite simply, as planning for ‘what ifs’.
How is financial scenario planning helpful?
Planning for ‘what ifs’ might initially seem like busywork for the sake of it; after all, why not invest time and resources into managing the issues right in front of you? But failure to properly plan for any number of potential eventualities could in fact be damaging for your business.
Financial scenario planning gives you the opportunity to get deep into your business’ finances, and gain a proper understanding of your short-term or long-term financial resilience. Running these potential scenarios can reveal weaknesses that currently exist in your business, be it a lack of legal representation or an inadequate approach to cashflow.
Anatomy of a financial scenario plan
What, then, does a good financial scenario plan look like? There are numerous different ways to approach this, and some ways are more beneficial for some businesses than others (dependent on size and spread). The most common approach, and perhaps the easiest to start with, is a three-pronged approach.
This means preparing plans for three key scenarios: the base-case scenario, the best-case scenario, and the worst-case scenario. The base-case scenario describes the present trajectory of your business, as projected from the previous one to three years of finances. The worst-case scenario assumes a downturn, and potentially a short-term financial shock in order to test short-term resilience. The best-case assumes considerable growth and expansion.
Within each plan, you should be considering the various ways your business can react to change – whether by leveraging assets, reaching out to investors or restructuring internally. With these three plans, you can adapt to practically any medium-term shift in business fortunes.
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