Why scenario planning is crucial to business recovery

0
331

By Sheraz Zaman of Brooks City accountants

As the lockdown eases, many small business owners are looking forward to picking up where they left off. However, there is still a lot of uncertainty going forward and trying to figure out what the “new normal” will be.

Who would have thought that 12 months ago more than 304,000 businesses would seek almost £15bn in financial support via government loan schemes and that 7.5 million employees would be furloughed.

While the pandemic was unfolding and small businesses were asked to shut their doors, all strategic planning, budgets and revenue goals went out the window.

With so many unknowns to getting back on track, Chartered Accountants here at BrooksCity offer a robust tool to help plan your business recovery and get ready for the future.

What is scenario planning

Scenario planning means making multiple assumptions of what the future may be and how your business will be impacted by that future. It’s identifying multiple uncertainties and the different realities your business might be faced with.

Making an accurate prediction about the future during these unprecedented times is very difficult. This is why creating multiple scenarios can help SMEs become aware of what’s most important and how to thrive in different outcomes.

In doing so, small business owners can devise better strategies and products that are adapted to each scenario and become better prepared for what comes next.

How to use scenario planning

When first starting out with scenario planning, it’s important to keep in mind that the end goal is not about making an accurate forecast as we mentioned.

Instead, SMEs should aim to explore what could happen and how they can thrive in these different scenarios.

Scenario planning can be done in three steps and small businesses can start with four-to-five scenarios. This is usually sufficient to cover the main points.

Identify uncertainties

Every economy big or small, even local, has certain driving forces that influence its growth. These can be anything from the multicultural aspect of the neighbourhood your shop is located in up to a global pandemic turning the world upside down.

And each of these driving forces is also a source of great uncertainty the world around changes and evolves.

The first step is to start by identifying these major forces at play and to make a list. To get started, here are some areas you could focus on:

 

  • Changing demographics
  • Changing demand
  • Social factors
  • Environmental factors
  • Technology
  • Political influences

Once you’ve done that, pick the top two that would have the most impact on your business.

For example, the two most important uncertainties for a farmer could be demand and crop success. Weather can influence the success of the crop and the farmer’s ability to meet the demand or exceed it which would results in a surplus while prices vary based on a multitude of other factors.

Develop scenarios

Then, to develop your scenarios, place your first factor on an X-axis and your second factor on a Y-axis to form a matrix when drawn up. In our farmer’s case, this could result in the following four scenarios: “high success & high demand”, “high success & low demand”, “low success & high demand” and “low success & low demand”.

Assess implications

Now that you have your fours scenarios start to examine the implications of each. Dive deeper into what the impact could be and what you would do in each case.

While so far this approach has been highly subject this doesn’t mean you shouldn’t include some data to further refine the scenarios. In our example above, think about what the level of sales be and the effect of those sales on the business.

Tips for success

When working on creating your scenarios try to avoid getting bogged down by an infinite number of possibilities. Focus on the two main driving forces and the resulting four or five scenarios at most.

While considering your strategy don’t do it based on a single scenario but rather take into account all of them. The scenarios give you a good bird’s eye so you can generally be better prepared for what’s most important.

Take a long-term view for each scenario and avoid getting short-sighted by the very immediate business environment your facing. The world is in a constant state of change and your goal should be to stay agile and prepared for what’s to come. Whether that’s taking advantage of opportunities or ensuring the survival of the business.

In conclusion

Scenario planning is used by millions of organisations around the world and both big and small companies have found great success in using it as part of their strategic planning. Just remember that scenario planning is one tool but shouldn’t be the only tool. As part of a planning toolkit, it can give small businesses a boost, helping them better manage the uncertain business environment we face today and create a more robust future of their vision.

Sheraz Zaman is Chartered Accountant with over a decade of experience helping SMEs grow and a partner at BrooksCity, a London based Chartered accounting firm.