Financial planning is a key tool that can help a business manage difficult circumstances and take advantage of opportunities. It has proven particularly useful since the COVID-19 pandemic and its fallout, which created a great deal of economic uncertainty that many businesses have struggled to manage. Keep reading to learn about financial scenario planning and how it can help your business.
What is Financial Scenario Planning?
So, what exactly is financial scenario planning? This involves identifying various factors that could impact your business, analysing them, and creating a plan to ensure you are well-prepared if this scenario arises. Scenarios can involve market trends, regulatory changes, economic changes, and many other factors. Financial scenario planning is all about protecting your business against factors that could damage but also taking advantage of any new opportunities that arise.
How Does it Help for the Future?
Financial scenario planning is a useful tool for improving foresight. The business world can be unpredictable, and there are many factors that can impact the success of your company. The COVID-19 pandemic is a good example of this as an external event that caught the majority of businesses off guard, with many finding it hard to survive. With a proactive approach, businesses can minimise the impact of potentially harmful scenarios or capitalise on new opportunities that are presented.
Agility is key to long-term success in business and financial scenarios planning allows businesses to adjust their operations and strategies to optimise business performance under different conditions.
How to Financial Scenario Plan
To create financial scenario plans, you first need to gather data and insights to create a foundation for scenarios. First, you should identify the key questions or issues which is at the core of your uncertainty. You can then brainstorm different factors that could affect the key issue, such as supply chain issues, new competition, changing customer habits, etc. Next, you should analyse the non-business factors using a PESTLE (political, economic, social, technological, legal, and environmental) analysis.
The next step involves creating a list of critical uncertainties, which will be the factors that have the biggest impact on the business and have the most uncertainty around them. You should then narrow this down so that you have between two and five scenarios to create a plan for. It is then a case of taking each scenario to its logical end, looking for options that make sense in every potential scenario, and defining early indicators to watch out for. It is also intelligent to use accountants in your sector to help with planning, such as hospitality accountants.
Financial scenario planning is critical for preparing your business for potential future scenarios, which is key during such an uncertain economic period. In addition to allowing you to create plans that will protect your business against future threats or capitalise on new opportunities, financial planning scenarios can also provide peace of mind.
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