Integrating scenario analysis to manage cash flow challenges
By ATB Financial 26 May 2020 5 min read
Managing cash flow continues to be a major issue every business must face, especially in 2020. Today’s new reality of uncertainty urges business leaders to harness a critical tool to help mitigate risk in this area: scenario analysis, or mapping.
Planning ahead and forecasting various outcomes from the effects of COVID-19 gives Alberta businesses many advantages—they can take actions and recognize their impacts; they can estimate cash flow backed by data; and management can ensure the business is appropriately staffed to meet demand. This integrated approach casts a wide net over the entire enterprise and buoys faith among customers that the business is well prepared to face the roadblocks ahead.
“Scenario analysis is about making assumptions,” says Kelli Elbertsen, Relationship Manager at ATB. “For each scenario you will want to look at the fixed and variable costs and what can be changed in each area. Which costs to your business are negotiable? Sometimes scenario analysis can historically be based on event-based outcomes, but the situation with COVID-19 is unprecedented and changing hourly. This is why it’s important to make assumptions to the best of your ability.”
She adds that scenario analysis encourages business leaders “to be proactive rather than reactive. You’ll want to add in inputs such as the phases of Alberta reopening, and also include a lot of what-if questions, such as, ‘What will happen if pandemic insurance doesn’t pay out what I think I’m owed?’”
Building a resilient business strategy amid the pandemic
If you want to make a solid scenario analysis framework, remember that a scenario, or possible future narrative, will usually impact many variables. For example, a recession scenario would likely ripple into a number of performance drivers such as unit sales volume, pricing, cost of materials and human capital turnover.
Scenario analysis can estimate the total consequence of the narrative on a business and trigger the development of a response.
In each future narrative you see for your business, clearly lay out your assumptions. Because COVID-19 has dramatically affected the economy and public health, let’s begin with those two pillars, which will foster many assumptions to include in your scenario analysis.
- How can you address changing Health Canada requirements for social distancing?
- What will some of the results of months of social distancing and other actions taken to reduce the spread of the virus look like?
- What happens if an employee contracts COVID-19?
- What precautionary steps can I take to protect other employees if one tests positive for COVID-19?
- What treatment options are (or will become) available?
Health Canada has also prepared a list of health assumptions for your consideration.
Economic and business assumptions
- What effect will COVID-19 have on employment and staffing levels at my business?
- How will the pandemic influence our customers and our revenues and collection periods?
- What supply chain challenges will worsen or taper off in the coming quarters?
- What will the market look like once repayments and sales resume?
As PwC notes, scenario analysis lets you “proactively manage where, when and how disruption will impact the availability and effective utilisation of skills in the business...” and also “prioritize actions to protect customer relationships and commercial interests.”
Because scenario analysis is helpful to making important decisions, cash flow strategies can also be strengthened when management seriously thinks about what may befall the business in the quarters ahead.
Big data and business continuity planning
Facing the pandemic with scenario analysis means bolstering each alternative outcome with your best guesses. They should all be guided with as much data you can gather—the bigger the better. If your analytics software is comprehensive enough, include as much as you can in each scenario.
“If you have data that concludes what worked and what didn’t, whether that comes down to cash flow or liquidity, that information can be used to shape future predictions for businesses,” says Elbertsen.
She identifies another critical piece of the scenario puzzle—how to activate your business continuity plan (BCP), which should be in place prior to squaring off against any crisis. A BCP will ensure everyone is on the same page when the business needs to adapt to a major event.
“If you don’t have a BCP or include details of that plan in your scenario analysis, you’re basically making things up on the fly, which can be costly,” Elbertsen says. “So if you didn’t create one now, you should, because this is not the type of plan you want to push under the rug and tackle on a rainy day.”
Online shopping isn’t going away any time soon
Consumers are recalibrating their spending by turning towards e-commerce options, which were popular long before brick-and-mortar stores shuttered their windows. Now more than ever, scenario analysis requires careful consideration and calculated bets on how online channels will be the nerve centre of a business.
Every company approaches their online portals differently, so it’s critical to envision what your technical needs and innovations may be in the coming months. That may mean assessing how your product development teams have progressed recently and what challenges they face during the pandemic. Supply chain management issues also have to be taken into account if you’re making goods requiring partners beyond your own internal staff.
Online success could also encourage you to be creative about possible scenarios related to opportunities you can seize amid the pandemic and its fallout. Scenario analysis ingredients could include ways your business can open a door that may have been closed before, such as delivery, or creating wholly new products to serve the needs of a changing consumer base.
Lastly, Elbertsen advises, “Be sure that you write down best-case and worst-case scenarios and everything in between. And be clear about the cash flow you expect to have on hand in each scenario, which is essential to figuring out how long your runway is.”
As management teams look for best practices to make part of their regular toolkit, they should consider scenario mapping and analysis as a key component that will boost their response times to various outcomes and reduce the risk of large-scale consequences from this crisis and future emergencies.
For a deeper look into cash flow strategies as we begin the process of moving business forward, watch our recent webinar on demand, titled Understanding cash flow in times of increased uncertainty with ATB Sales Director, Jeff Purdy and Blaine Bertsch, Co-Founder and CEO of Dryrun.
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