We manage uncertainty in the financial planning process through scenario planning. You can use scenario planning as part of your year-end planning strategy to better anticipate potential problems and opportunities in your business and create a plan around how to respond.
Why Use Scenario Planning
The last few years have brought with it a lot of uncertainty, and 2022 is shaping up to be no different. As we go into next year, businesses are facing inflation risk, labor and talent shortages, and many other business-specific risks or opportunities. For consumer goods companies, 2022 also brings with it unprecedented supply chain issues that have led to high inbound freight expenses and inventory delays.
You’ll want to begin with Plan A, which will be your base plan and your most likely scenario. This plan includes a balanced view of risks and opportunities. If you only created one plan, this would be it. But because you are a savvy financial planner, you aren’t going to create one plan. You are going to create at least three.
Your second plan is a Plan B. This should be your worst case scenario. It can include things like rising costs, loss of distribution or key customer accounts, and labor shortages. What would you do if these issues arise? How would your business survive? Your goal here is to think about how you would aggressively cut expenses in order to support high costs and low revenue and leave your business with enough cash runway to survive the crisis.
Plan A+ on the other hand is your absolute best-case scenario. Costs are reasonable and you are growing at a rapid pace. But new issues arise, such as how to fund the growth, how to hire quick enough, and where to invest in key systems and processes to support a business in hyperspeed. While these sound like “good problems”, they are still in fact problems and planning for this now will allow you to think through solutions so your growth potential does not outpace your ability to deliver your products or services.
These plans and other scenarios will help better prepare you for any unforeseen changes in the business environment, giving you a better handle on what to do should the best, or worst, occur.