58th Edition — March 15, 2020
My guess is that the companies to come out of this the strongest are the ones already thinking their way through, and trying to plan.Joseph Haslag, professor of economics at the University of Missouri – Real Negative Shock to Come After Coronavirus – CFODive – March 11, 2020
1. Time to Reconsider Scenario Planning?
Scenario planning is far more than building a best case, worst case, and likely case into your financial model.
Scenarios first emerged after World War II as a tool for military planning. The U.S. Air force prepared for alternate strategies based on what its opponents might do. A few years later, Herman Kahn refined this scenario planning process for business in the 1960s.
According to the book, The Art of the Long View, the precise definition of ‘scenario’ is a tool for ordering one’s perceptions about alternative future environments in which one’s decisions might be played out.
2. McKinsey’s 3 Possible COVID-19 Scenarios
One of the best documents I’ve read for business leaders on the coronavirus outbreak is a briefing document McKinsey has updated twice since the beginning of the month. Their three scenarios include:
- quick recovery
- global slowdown
- global pandemic and recession
The writers then list possible economic impacts under each scenario.
Make sure you read the 7 actions they recommend. Your list might be different along with reordered priorities. This checklist applies to any business of any size.
3. Three Tips to Better Scenario Planning
When I build models, I start with units or activities first (like customer orders, projects, shipments, online downloads by prospects, etc.). Accordingly, do not just focus on just dollars, but prioritize the 5-7 economic units that drive the dollars in your business.
Next, stress test for each of those identified economic units. For example, stress testing customer shipments to a certain region where slowdowns are expected could be varied from 3-7 days late for a certain percentage of orders.
Finally, give your scenarios a name as McKinsey did in their briefing document. But go beyond the name. Create a possible narrative behind the name which will help team members creatively identify multiple strategies to attack each possible scenario.
4. A Simple eCommerce Example
I enjoy doing BI work in the eCommerce space. Below are three possible scenarios a medical device supplier selling exclusively online from its Nashville location near the airport should consider:
- After studying its list of vendors, creating 2 possible scenarios of its four largest vendors delaying shipments on recent POs over the next 90 days.
- Shipments to California customers being delayed under 2 different scenarios in which both are likely to happen – severity is the question.
- After a scan of 6 of its largest corporate accounts who are already in at-risk status, 3 potential scenarios are identified for customer payment delays due to their new soft demand.
All of your scenarios should lead back to the impact on cash and LOC capacity to fund short-term cash flow deficits. Whether you are using Adaptive Insights, Planful (formerly Host Analytics), or Anaplan, link your key unit drivers to the financials if you have not already.
5. Do We Need Some Humor?
As the family patriarch, after careful consideration and thoughtful deliberation, I’ve decided that when our children come to visit, they will have to bring their own TP.
This Week’s Podcast
Mark and Bruce continue the conversation on scenario planning, and the PracticeLink CFO also talks about how his team is keeping the dust from collecting on their 13-week rolling cash flow forecast.
Thank You For Reading
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Take care and have a great week. Always be learning.