Scenario Planning: A Roadmap Through Recession and Inflation
For the first time in well over a decade, businesses are looking a possible — perhaps probable — economic recession in the eye. With many companies just now recovering from the pandemic, everything from cash flow and capital investments to debt covenants and labour are once again clouded by uncertainty.
This additional risk demonstrates the never-ending importance of scenario planning and sensitivity analysis, tools that allow a company to identify and strategise for countless what-ifs before uncertainty puts operations on the ropes. Unfortunately, many financial planning and analysis teams (FP&A) aren’t accustomed to integrating so much risk into their financial models, leaving the entire organization susceptible to the unknown.
Start With Cash Flow
First and foremost, when uncertainty is so pervasive, cash flow forecasting becomes an absolute necessity. Otherwise, leadership has no way of gauging how well an enterprise can navigate the countless twists and turns created by external forces like a pandemic, rising inflation, or shifting consumer expectations.
In that sense, cash flow forecasting is the foundational piece to more comprehensive scenario planning, a reference point FP&A can use to plan for risk across different scenarios. For example, without cash flow forecasting, an organization can’t adequately prepare for any larger fixed or unexpected costs. In such a case, a cash flow forecast can dictate if an enterprise needs to revisit its payables process or capital investment strategy to free more cash, areas that are invaluable to the budgeting process as well.
