Scenario planning helps businesses navigate an uncertain future by planning for various potential future environments. While it may seem like more effort than it is worth for small and medium enterprises (SMEs), one need only look back over the past 18 months to appreciate the importance of planning for an uncertain future, says Alex Appleby, Retail Capital Head of Treasury.
“While it is very unlikely that many business owners would have predicted or budgeted for a virus pandemic – there were certainly warnings signs leading up to the countrywide lockdown – prudent businesses would have had a worst-case scenario (or very quickly developed one) within their planning. These usually entail disaster situations,” says Appleby.
“This is not about being a pessimist,” explains Appleby. “Scenario planning will touch on all ends of the spectrum from the most favourable to the most reasonably difficult. In essence, it helps business owners understand how various events or situations will affect their ability to do business. This enables the various arms of a business to be prepared – operations, finance, support, and everyone else, can plan their responses accordingly.
“We instinctively understand the need to ‘save for a rainy day’. Now, we may not want to endure a rainy day, and perhaps we don’t think it will rain any time soon, but by saving for its potential arrival means that we know certain things will be taken care of. This is how businesses should approach having a plan in place for various scenarios,” he says. He adds that all plans will be fluid and need to be updated as events and assumptions evolve.
Depending on the size and complexity of a business, scenario planning can become a complicated and time-intensive exercise, which may put small business owners off. “Small businesses owners are generally on the ground running the business. Their focus is on sales, customer relationships, and operations, while at the same time overseeing finance and their employees, etc. They cannot imagine freeing up the time to complete the exercise, or find the money to pay a consultant to do so,” says Appleby.
However, he says that even in these cases, where micro-enterprises are being run by small teams with little time and few resources, they would do well to perform at least a rudimentary scenario-planning exercise. “At the very least, even if the business owner works to put a business continuity plan in place, the exercise holds immense value. Again, in the context of Covid-19, it is evident how this type of planning would have helped many businesses,” he says.
SMEs should begin with the big picture. “Start with the pandemic. We are now in a third wave – what are the implications of the vaccination drive taking longer than the fourth wave possibility? If it picks up and runs ahead of schedule, how is that likely to affect the shape of the pandemic and business conditions?
“The big picture also includes things like global geopolitics and the oil price, the fourth industrial revolution, how technology is likely to change business, local politics and governance and how various outcomes are likely to affect the economy.”
He says that once an SME has considered the main drivers of the big picture, the next step would be to decide which of them have the most impact on the business.
“If you are in tourism, for example, these may include the pandemic’s impact on borders and tourists resuming international travel, local tourists and their tastes and buying power, the weather, and perhaps legislation specific to the industry. If you’re in hospitality, perhaps it is food prices and consumer demand – more than a year into the pandemic we are all developing more insight to enable businesses to plan for the current wave of infections and the period beyond this when transmissions subside. Try to stick to the two main drivers most likely to impact your business,” he says.
Once the main drivers have been defined, the business owner should draw up various scenarios that could reasonably play out, and then consider how the business would react, and importantly, what needs to be in place to enable the business to make those calls. If a business requires a funding partner to help it scale during favourable scenarios, then building those relationships now, rather than reacting in the moment, makes the most strategic sense.
“Carefully consider the implications of the different scenarios and start planning your strategy and goals, cognisant of these scenarios,” he says, adding that it is important not to feel as though every possible scenario and every possible outcome should be analysed. Not only is this impossible, but it would become counterproductive.
Rather, the goal of the exercise is to empower an SME and its leadership team to be able to respond quickly and effectively to whichever changes occur in the world that would affect the running and profitability of the business. It is an exercise in building resilience.