Reduce business risk through scenario planning
There are enough what-if worries in our lives, everything from 'what if we don’t take action on climate change?' to 'what if I don’t make it home in time for the football?'. So, to help reduce the constant stress and uncertainty in business, we've put together this introduction to scenario planning, which should help you calm those 'what if' panics.
What is scenario planning?
Scenario planning is a powerful tool in your armory. Why? Because clients love it!
It’s a valuable conversation and it’ll capture your clients' attention. Getting them talking about their business and future business plan, rather than their accounts allows them to see the practicality of your advice.
Combining different sets of assumptions allows you to predict the outcome of any changes to a project or forecast and also flag trends that could lead to problems for the client. Set thresholds with your client, so if areas of their business start to go south, you can be alerted and catch them early.
Asking simple questions as part of your usual meetings will get the ball rolling - and you will be amazed at how quickly clients get into the swing of things.
Why is scenario planning important?
We’re all told that we should be working on our business, not in it.
And this is what every business owner would love to be doing, but with so much going on, it’s difficult not to get sidetracked. So scenario planning is there to get your client ahead of the game, with a clear head.
Meeting a manufacturing business, ask about whether they expect the price of raw materials to rise or fall in the next 18 months. Feed the information into Futrli and work with your client to put together an action plan based on the best and worst-case scenarios.
They’ll be less troubled by the future, knowing they have plans in place. They’ll be free to knuckle down on what’s happening in their business right now. Should the worst happen, they have effective, data-backed plans, ready to go.
"Be warned. There’s no point in making assumptions for the year then persist on the same path when something happens. The forecast changes, and so should your scenario with it." - Hannah Dawson, Futrli CEO and Founder
What type of scenario might shake the foundations of a business?
If you're unsure about what kind of questions you should be posing to your client, here are our top examples to ask your client:
- What if they lose their biggest client?
- What if prices rise by X%?
- What if they can’t collect receivables within X days?
- What if they can collect them within X days?
- What if they need to lower prices by X% because of competition?
- What if they increase selling prices by X% due to e.g. new product development and decrease the volume of sales by X%?
Creating a what-if allows you to alter more than one variable within your scenario to assess the outcome. It's vitally important to know which variables you’re testing and how the results will compare to other scenarios. The best practice in this approach is to display each scenario in a unique dashboard so that all outcomes are crystal clear, and you can compare the decisions directly.
The benefit of this approach to you and your practice?
- Client retention - clients love it and see the real effects it has on their business.
- Client acquisition - when your clients see the practical value of your service, they’re far more likely to refer you to other businesses - and not on the basis that their tax return might be a bit cheaper.
- More work - scenario planning naturally leads to the need for forecasting, tax planning, arranging debt, management accounts. It can be a great gateway to a full advisory package.
- More outbound referrals - scenario planning increases your ability to refer work to banks, solicitors, finance brokers strengthening your firm's position with key refers.
The feel-good factor of scenario planning in forecasting…
To solidify just how powerful scenario planning can be, here’s an example from Phil Beavan, our VP of Sales for the Northern Hemisphere, who recalls a story from one of his clients.
“Remember when that volcano in Iceland went pop and grounded flights across Europe? I remember a story from one of my partners who frequently used scenario planning with their clients. When disaster hit, they were able to quickly contact the client’s bank and tell them exactly how much debt they would need if the situation continued for a week, ten days, two weeks, three weeks, a month, etc.
Their bank manager was speechless. And more importantly, comfortable extending the client’s debt. The client was delighted and referrals were received from both.”