Scenario planning means preparing for different situations that a business can face. It is closely linked with the cash flow management of a business but takes a comprehensive approach.
Let us discuss what is scenario planning and whether it is useful for small businesses.
What is Scenario Planning?
It is the process of forecasting different events and possibilities in the future and predicting the results or outcome of these scenarios.
Scenario planning or analysis can be performed for any business function. It is commonly linked with cash flow forecasting, budgeting, and planning.
It enables businesses to assess possible future scenarios and analyze positive and negative outcomes. It helps businesses in developing plans to manage these situations and prepare in the best possible way.
Unlike cash flow forecasting, it is a comprehensive approach to dealing with uncertainty and risks arising from controllable and uncontrollable measures for a business.
Types of Scenario Planning
Businesses can prepare for uncertainty by evaluating different types of scenario analysis. Here are the most useful types of scenario analysis.
Quantitative Scenarios
These are financial projections of a business and are used to evaluate the best and worst financial outcomes of the business.
In practice, it involves using monthly and yearly budgets, cash flow forecasts, project evaluations, and capital resource management.
Qualitative Scenarios
These factors are qualitative in nature for a business. For example, the timing, price, and place to launch a new product for a business and the possible outcomes.
These factors include scenario assessments in marketing, HR, and compliance segments of a business.
Operational Scenarios
These scenarios relate to the internal competency of a business. These involve managerial and operational decisions of a business such as reducing the labor cost, purchasing new machinery, and so on.
Scenario Planning for Small Businesses
Unlike the common notion, scenario planning is more important for small businesses. It helps small businesses to plan for uncertain future events.
The foremost advantage for small businesses is to get prepared for emergencies like economic meltdowns as we have seen in the recent past due to Covid-19 pandemic hardships.
Scenario planning helps small businesses to remain proactive and take decisive actions when in trouble without building a plan from scratch.
It is useful for small businesses to evaluate the best possible outcomes for different situations. It can lead small businesses to proactively plan for increased sales, better cash flow management, and develop sustainable growth.
Generating Use Cases for Scenario Planning
Scenario planning can be a complex task, particularly for cash flow forecasting scenarios without using cash flow management software.
Here is a simple three-step approach for you to develop a scenario plan for your business that you can use for cash flow management and other cases as well.
Average or Base Case
These are your base or average scenarios that your business has developed over the years.
For example, your average monthly sales, average variable expenses, and so on.
Worst-Case
Consider the worst possible situations for your business in different sections. For instance, if a pandemic forced your outlet to close for a month and you have zero sales.
Replicate the approach with marketing failures, labor shortages, and financial management situations.
Best-Case
These are the ideal or targeted scenarios for your business.
For instance, if your sales skyrocket to 300% by the end of this quarter. It helps you utilize the best opportunities available.
Integrating Scenario Planning in Cash flow Analysis
Integrating scenario planning into cash flow analysis is pivotal for your success. Doing it manually can be a complex and time-consuming task.
This is where you can seek perfection with accounting software like Pelrio which offers cash flow management as well as scenario planning.
You can forecast a cash flow scenario using Pelrio solution to analyze test cases.
For example, you can use your average revenue (5%) to set it as the base case. Next, you can set a revenue forecast of 0% for the next month for the worst-case scenario.
Similarly, you can set the best-case scenario with revenue growth of 15% for the next quarter.
Advantages of Scenario Planning
Scenario planning has the following advantages:
- It helps businesses become proactive and plan for feasible future events.
- It helps in managing risks and uncertainty occurring from unwanted situations.
- You can turn threats into opportunities if you are well-prepared with planning.
- It is a comprehensive approach for any business that integrates the efforts of finance, marketing, HR, and Legal sections of the business.
- The process prepares documented plans which can be used even in the absence of key team players when needed.
Small businesses can use scenario planning tools without hiring full-time specialists and incurring huge costs.
Disadvantages of Scenario Planning
Scenario planning has some limitations despite having enormous usefulness.
- It can be a lengthy and complex task to collect data, analyze outcomes, and plan accordingly.
- Small businesses often lack the skills and expertise to develop scenario planning.
- Business and financial scenarios change quickly. Thus, adjusting to the plan would need frequent changes.
- It does not guarantee the outcomes as planned and the execution part would affect the results as well.
Challenges with Scenario Planning for Small Businesses
Small businesses have adopted cash flow management software to maintain their cash flows. Similarly, they must adopt financial management tools that include scenario planning and cash flow forecasting at the same time.
Pelrio is an exceptional tool that can help small businesses to cope with these challenges in scenario analysis.
Uncertainty
Uncertain events cannot be forecasted accurately. Small businesses can only develop contingency plans to cope with uncertainty.
Building a collection of data sets for uncertain events can be a challenge for small businesses.
Limited Resources
Small businesses have limited financial and human resources. Small business owners often run a small team or do it by themselves.
Either way, without using a financial management tool, you’ll find it hard to develop scenario analysis.
Lack of Skills
Even if you have sufficient financial resources, you may lack the skills to conduct challenging tasks like cash flow forecasting and scenario planning.
One way to eliminate this deficiency is to outsource or look for automation.
Integration of Business Objectives
Forecasting and planning also require integrating the business objectives. For example, you must carefully embed your revenue growth target of 15% by the year-end into your scenario planning.
How Pelrio Can Help You with Scenario Planning?
Simulating multiple scenarios and developing actionable plans is challenging for a business of any size.
Small businesses can particularly face challenges in developing forecasts and financial insights with their limited resources.
Pelrio is an exceptional financial management software that helps businesses control their financials as well as develop scenario analysis.
Here are a few ways Pelrio can help your business:
Time-Saving: Automation of cash flow and scenario planning will save you an enormous amount of time. You’ll be able to forecast multiple scenarios with a few clicks.
Data Availability: Once you input key data metrics and develop a plan, it will remain with you forever. You do not need to invest the wheel every time.
Multiple-Scenario Building: Changing the key data metrics will help you develop multiple scenarios for cash and other business functions.
End-Case Analysis: Once you have different scenarios, you can proactively plan for your business accordingly.
Flexible and Cheaper Solution: Using Pelrio software is a flexible and cheaper solution for your business than doing it manually and hiring new staff.
About Pelrio
Pelrio is a simple expense & cashflow management tool that utilizes artificial intelligence to provide real-time analytics, dynamic forecasting, and expense control for small business owners
Questions, comments, or feedback? We’d love to hear from you. Get in touch by sending an email to info@pelrio.com
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