Planning for possible future events is critical to move companies forward, helping leaders manage risk, identify opportunities and find the next right move for the organization. It’s especially important during uncertain times, when leaders are called upon to navigate unforeseen risks that can arise overnight.
But there’s the challenge: Scenario-planning is most difficult during periods of high volatility—just when organizations need robust contingency planning the most.
Despite the difficulties, CFOs have significant opportunities to renew their focus on scenario planning and use strategies and best practices that build a more resilient organization. Here, we’ll share tactics and insights that can help you prepare for unknown contingencies down the road.
Start with a focus on data
Reliable access to data forms the foundation for scenario planning. CFOs must be able to layer the organization’s first-party data over reliable third-party data to make predictions and plan accordingly.
“Some of the biggest risks to organizations come from outside the company, from the economic environment to new legislation to shifts in the political environment,” says Tony Grayson, vice president and head of Commercial Card Optimization and Consulting at U.S. Bank. “Scenario planning is about looking at those trends and being able to determine how these shifts will affect you.”
CFOs grappling with data silos, though, may not be able to generate the comprehensive insights they need to create accurate forecasts and corresponding contingency plans. So the first step is often a critical look at the organization’s data strategy to assess:
- Data quality and reliability
- Level of integration across data sources
- Level of access to real-time data
From there, CFOs can suggest the ideal next step, such as investing in integrations or unified platforms to break down data silos, looking for opportunities to integrate additional data sources, or investing in advanced analytics capabilities.
Devise a framework to triage risks
While risk management is often a central goal of scenario planning, not every risk poses a significant threat to the organization. It’s important to start planning by identifying mission-critical initiatives—the processes and workflows that need to continue to support the company’s operations, no matter what happens outside the organization.
These initiatives should be the first priority in scenario planning, says Grayson. “Identify the bare minimum that these processes and workflows need to continue and build your contingency plans around that.” From there, you can expand your planning to incorporate secondary risks until you feel satisfied with the overall level of risk management.
Plan for ‘sunny days’ and ‘rainy days’
Ultimately, the goal of scenario planning is to be ready for anything. That means creating a broad spectrum of forecasts to plan for as many scenarios as possible.
If you’re focusing too heavily on sunny-day forecasting—what to do when times are good—you miss opportunities for risk management, Grayson says. On the other hand, focusing too much on what to do in the worst-case, or rainy-day, scenario may mean you’re less prepared to capitalize on opportunities for growth.
After all, it’s important to remember that growth opportunities come with their own challenges, such as how to optimize your supply chain to meet a surge in customer demand, or how to increase headcount when you need to expand your capabilities. Scenario planning for each eventuality allows you to make the most of any environment—no matter what’s happening in the economy around you.
Ground scenario planning in practical actions
Just as it's important to plan for a range of scenarios, it’s important to have a plan in place to translate your forecasts to clearly defined actions.
“Contingency planning should not be a thought exercise. It should inform a dry run of what you’ll actually do when a situation occurs,” says Grayson. “For example, your scenario planning might include processes to regularly back up your system to enable key operations in the event of an outage, but it’s equally important to confirm that you’ll actually be able to access that data when you need to.”
Consider a series of dry runs that allow you to spot gaps or challenges within your scenario planning so you can adapt your strategy accordingly. This way, you can feel confident that you’ve done everything possible to ensure the plan works smoothly in practice.
- Pro tip: It’s equally important to ensure your organization has the financial resources needed—for example, sufficient cash flow or access to capital—to execute contingency plans. Use this exercise to create a list of financial must-haves to successfully deliver on your plan.
Continue to fine-tune your forecasting strategies
Contingency planning is not a “set it and forget it” practice. It's an ongoing strategy that needs to evolve over time.
After all, market dynamics or changes within the organization can create risks you’ll need to manage and shifts in strategy will change how leadership responds to new environments. Additionally, turnover within the organization requires regular check-ins to ensure the team can still implement contingency plans.
Check in on your scenario planning regularly to ensure your plans still serve the organization’s needs. This exercise also shows you if the organization is continually meeting the financial must-haves you identified earlier in the process. If you need to expand your access to capital or improve cash flow, for example, you can take action now to ensure the organization has what it needs.
Explore how to transform your plan into action
In today’s dynamic economic environment, leaders need to invest in scenario planning to manage risk and maximize opportunities. Financial preparedness plays a critical role in successful planning—and dedicated corporate payment experts can connect you to the resources you need to make the right next move.
Whether you’re looking for flexible working capital, treasury management or cash flow support, or the latest insights into scenario planning across your industry, the dedicated teams at U.S. Bank can help you understand your options and devise a plan to set your organization up for success—today, and as new situations arise.
