What-If? Scenario Planning For Marmite Moments

Once again, the idea here is to experiment with several financial scenarios to see what will happen to your cash and profits in different situations. Here are a few questions to help you determine which ‘what-ifs’ your business should consider when planning for an economic downturn or increased inflationary pressure.

• Length of downturn & time to recovery: What if the economic downturn lasts two months? Or six months? A year? How quickly will your market recover from an economic downturn? Are businesses likely to bounce back quickly, or will they take time?
• Impact on sales: If your sales go down 30%, what will you do with payroll and expenses? How about if sales go down 50%? Or 70%?
• Financing options: Can you access additional funding if needed? How will this impact your numbers?
• Retaining your workforce: How long can you keep your people without having to let anyone go? What will be the total cost of letting somebody go, factoring in recruiting and retaining a replacement once the economy recovers? If you are restructuring and letting people go, be sure to allow for redundancy pay and annual leave pay outs. (Best practice is to keep your annual leave balances low – for the wellbeing of your staff and your balance sheet).
• Cutting expenses: Which of your expenses are truly discretionary? How much damage would a particular cut do? Each scenario that you develop should combine your key numbers in the hypothetical case, and explore the impact on your business’ bottom line and cashflow.
• Inflation: What will the impact be of increases in your cost of goods sold, people costs and general expenses? This is critical to understand, especially if you’re tied into longer-term contracts.

People love creating profit and loss forecasts, but don’t forget – ALWAYS come back to cash flow. Building a cash flow forecast simply means mapping out your incoming cash (revenue) and outgoing cash (expenses, asset purchases, stock builds, etc) over time.

We recommend starting by understanding what has happened in your business over the 12 months just passed. Give this a whirl…

The best way to build a cash flow forecast is to jump into Xero and run the report called ‘Statement of Cash Flows – Direct Method’.

1. Select this report from the Accounting > Reports menu in Xero. You’ll find it under the ‘Financial statements’ heading.
2. Select ‘Date range: Last month’ and ‘Compare with: 12 months’. (It’s good to run this by month for the last 12 months to check for seasonality.)
3. Tip: At the bottom left of the report you’ll see the ‘Edit layout’ button – click this and then click on all of the arrows down the left of the report until all of the drop-downs are displayed. (This way you’ll be able to see each line, rather than just the category totals.)
4. Click ‘Update layout’ at the top of the window, then export your report to Excel or Google Sheets using the ‘Export’ button at the bottom right of your window.

Now you’re ready to update your prior year figures to reflect the scenario you’re planning for.

Unfortunately, there is no magic algorithm here! Scenario analysis combines both numbers and intuition, so you’ll need to employ your experience and judgment when developing predictions. Reach out to experienced, trusted advisers to support you, and remember to review and revise your scenarios regularly, making adjustments based on actual performance and observations of how the market is changing.

At the end of the day, one of the keys to surviving a decline is acting fast. ‘What-if’ planning will help you take swift action and minimise damage when the marmite hits the carpet.

Need help deciding which ‘what-ifs’ are critical for your business? A quick chat is often all it takes to get you on track.

Book a free call with Darrin or Paul at a time that suits you, and let’s discuss the most important scenarios to plan for in your business.