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What if?

Engaging in thought experiments and playing out scenarios can help identify opportunities and insulate your business against the worst.

What if?
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  • Christian Doherty
  • January 15, 2021
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It’s a question that should lie at the heart of all of business discussions: what if the price of a certain raw material increases sharply? What if a new regulation stifl es our plans to open a new plant? What if we lose a senior and vital member of staff? What if a global pandemic hits and we’re forced to shut our shops for six months?

Understanding and anticipating these is never simple, and it’s fair to say 2020 has shown up the limits of most people’s imaginations when it comes to the future. But if COVID-19 has taught us anything, it’s that having a robust plan in place in case things change is fundamental to any business’s survival.

But it’s not easy: there were 5.9 million SMEs in the UK in 2019, which was over 99 per cent of all businesses. However, a CBI survey in November 2018 revealed that fewer of its smaller members had carried out scenario-planning than their larger counterparts (44 per cent v 76 per cent).

Known unknowns

So, what does a good plan look like in practice? It means asking some hard questions of the business itself: What are our aims for the future? What is our competitive advantage? What barriers might we face – both internal and external? These are the questions we need to be asking to set the scene for planning and decision making.

“The priorities for a small business finance partner will obviously depend on the type of business it is (B2B, B2C) and sector (retail v tech v industrial services), its supply chain, and if there is customer/supplier concentration and the liquidity levels (availability of cash from funding),” says Rob Rattray, a chartered accountant and corporate finance specialist who works with businesses to help develop the ability to scenario plan and forecast with greater accuracy.

The key, says Mr Rattray, is to develop new and alternate scenarios to stress test the business and establish what actions you can take to improve the situation.

And you may need to adjust terms or prices to customers to retain their business. There are several basics to financial planning and modelling.

“As a finance professional in a small business, you are probably intimate with all parts of the business, and you should be able to help the sales team with ideas around what terms can be altered to facilitate a sale that keeps the cash coming in,” he explains. “Increased sales come about from more customers, existing customers buying more often, customers buying larger average baskets and increasing prices.”

Accountants also need to get out of the finance silo and make sure that the strategic plan has a robust foundation.

“Finance professionals need to get involved,” says Mr Rattray. For instance, help the procurement team with thoughts on how continuity of supply can be maintained in any given scenario, or whether supplier deposits and required new terms to keep on trading.

Play it safe

Nick Bettes agrees. He works with business owners to take time out from the everyday and to focus more on planning their next phase. “The first thing is a budget and cash flow forecast that shows how I get through the next 12 months – in particular, making some conservative assumptions, do I have enough cash at the start to execute the plan, pay ‘me’, pay the bills and achieve lift-off without ever running out?” he says.

“Next is a clear marketing plan. I know that people buy (or have bought) what I sell but I'm going to make sure I invest enough and take an organised and active approach to marketing in order to achieve the plan.”

But while there are some things that are almost impossible to foresee, a good strategic business plan will go a long way to steadying the ship if the business enters choppy waters.

John Farley is a seasoned planner who works with businesses to help them identify the likely challenges they face and develop plans to navigate through them. He says that managers should start by setting aside some time to address the business’s main strategic objectives and the risks it faces in achieving them.

“We find that by going through a planning exercise, you can highlight areas of concern and to develop scenarios that may occur. There’s no standard or magic number of ‘what ifs’,” says Mr Farley, but if you can ask what might go wrong and start looking at that, you begin to make progress. “So that might include technological advances, or changes in government regulation of your sector.”

Time for change

Plans must be agile, he says. “The whole point is to create a start line. No one knows what’s over the horizon, but you’re trying to imagine what’s over it.

If you have a good plan you can inject these scenarios at any point; you don’t have to cover all of them at the start. “Instead, once a month you can gather the senior people around a table with an agenda and go through the plan.”

Having done that, it should then become a monthly or quarterly routine to include a strategic element on that agenda to look at some different scenarios. “It’s a process where you stop, look at the strategic plan and ask: what’s changed, are we meeting our goals, what’s happening externally that could impact that, should we be questioning certain elements?” adds Farley.

And when it comes to better planning, success isn’t a one off , it’s a process; one that requires regular attention. Ultimately, your plan needs to be a living document that you can add to and improve all that time – which is why it’s important to keep it simple and therefore easy to use. You’re not trying to create some tome to sit on a bookcase - it needs to be usable.

Mr Bettes recommends sense-checking the plan every quarter and then, once a year, take a day to sit down and update it for the next financial year. “It’s very simple at that stage because you’ve done the grinding at the beginning and now you’re plugging your financials into the plan and looking at what’s to come. And you can then measure whether you’ve achieved your objectives: maybe one or two are now irrelevant, or they’ve been achieved; then you can add new ones.”

And once you’re through the first iteration of your planning, it will inevitably get easier with each new round. “Well-established businesses tend to need less adjustment, but younger businesses or established businesses who have just begun a proper planning process or journey may need to make more of them,” says Mr Farley.

The important thing to remember is that all planning is helpful. “Even the most unlikely scenarios can sometimes occur, so taking the time to imagine what the effects would be and how you could respond is vitally important,” concludes Mr Farley.

Christian Doherty is a freelance journalist

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