Scenario Planning

During a crisis there are lots of considerations – but the money will influence what we can and can’t do.

You need to primarily be concerned that you are able to survive the crisis to be there on the other side. Many businesses fail during these times because they don’t make the financial changes fast enough. The goal is to build the longest financial runway you can, to make sure you get through.

With the potential knock-on effect of significant economic downturn, you need to anticipate that your income will be significantly reduced. This will depend on your industry and might take a few months to filter through but you need to make the decisions now.

I probably don’t need to tell you this, but our economic conditions are unprecedented. Global markets have shrunk ~30-40%, our currency is the lowest it has been in 17 years, our interest rates have never been lower and unemployment is forecast to reach over 10% by the end of the calendar year. Even if self isolation is short lived, the economic recovery and consumer confidence is going to take a long time to recover.

The key to your finances is to run some scenario planning and look at what changes you need to make, to still remain solvent.

Solvency relates to the Balance Sheet items – that you have more assets than liabilities, but also and more importantly in this scenario – that you have the cashflow to pay for your financial requirements as and when they are due for the foreseeable future.

So why scenario planning?

This is about understanding a range of scenarios where your income may change and in advance determining what levers you can pull to adjust, and the timing of when you need to pull them.

Briefly about scenarios:

• They won’t give all the answers – but will help your leadership team ask better questions and be prepared for the unexpected.

• They can create collaborative problem solving, to stop "group think" – meaning we just all agree with what the most senior person in the room says.

• They may expand your thinking in regards to opportunities or uncover an inevitable future.

So here are your steps:

A. Base Case: Begin with your documented base case – this should be your existing budget and regardless of where you are in the financial year – get a version that goes 12 - 24 months out from where you are.

B. Cash Position: Make sure your forward budget aggregates the moving cash at bank position from month to month at the bottom. You need to be able to review this to determine the runway you have (ie based on the scenarios – when does the money run out)

C. Scenarios: Right now you are mostly interested in a case where your expected income is dropping and giving visibility of the decisions you need to make. I would consider at least 3 scenarios from the original budget that look at income levels at 80%, 60% and 40% (pick your own that make sense against your industry.

If you use Xero (this is what we use), Quickbooks or FreeAgent for your accounting there is a great tool called Float that pulls in your financial data and allows you to build multiple future scenarios and assess the impact).

D. Cash Buffer Days (Worst Case): You also need to consider the case that you received no more income. This is called the cash buffer days. Keep in mind the average for small business is 27 days.

E. Decisions: For each of your scenarios understand the choices you need to make to allow the organisation to financially survive. This will relate to:

• Income - are there new income opportunities

• Concessions - what concessions and grants are available?

• Cost Cutting - what cuts needs to be made?

Here’s a couple of ideas:

Building

• If you lease, can you ask for rent relief at this time (more info here).

• If you have a mortgage on the property, can you get mortgage relief (more info here).


Utilities

• Can you get relief on your utility payments – this is state based so check with you local state providers.


Software Subscriptions

• Many companies at the moment are offering discounts or free options to support during COVID-19 – you can check out a list here.


Financial Support

This is moving very quickly and will have both national and state based support - so review according to your context:

Federal government support check here.

For State based support check here.

And finally lets talk about People.


People

Given a lot of your financial costs that may need to be reviewed will revolve around people, it could be inevitable that staff costs need to be cut (make sure though you have factored in the financial support governments are providing that we have previously talked about).

If you need to cut staff costs then make sure that you:

• Work with your Board or Advisors through this process.

• Consider the financial support packages to assist employers at this time.

• Ensure that people cost is the last cost to be cut (but not delayed if required)

• Look for an all-in option (see notes below)

• That if you do need to make a role redundant, that you follow the legal obligations as an employer (more information here).

The All In Approach

There will be a time where your team can rebuild, so if it is possible to keep the team together during this time you should aim for that. Ideas that can support that include:

• Can paid staff stay employed but reduce their paid working hours/days?

• Can all paid staff accept an across the board 10-20% pay reduction (this cannot be enforced)?

• Are there some people that can afford to take unpaid leave at this time?

If it does come to a situation where you need to let a staff member go – here’s a couple of tips to help with that:

• Be gracious.

• Be thankful.

• Have someone else in the room with you.

• Don’t draw it out – be decisive and factual, but compassionate.

• Let the rest of the staff know.

• Provide appropriate introductions to alternative employers, government assistance and/or support agencies.

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© 2020 Derek Gerrard