This is the third in a series of three articles about the changing nature of planning. The first article explored the need for a new approach to planning as businesses adapt to the COVID economy. The second examined the potential for economic scenario planning. This article looks at how businesses can use economic scenario planning to sharpen 2021 forecasts and mitigate risk.
Companies are now integrating economic scenario planning into their planning processes more than ever. They realize value from its ability to deliver improvements in planning accuracy, resiliency, risk mitigation, and shareholder communications. Businesses benefit from dynamic planning models as the pandemic continues to make the economic environment extremely unpredictable.
More Accurate Planning
Prevedere’s scenario plans are a valuable input to strategic, financial, and operational planning. They enable companies to achieve a more accurate understanding of how the COVID economy might affect outcomes in 2021 and beyond. It’s a strategic technique for businesses in nearly any industry, including manufacturing, retail, and consumer goods. Companies can apply the approach to operating units and product categories, varying the models by major geographic markets.
Consider the hypothetical example of a national retail chain trying to plan for 2021. With economic scenario planning, the company can model category performance for a range of economic conditions shaped by the pandemic. For instance, sales of luggage might decline, even if the overall economy improves, because travel is restricted, or people are reluctant to fly. At the same time, sales of board games might go up, even if the economy struggles, because people will be stuck at home and will still likely spend some money on activities if they can’t go anywhere. These simple examples demonstrate the methodology. The model could take regional differences into account, as well.
2020 demonstrated, with startling vigor, just how volatile economic conditions can get. Companies that want to achieve optimal results, despite erratic market trends, need agile planning capabilities. They must be able to refresh dynamic scenario models rapidly. That way, they retain the ability to pivot into profitable lines of business as the economy recovers—or steer clear of over-investment if it doesn’t.
Think of the challenges facing a food distribution business that serves both restaurant and supermarket channels. Restaurant sales might drop substantially due to lock-down orders. At the same time, supermarket sales may actually increase in tandem with the lockdowns. People might want to stock up on food supplies. However, if the restrictions on dining come to an end, the restaurant sales channel may rebound quickly, while supermarket sales will likely drop back to normal levels.
Armed with such insights from economic scenario planning, the company can adjust the operational aspects of the business to optimize performance and stay ahead of shifting channel dynamics. It can adapt plans for activities like advertising and ordering inventory. The better executives can project future sales in the restaurant and grocery industries, the more profitable the company can be during the pandemic.
Planning intersects with risk management. With economic scenario planning, a company can develop viable forecasts of risk to business performance due to expected economic headwinds—and then come up with mitigation plans. Continuing with the food distributor example, the models might show headwinds to the restaurant side of the business if the pandemic persists and government restrictions stay in place. This foresight can help the company look at different dimensions of consumer behavior and make strategic decisions to minimize losses.
Shareholders want to know how companies are planning to weather the COVID storm. The pandemic and COVID economy have disrupted the process of issuing guidance to shareholders about earnings—a challenging proposition even in normal times. In addition, the SEC has issued a statement requiring public companies to inform investors about where the company stands in operational and financial terms during the pandemic. Economic scenario planning can help in realizing the demands of this SEC requirement by improving the accuracy of forward-looking statements. Investor relations and the Office of the CFO can also use insights from scenario planning to add economic context to 2021 financial projections—such as how and when external factors will affect future performance.
The benefits of economic scenario planning overlap and reinforce one another. When planning reflects changing economic realities, companies can be more resilient. They face lower levels of risk and can more confidently share earnings projections with shareholders and board members. What matters is the model. By modeling scenarios using external economic data in iterative, AI-driven algorithms with expert economist supervision, companies can get better at foreseeing where things are going, even as the economy behaves in irregular, idiosyncratic ways.
Navigate What’s Next with Economic Scenario Planning
The COVID-19 crisis has given rise to a world of economic uncertainty, with uneven effects across regions and industries. As we head into the 2021 planning cycle, every business wants to know How will the pandemic impact next year’s numbers?
Prevedere’s Economic Scenario Planning solution helps companies navigate these tumultuous times. The solution projects future business outcomes for three plausible macroeconomic scenarios under COVID-19. Companies can use these insights to sharpen 2021 forecasts and plans, improve shareholder guidance, and stay on top of the pandemic’s evolving impact.