Using a Forecast for Risk Analysis and Scenario Planning

23 November 2021

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Setting out a foundation financial forecast for risks analysis is a challenge. It’s time consuming and takes thorough thought and often collaboration to collect all the correct data. But after the initial set up, putting the effort you put into it going forward can really make your numbers shine.

One function an accurate forecast can have is as a means to plan for risks and scenarios in the future. It’s getting harder and harder to predict what will happen next - a pandemic, Brexit, a recession... Getting ahead of the game and planning out some examples of potential situations can give you a chance to take control of them, instead of letting them take control of you.

For risk analysis, you could break these scenarios down based on the numbers – a 10% drop in sales, hiring an extra 3 members of staff, or spending a certain amount on marketing. However, these are the implications, not the cause. What caused each of those effects or decisions in the first place? That’s the best place to start. 

 

SWOT analysis

 

A great way to figure out what to plan for is to do a SWOT analysis on your business. Look at it from every angle and figure out what could impact your finances specifically so that you can put an action plan into place. 

 

If you’ve not come across the SWOT analysis method before, it’s fairly straightforward. Gather the key members of your team and get brainstorming. The analysis is broken down into strengths, weaknesses, opportunities and threats. Thinking about these in terms of your finances will help you draw out the priority scenarios you should be planning for. 

 

Strengths and weaknesses

 

This section of the analysis will help you identify the internal factors that affect your business, which will help inform the next section of the exercise. These internal factors, both positive and negative, could include: 

 

  • People and skills – what makes your team special? 
  • Tangible assets of the business such as capital, credit, or existing customers
  • What sets you apart from your competitors?
  • Location – good or bad, or even both for different reasons 
  • Is there anything limiting your business, such as a lack of resources or certain expertise? 

 

Once you’ve broken down the internal elements of your business, it will be much easier to get into the opportunities and threats that it faces externally. 

Opportunities

 

Scenario planning isn’t all about the bad. When something good happens, you want to be prepared to ride the wave and make sure you get whatever you can out of the moment. Think about these opportunities as external factors which could affect your business in a positive way. Some questions to consider: 

 

  • Is the market you’re in trending up? 
  • Are there any patterns within the market you could take advantage of? The increased popularity of Black Friday for example 
  • Is there any new technology emerging that could impact you? 
  • Is there anything topical which could impact your industry? Even if it’s not on the horizon, it’s a good idea to have an awareness of what these could be in the future so you can keep an eye out.
  • Is there anything which could increase the awareness of your business or the positive perception of it? 

 

You can take this as far as you want, and be as imaginative as you think is helpful. Knowing what events will provide positive outcomes for your SME is half the battle in making them happen. Some will be predictable, like Black Friday, whereas others may seem to come from nowhere. But having an awareness of the possibilities will put you in the best position to act in a timely fashion and take full advantage. 

 

Threats

 

Of course, there’s always the chance of external threats too. Taking the time to scope these out will prevent a problem becoming a disaster. Having an action plan in place can support you in correcting course quickly and efficiently. Some things to consider when brainstorming the threats to your business: 

 

  • Identify your main competitors and try to keep on top of their movements.
  • Are there any unfavourable trends that could bring challenges?
  • What situations could affect your marketing efforts?
  • How could the economy, government, or politics negatively impact your business?
  • New innovations could bring opportunities, or even make you obsolete. Be aware of any research or technology developments that are relevant.
  • Work through the cycle of your business to ensure you take into account supplier behaviour as much as consumer’s.
  • Remember that whatever your industry, it relies on other markets such as recruitment and distribution.

 

Prioritise

 

While it can be tempting to go through this exercise and want to plan out every possible scenario, keep it to 3-5 at a time. Too many and you run the risk of confusing things and detracting focus from what matters, too little and you’re more likely to get a surprise. To help you decide which to hone in on, make a priority list of the most important situations to be prepared for. Go through each section and think about how likely these things are to happen, whether they need a quick response, and how much effort or resources would go into creating and implementing an action plan. 

 

Certain risks and opportunities will clearly take precedence, for example regulation changes where a failure to recognise them could result in fines or other punishments. Whereas others, such as a topical news story which you could comment on as an expert to bring exposure, might depend on your resources at the time. 

 

Having a clear picture of what your priorities lie will be especially helpful for your team to support you in managing these situations, so that they know where their efforts will be best placed.

 

Using your forecasting tool to create a plan based on risk analysis

 

Once you’re aware of the various scenarios that could play out, you can take them to your forecasting model to run the numbers. This is where you go back to your implications, but with a much clearer picture of what is likely to happen and how you can handle it. For both positive and negative situations you can create variations of your models that reflect what could happen within your business. You might be able to anticipate the direct and immediate effect, but bringing your forecast into this exercise will show the domino effect on your entire business. 

 

By having a clear view of the numbers, you can formulate a calculated response ahead of time rather than reacting blindly. You’ll be able to see the whole picture with so much less effort and time. And with that kind of information, nothing will hold you back for long. 

 

Once you’re aware of the long term effects on the foundation of your business, decisions will become easier and quicker, as well as having a greater impact with less red tape, which could be exactly what you need to move up a level. 

 

You can read more about our conversations with small business owners and their relationship with forecasting here

 

If you’re interested in finding out more about the tool or any of our other services then get in contact on 01454 300999 or info@fd-works.co.uk