Many business owners are struggling with the effects the ‘invisible enemy’ is having on their enterprise. Those that had planned for declining economic activity, maybe not as damaging as that being inflicted by COVID-19, were well prepared to make informed decisions to keep their businesses alive. This preparation will also better position them to thrive as the economy begins to normalise.
A key tool to prepare for unpredictable economic events and downturns is a comprehensive financial model for scenario planning. A model used for scenario planning contemplates a series of market events and considers the responses that are required to overcome an adverse business environment. Business owners that were practicing scenario planning prior to the pandemic are likely to be in a far better position today compared to those that weren’t. The good news is, it isn’t too late to start. Scenario planning now, during the pandemic, can provide an idea as to the options that are available to your business and clarify how the next six months might play out.
The balance sheet, profit and loss and cash flow statements tie together to give management an understanding of the key drivers of a business. Using forecast assumptions about the business and the economic environment, a financial model incorporating these financial reports can be tailored to empower business owners with a customised scenario planning tool. An effective scenario planning tool:
- Provides a deeper understanding of the options available to the business in a downturn
- Allows business owners to respond quickly and make fully informed decisions; and
- Enables effective communication with key stakeholders, such as staff, banks, landlords and customers.
The Corporate Advisory team at William Buck has designed a three-way cash flow forecasting tool that incorporates the following scenario planning mechanisms to assist business owners manage cash flow:
- JobKeeper Payment eligibility (basic test) and payments
- Tenant rental payment deferral (while continuing to accrue as a liability)
- Loan payment deferral (with interest continuing to accrue and capitalised into the loan)
- Reduction of hours worked by individual employees or groups of employees; and
- Timing of income tax instalments.