5 minute read 17 Jun 2020
How scenario planning can create clarity in the midst of uncertainty

How scenario planning can create clarity in the midst of uncertainty

Authors

Tristan Dhondt

EY WEM Strategy and Transactions Partner; Strategy and Transactions Leader for EU institutions

Out-of-the-box thinker. Focused on financing,deal making, and quantification of decision processes. Take macro-economic views. Challenge existing strategies and the status quo.

Marcel Van Rijnswou

EY Belgium Transaction Diligence Partner

Passionate about digital and data analytics. Dedicated husband and father.

5 minute read 17 Jun 2020

Optimising decision-making in uncertain times through forecasting and scenario planning.

With the COVID-19 pandemic came volatile markets, disrupted business activities and great uncertainty. How can business leaders optimise their decision-making in these unpredictable times? Dynamic forecasting and scenario planning provide a solid foundation to underpin medium and long-term business plans objectively.

In times of high uncertainty it’s vital to assess the economic effects of disruptive events and corresponding shifts in business trajectories. Driver-based forecasting models enable companies to better understand the impact of variances in key business and value drivers on financial, operational and commercial KPIs. These models focus specifically on drivers that impact your business most.

In contrast to existing tools and processes, value-driver-based forecasting models are dynamic and deliver what-if answers in cycle times. Due to the volatile nature of the COVID-19 crisis, it’s key to identify and model risks that companies never had to consider before the pandemic struck. Today, most companies are tackling their short-term problems, but it’s even more important not to lose track of the long-term impact of this crisis. 

Business leaders need to make the right choices now to become, to be and to stay resilient for the next two to three years.
Tristan Dhondt
EY WEM Strategy and Transactions Partner; Strategy and Transactions Leader for EU institutions

Using objective scenario planning

With value-driver-based forecasting models, companies can run various scenarios to better understand the impact of each KPI on their business decisions. Scenario planning helps businesses to lay out the possible alternative futures and anticipate them. Businesses are typically a unique combination of a complex chain of contingent events and impacts. Quantifying the impact of different scenarios that are potentially ahead of your organisation helps to find direction and take objective decisions.

Especially in the current environment, using a structured methodology to analyse the financial viability and resilience of your company under different scenarios is pivotal. Ensuring short-term survival, as well as long-term success, requires careful attention to and understanding of different scenarios impacting a company’s cash flow, solvency and liquidity.

Looking beyond the crisis

Many organisations are prioritising to navigate the next three to eighteen months and are only optimising their response to the crisis with forecast models within that time frame. Short-term survival and building resilience are vital. But it’s also important to improve your competitive position in the future. The COVID-19 pandemic accelerated the digital transformation, created more interest in green tech developments and made companies reinvent their business models. A driver-based forecast model should therefore be dynamic and flexible with the ability to incorporate different scenarios, so that business leaders can make strategic decisions for the longer term. 

A forecasting model should also be used to proactively capitalise on new economic realities and opportunities that accompany market upheaval, so that companies can thrive after the crisis and beyond.
Marcel Van Rijnswou
EY Belgium Transaction Diligence Partner

Forecasting for the long term in practice

A value-driver-based forecast model mainly supports decision-making based on tactical options and does not consider strategic planning to focus on what’s beyond. A forecast model alone is not sufficient to improve forecasting accuracy in the context of high uncertainty and should therefore be part of a multi-stage approach.

  1. Use economic diligence analysis and statistical testing to identify and prioritise variables as key business and value drivers. Test your forecast model for accuracy and predictive power.

  2. Use artificial intelligence (AI) combined with business and value drivers to define scenarios and predict the potential evolution of these key drivers to create forecasts and different scenarios of company KPIs.

  3. Update inputs, review scenarios on a regular basis and repeat this process frequently to counteract uncertainty and to improve the accuracy of your business and financial planning.

Harvesting the power of data analytics and even AI

The ability of people to analyse the enormous input of data is limited. Human information processing can only produce a small number of scenarios that are relevant to current events. Observing and analysing key business and value drivers requires in-depth industry knowledge, significant analytics skills and awareness of the forces that impact specific industries and businesses, as well as a keen historical perspective and some degree of foresight.

Big data, and a step further, artificial intelligence overcome human limitations. Moreover, using data analytics in scenario planning is essential in identifying extreme, yet possible, risks and opportunities that companies usually not consider or include in their daily operations.

Data analytics and artificial intelligence:

  • Modernise strategic planning by shifting from annual or quarterly cycles to on demand as events occur.

  • Provide a variety of often unexpected potential future outcomes.

  • Accelerate creation of these outcomes from four weeks to a few hours.

  • Promote a diversified point of view by eliminating natural biases associated with risk planning.

  • Encourage exploration thanks to an immense capacity to rapidly analyse and extract business and value drivers from a myriad of sources.

Securing stable financing through forecasting and scenario planning

In these challenging times, both companies and lenders or banks are concerned about repayment capacity and if risks are properly covered. Capital and debt financing can be a complex and challenging process due to the variety of financing options, financing instruments and partners. A well-balanced financial structure based on a solid repayment and risk analysis that is well documented is a requirement for successful (re)financing and for a good follow-up in the future.

A detailed business plan (short and long-term) will reassure potential lenders. It’s therefore important to take a holistic view when attracting debt or capital. A validated business model underpinned by well-assessed forecasting and solid scenario planning will increase your bargaining power during negotiations with potential lenders.

Accelerating out of the crisis

Due to the uncertain nature of the COVID-19 pandemic trajectory some companies struggle to find the right direction to accelerate out of the crisis and determine the window of opportunity to do so. Value-driver-based forecasting models combined with scenario planning take out the emotional and subjective insights that often cloud the decision process. They give a good idea of the magnitude of the impact of certain choices and help to objectively substantiate your business strategy in order to determine the right direction for your company. Solid scenario planning identifies future risks, helps build resilience, but also reveals new opportunities for businesses to prosper after the crisis and beyond.

Underpinning objective and effective decision-making

Connected Capital Solutions help clients drive inclusive growth by focusing on their capital and (transaction) strategy through to execution to drive fast-track value creation.

EY’s Strategy and Transaction experts help clients address core business decisions through smart financial modelling, economics and analytics. We combine dynamic forecast models with objective scenario planning to quantify the decision process in order to validate strategies, not only for today, but also in the medium term.

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Summary

Business leaders are looking for strategies to guide their organisations through the economic turmoil of the COVID-19 crisis. Dynamic forecasting and scenario planning provide solid key insights to support objectively medium and long-term business plans to come out stronger from the crisis and grasp the opportunities that lie ahead.

About this article

Authors

Tristan Dhondt

EY WEM Strategy and Transactions Partner; Strategy and Transactions Leader for EU institutions

Out-of-the-box thinker. Focused on financing,deal making, and quantification of decision processes. Take macro-economic views. Challenge existing strategies and the status quo.

Marcel Van Rijnswou

EY Belgium Transaction Diligence Partner

Passionate about digital and data analytics. Dedicated husband and father.