Sizing up the scenarios

The recession and financial crisis are playing havoc with many businesses. Credit is tight, sales are down, and employees are nervous. But wishing things were different won't make them better.

It's time for some serious scenario analysis. [1] Radical changes may be required for your business to survive but making the wrong changes may also accelerate its decline.

Here are a few thoughts to consider as you develop your analysis:

• Draft a range of scenarios – conservative and extreme. The current economic environment is so volatile that extreme measures (liquidation or sale) may be necessary. Don’t get caught short by excluding unpleasant cases.

• Vet your assumptions with key colleagues and outside advisors. Outsiders often recognize the signs of a rapidly deteriorating environment before management does, and a group will generally think more comprehensively than one or two individuals.

• Model the consequences including rigorous financial analyses. How low can sales go before you: Violate your loan covenants? Run out of cash?

• Prioritize your options – renegotiating bank lines of credit, salary reductions, layoffs, store closings, or other actions should be planned and prioritized. What do you do if this happens? Where is the next firebreak? [2]
  

• Be prepared to shift to the next option quickly if your first choice isn't working. Just as firefighters dealing with a brush fire fall back when the wind turns against them, you need to be prepared to change directions quickly if market conditions shift or worsen.

Waiting to plan will only make things worse.

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[1] “Scenario analysis is a process of analyzing possible future events by considering alternative possible outcomes (scenarios). The analysis is designed to allow improved decision-making by allowing consideration of outcomes and their implications.” Continue reading at http://en.wikipedia.org/wiki/Scenario_analysis

[2] A firebreak is a gap in vegetation or other combustible material that acts as a barrier to slow or stop the progress of a bushfire or wildfire.