What-If Scenario Analyses More Important Now Than Ever



UPDATE:

DataRails acknowledges that this is a difficult time for many individuals and businesses, and that’s why they're offering a special promotion to help organizations weather the storm.

They're offering a free one-month trial, after which the platform is offered on a monthly basis with no commitment.  With thorough analysis capabilities including ad hoc reporting, drill downs, and variance analyses, conduct rigorous investigations into your data to explore how different scenarios might affect your business in the short, medium and long term.

This post is sponsored by DataRails.

Be proactive, not reactive.

COVID-19 has us experiencing disruptions in both individual and business life.


This pandemic is the first the modern world has seen, but it is not the first in human history. We already know that individuals can take preventative measures like frequently washing their hands, staying inside, and avoiding touching their face. But what about businesses?

What precautions can organizations take to ensure they don’t just see the light at the end of the tunnel, but reach it?

Organizations must properly prepare for the day after tomorrow by being ready for whichever scenario may unfold. 


Scenario analysis: future looking, multi-modular risk assessment

According to the Corporate Finance Institute, scenario analysis is a process of examining and evaluating possible events that could take place in the future by considering various feasible results or outcomes. In financial modeling, this process is typically used to estimate changes in the value of a business or cash flow, especially when there are potentially favorable or unfavorable events that could impact the company (such as COVID-19).

Most business managers also use scenario analysis during their decision-making process to find out the best-case scenario, as well as worst-case scenario while anticipating profits or potential losses. 

When performing the analysis, managers and executives at a company will generate different future states of the business, the industry, and the economy. These future states will form discrete scenarios that include assumptions such as product prices, customer metrics, operating costs, inflation, interest rates, and other drivers of the business.


Three scenarios, three potentialities


Morgan Stanley has presented the following three cases as potentialities for Coronavirus development.


  • Best Case – Containment by End of March: The virus outbreak is contained by end-March and production disruption is limited to the first quarter. Policymakers in China and Asia move to provide meaningful fiscal and monetary support, with China expanding its fiscal deficit by 1.2 percentage points, keeping it high for the second year running. Global growth dips to an annualized rate of 2.5% in the first quarter, down from 2.9% in the fourth quarter, 2019, but recovers meaningfully from the second quarter onward. Global growth dips to an annualized rate of 2.6% in the first quarter, down from 3.0% in the fourth quarter, 2019, but recovers meaningfully from the second quarter onward.

  • Base case – Escalation in new geographies, disruption extends into the second quarter: In this scenario, new cases continue to rise in other parts of the world, before peaking by April / May. The disruption extends into the second quarter, affecting corporate profitability in select sectors, risking the emergence of corporate credit risks. If the dislocations in asset markets also persist into the second quarter, a sharp tightening in financial conditions may mark a tipping point, exacerbating the impact on growth via weaker corporate confidence, falling capital expenditures and cutbacks in hiring. In response, policymakers around the world would step up easing measures, with fiscal policy in Asia and Europe and monetary policy in the U.S. doing the heavy lifting. Last week, the Fed announced an unexpected half-point rate cut and our Chief U.S. Economist, Ellen Zentner, expects the Fed to follow that cut with another half-point rate cut at its March meeting, and a quarter point rate cut at the April meeting. This would bring the Fed funds rate into a 0.25-0.50% target range. Global central banks will also ease, taking the global weighted average policy rate to a new all-time low. The fiscal response across key developed and emerging economies will also kick in. In aggregate, the cyclically adjusted primary fiscal deficit for China and the G4 nations (U.S., euro area, Japan and UK) widens to 5.1% of GDP in 2020, from 4.1% in 2019, a level not seen since 2011. In this scenario, global growth averages just 2.3% in the first half of 2020, but starts to pick up in the third quarter.

  • Worst case – Persisting into third quarter, escalating recession risks: The outbreak’s global disruption continues to spread into the third quarter, encompassing all the large economies. China faces a renewed rise in new cases as it restarts production. The extended disruption to economic activity damages corporate profitability and brings about a rise in corporate credit risks and significant tightening in financial conditions, which exacerbate the slowdown in global growth. While there should be a rebound in growth from the fourth quarter, given that the slowdown would extend into three quarters in this scenario, it would mean that the global economy will enter into recession in this scenario. We project full-year global GDP growth of 2.1% (i.e., below the recession threshold of 2.5%). All of the G3 economies—the U.S., euro area and Japan—would also have moved into technical recession territory (i.e., two quarters of sequential contraction).


What are the benefits of performing scenario analysis?

There are many reasons why managers and investors perform scenario analysis. Predicting the future is an inherently risky business, so it’s prudent to explore as many different cases of what could happen as is reasonably possible.

Key benefits include:

  • Future planning – Provides a peek into the expected returns and risks involved when planning for future investments. The goal of any business venture is to increase revenue over time, and it is best to use informed calculations when deciding to include the investment in the portfolio.

  • Proactive – Companies can avoid or decrease potential losses that result from uncontrollable factors by being aggressively preventive during worst-case scenarios by analyzing events and situations that may lead to unfavorable outcomes.

  • Avoiding risk and failure – to avoid poor decisions, scenario analysis allows businesses to assess investment prospects. It takes the best and worst probabilities into account to allow for informed decision-making.


Organisations MUST be proactive as the situation continues to evolve.

Reliable data underpins both crisis planning and response.

Updating data frequently and exploring how different scenarios could affect the business in the short, medium and long term allows organizations to consistently reframe their overall perspective and adapt behavior accordingly.

It’s also likely that the crisis will create unpredictable fluctuations. So putting in place rapid-reporting cycles will allow the c-suite to understand how the business is being affected, where mitigation is required, and how quickly operations are recovering.


Financial analytics for comprehensive scenario analysis

DataRails offers a next-gen financial analytics solution that can help you quickly analyze and understand the current state of your business, spot variances, and respond dynamically with best actions. With DataRails, connected teams can conduct what-if scenario planning and collaboratively decide how to make up for shortfalls, seize emerging opportunities, and avoid pitfalls. 

And with DataRails, organizations are able to leverage ALL organizational data including unstructured data that is spreadsheet-based, all of which is consolidate on the cloud and made instantaneously accessible and ready for analysis. 

What’s really needed to respond to rapidly changing conditions with agility is a platform that can tie together the data, the people, and the plans to maximize visibility, and DataRails does that. 


Be ready, no matter which scenario unfolds.

There’s no telling how long businesses will experience coronavirus-related issues. This is an ongoing and evolving situation, and your approach to it should be the same. 

Finance holds the key to crisis response agility with modern analytics tools such as DataRails that enable flexible and informed decision making. It is therefore crucial that the management team consistently review, reassess, and- where required- reset, their action plan to ensure they remain relevant and focused on the right areas to remain viable.

Sooner or later things will get back on track, and markets will tell which companies managed the challenge most effectively.


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