Scenario Planning for the New Normal
In this episode, Debbie Rosler, Outsourced CFO at Burkland & Associates chats with us about best practices for scenario planning, how to get started with an easy five-step approach, and the tactics to extend your runway and cash flow.
Speakers: Debbie Rosler, On-Demand CFO, Burkland & Associates
Debbie Rosler is an on-demand CFO at Burkland & Associates. She has 20 years of experience with companies in a broad range of industries and sizes, from early-stage start-ups to Fortune 500 Companies.
With expertise in financial planning and analysis, corporate strategy and financial modeling, Debbie has helped companies establish finance and accounting functions and identify opportunities to improve business processes. She is currently working as an Outsourced CFO for several early-stage companies.
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Why is scenario planning especially important throughout this time?
04:49 – Scenario planning really helps companies to navigate uncertainty and plan ahead so they can anticipate and quickly respond to the changing landscapes. So while we’re currently facing an economic downturn, there’s a lot of uncertainty as to how deep the recession is going to be and how long it’s going to last.
By planning ahead for a range of economic scenarios, companies can develop plans that respond to each of the landscapes and that they can pivot quickly so that they can ensure that they survive and potentially even thrive in the current environment.
What actually goes into creating a plan and how can people start doing this?
So so I’m recommending my clients apply a five-step approach towards scenario planning. This approach was actually outlined in a guide that was written by a venture capital firm called First Round Capital. And the name of the guide is the Founder’s Field Guide for Navigating This Crisis. Google it. You’ll find that right away. I highly recommend it’s a really great read, but I’ll walk you through some of the five steps that they outline. And I’m working with many of my clients on this approach.
Step 1 – Identifying Key Uncertainties
The first step to scenario planning is identifying the key uncertainties.
So what are maybe 6-10 uncertainties that were introduced by COVID-19 for the next year that are going to help to inform your planning cycle? We want to focus on the items that are going to have the most significant impact on your company’s prospects. So in this case, it might include macroeconomic uncertainties, epidemiological uncertainties, uncertainties for your market or for your customers and stakeholders, but you’re going to figure out what those uncertainties are.
Step 2 – Bucket Uncertainties into Scenarios
So as a general rule, I often do three scenarios. You could do more than three, but I probably wouldn’t do less. It’s pretty common that you’ll see a company will do a best-case scenario or worst-case scenario, and then something in the middle that you might call the base case. Maybe that’s the plan – that you’re going to sort of be going after initially and for some companies right now. It could make sense to tie those scenarios to what the economic recovery looks like.
So, for example, the best-case scenario would be a view shaped recovery, where the sharp drop in economic activity we’ve seen is going to be followed by a swift rebound. There may be a best-case, which is like a U-shaped recovery where the bottom is little less clearly defined and the growth recovers, it takes a little longer to gain green ground. And then maybe the worst case would be an L-shaped recovery, where you have a severe recession or maybe even a depression after recovery, where growth takes a while to recover.
Step 3 – Craft Responses to Each of the Scenarios
So after you’ve figured out the scenarios, the third step is to craft responses to each of these scenarios. So to some extent, the scenarios are the items that are out of your control, but what’s in your control are the responses and the contingency plans you put in place to offset that so that you can maintain your desired level cash runway.
So what are some of the contingency plans that you could be putting in place? It can be areas of cost reductions, whether it be headcount or other areas. It can be changes in product direction. So maybe delaying product launches, or slimming down some of the products that you currently have. There’s a wide range of responses you can make to offset some of the impacts of the different scenarios.
Step 4 – Find Trigger Points to Each Response
Once you figured out the scenarios and the responses to them, the next step is for us to look for what the trigger points are. Essentially, the trigger point indicates where you should move from one scenario to the next. You may be starting in the base case for what’s going to indicate the point where you pull the trigger to actually move into the worst case or in the best case.
Some examples of some of the trigger points could be things like ‘is there an extension to the shelter in place?’ So maybe you had certain assumptions around when that was going to get lifted and the net shifted. It could have to do with unemployment rates. Are they higher than what you initially anticipated or lower? They could have to do with your own internal company performance. For example, is revenue growing faster or slower than you expected? Is there a higher customer churn? Those types of factors. But if you start in there with the trigger points with a tie to each scenario, you know at which point you need to be shifting between the scenarios.
Step 5 – Rinse, Revisit, and Repeat
Scenario planning is not a one and done activity. You know, traditionally for a lot of companies and startups, they often do long-range planning on a very periodic basis, often tied to fundraising – they might do it once every two plus years. And then, you know, in between that, they might be doing planning but on a shorter-term time horizon.
But in the current environment, you really need to be more regularly updating your long-range plan and looking at what your runway looks like, and also figuring out the scenario that we started with initially. Is that where we’re headed or do we need to start pivoting?
Does the process for scenario planning vary depending on the stage of the startup?
I would say that in general, the approach to scenario planning may not vary that much between seed, Series A, B, or Series C companies. However, one thing that could drive a difference in the approach would be based on the funding stage would have to do if the market for raising B and C becomes more challenging for one funding round versus another.
So, for example, if you look back at the 2008 recession, sort of after the fact and look at all the data of venture capital funds raised, what you’ll see is that there was a much more dramatic decline for Series B and C funding rounds than there was for Series Seed and Series A. Not only was there a more dramatic decline, but it lasted for a lot longer. And so what that means is if you were to go back to that time, those companies to survive through that period would likely have needed to extend their cash runway even more than perhaps the earlier stage companies that had essentially more access to capital.
It’s too soon to tell right now if the same trend is going to be prevalent for the current recession as was in 2008. So I can’t say that it’s, you know, that Series B and C companies need to extend runway more than seed at this point. It’s too soon to tell. But it’s quite possible, though there will be some discrepancy between the different funding rounds that will need to be addressed via different types of planning.
Since cash is king right now, what tools would you recommend for a Series A, B or C startup to put in place? When is it a good time to start implementing a tool for controlling spend?
As you start getting bigger, you really need to start getting to the point that you have budgets distributed by departments and owners, and then you have different approval and authorization matrices where the CEO doesn’t need to approve everything, but perhaps approving stuff as gets the largest levels.
But I would say as you’re getting into Series B – you should be putting the tools like expense management software or approval tools like Procurify, and all that commonplace.
I would put that in place from day one because frankly, having any of those types of processes in paper or offline is incredibly inefficient, and those systems pay for themselves. They’re not that terribly expensive. So certainly putting them in place in terms of distributing ownership, in terms of approval processes is important. Getting the visibility into the cash flow and expenses are also quite useful.
I think by the time you’re at Series B, it makes sense to start having department level financials and separating out the ownership. So that’s sort of what I’ve seen as sort of the breaking point. I do find that a lot of my clients that as you’re getting towards Series B, I’m trying to put in place department budgets so that everyone starts is be in ownership of the spending, although it’s a bit of a transition for people to get used to. It’s no longer the CEO being the only one that owns the budget.
This interview is taken from an episode of the Spend Culture Stories podcast.
If you’re interested in hearing more stories from remote virtual CFOs, you may enjoy these Spend Culture episodes:
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