What is scenario planning?

Scenario planning is a process that helps businesses anticipate different ways situations could unfold and prepare to respond effectively. Business scenario planning approaches support strategic moves including:  

• Making long-term market positioning decisions
• Evaluating new markets or product launches
• Planning for changing regulatory environments
• Preparing for economic volatility or supply chain disruption

Some companies regularly include scenario planning in larger strategic planning efforts, but you don’t need a formal process to benefit from this approach. 

Scenario planning for economic uncertainty

These four steps can help companies prepare for economic uncertainty by understanding its impact on operations and working capital. 

1. Assess customer and supplier risk

When your customer or vendor misses payments or deliveries, that company’s struggles quickly become your business challenge. Evaluating customer and vendor risk profiles helps you proactively manage concerns and plan for potential working capital needs. 

Assess risks when considering a potential vendor or client and reevaluate annually, said Jim Hoban, industry solutions director at J.P. Morgan. Your criteria should be specific to your business and industry, but a few good starting points include:

• Sales size and credit rating: A high-revenue, deep-pocketed supplier or customer is typically more resilient to volatility. 
• Operational characteristics: Does the company stick to agreements and keep working capital flowing smoothly? Customers prone to late payments make it harder to maintain healthy liquidity, as do vendors that experience higher rates of returns or quality issues.
• Diversification: “If a key supplier or customer were to fail or become unreliable, you need to understand how that can affect your business and what alternatives you may have to protect your business,” Hoban said. For a customer, what share of your overall sales do they account for? For a supplier, how critical is their product to your business?
• Currency risk for international vendors: Assess the potential for financial gain or loss due to exchange rate fluctuations. Negotiating dual-currency invoicing with international vendors helps manage volatile exchange rates. “It gives companies the power to send payments in a currency that’s more favorable,” said Eric Martin, product solutions director at J.P. Morgan. 

2. Increase cash visibility

To understand how volatility could affect your liquidity, start with a clear picture of your company’s cash position and establish regular cash forecasting.

“You can leverage bank tools, whether online or mobile, that help you understand your current cash position. The same can be had outside of bank tools through APIs and host-to-host connectivity,” Martin said. 

Connect, for example, provides easy access to summaries of cash inflows and outflows. J.P. Morgan Access, meanwhile, consolidates data across banks for an overall view of your company’s cash position and connects with enterprise resource planning systems, accounting software and spreadsheets for streamlined data access. 

Don’t stop at forecasts based on current conditions. Incorporate potential scenarios your company may face to assess future liquidity needs. For example, a company concerned about a downturn in a critical customer industry might model the impact of 30- vs. 60-day accounts receivable delays.

3. Create a liquidity plan

Once you have your cash forecasts, take steps to meet anticipated liquidity needs. Proactive strategies to preserve liquidity include: 

• Consolidate cash: Redirect cash to your primary operating accounts for stronger visibility and to ensure critical funds are ready when needed. 
• Accelerate customer payments: “Forecasting helps you identify how sensitive your business is if a customer delays payment, and there are a lot of things you can do to manage your exposure,” Hoban said. Options include offering early payment discounts, encouraging customers to use electronic payment methods that deliver cash faster, or requiring customers settle outstanding invoices before shipping future orders. 
• Extend vendor payments: “Negotiating payment terms with vendors is critical to your cash position,” Martin said. Card payments, such as virtual card, are another strategy. They let buyers pay vendors immediately while extending their own cash flow until the card statement is due—typically 15 to 30 days later. 

4. Check in with your banker

Your banker can be a valuable source of information on what’s driving volatility and how it’s affecting companies in your industry. 

Your banker can also help ensure your business is fully leveraging cash positioning and forecasting tools and work with you to create a liquidity strategy tailored to your business goals.