This third and final expose on how a Strategic Plan can debug uncertainty, moves on from the discussion in Part 1 (improving corporate governance and productivity) and Part 2 (stakeholder “buy-in” and DCF), and focuses on sensitivity analysis and scenario analysis.
The sensitivity analysis enables the strategic planning professional to conceptualise the drivers on a company’s future, financial performance from the adjustment of forecast assumptions. On the other hand, the addition of scenario analysis will offer executives flexibility and further analytical insight with their company’s Strategic Plan.
Advanced approaches to demystify financial uncertainty – sensitivity analysis
The strategic benefits of sensitivity analysis are boundless. This is where a strategic professional can really add value to a corporation, by constructing a user-friendly, integrated and powerful tool for executive management to understand the financial implications of unexpected changes to their bottom line. The strategic professional can integrate this feature into the strategic plan, which will provide flexibility and ease of use for executives to play around with certain elements of the financials in the strategic plan.
The above animation outlines the immense value of a sensitivity analytical tool for stakeholders during the strategic planning process. It can help to reduce time, which would otherwise be spent building numerous versions of a company’s financials – based on varying forecast assumptions.
The following video will demonstrate further the practical applications of sensitivity analysis in a Strategic Plan. It can be applied from a company-wide or micro, product/service-specific angle, in order to improve the Company’s uncertainty in its strategic planning.
[youtube]http://www.youtube.com/watch?v=1LybQLndEuY[/youtube]
Advanced approaches to demystify financial uncertainty – scenario analysis
Often strategic planning professionals prefer to undertake scenario analysis with a company’s strategic plan – rather than the quick, high-level approach of sensitivity analysis. This is particularly beneficial for a company undertaking an investor roadshow, where they might be pitching their company to potential investors. As part of the sales pitch of raising capital, it is often wise to pitch to these potential capital providers under a range of equity, debt or hybrid issuing scenarios.
Another reason for generating these various planning scenarios is to offer a company’s executives some flexibility with the draft plan. The multiple scenario plans might better help these executives to decide on which scenario of the financials becomes the final strategic plan, in which to execute and implement across the company.
In Summary
The cost, time and effort associated with composing a sophisticated, value-adding and robust best-practice, strategic plan cannot be underestimated. It goes without saying that in the current economic environment, all companies are looking to manage their costs and run lean; some companies would perceive the investment of a strategic plan as an unreasonable expense – rather than a wise investment.
As discussed previously, the strategic plan can greatly improve and quantify future uncertainties, and assist strategic and executive professionals in a company to negotiate the rough economic waters in the short to medium term. Additionally, the scenario and sensitivity analyses functionality of the strategic plan, help strategic professionals to better understand revenue and cost drivers compared to their rivals or peers
The Future
A company’s preparedness to deal with such future uncertainty is a very valuable and powerful sales pitch in favour of a best-practice financial model, strategic plan. It could mean the difference in a company stealing the march on its competitors in future years, because of their ability to better anticipate future economic or financial challenges faced by all players in an industry, or it could enable the company to make an acquisition or divesture that represents a future game-changer in the industry.