Navigating Economic Uncertainty with Financial Modeling
The coronavirus-induced collapse of the global economy is predicted to be the worst downturn since the Great Depression. Now more than ever, business leaders and finance teams are turning to scenario planning to weather abrupt financial changes and analyze a range of future unknowns. In this article, we have defined three potential economic recovery scenarios, the tools needed to navigate each case, and how to quickly make strategic moves with confidence – all while aligning leadership teams and driving consensus around high-impact decisions.
Business implications of the coronavirus
COVID-19 presents unprecedented challenges for the private sector, including supply chain disruptions, reduced consumer spending, and weakened demand across sectors like tourism and travel. As the coronavirus pandemic continues to surge globally, small to mid-size companies face mounting economic fallout as business closures and movement restrictions disrupt normal activity. Adapting to this crisis may force a paradigm shift for many businesses, and maintaining financial solvency requires forward-looking, innovative solutions to navigate future uncertainty.
March witnessed a series of unprecedented events due to the outbreak’s rapid spread, including near-total business shutdowns, widespread stay-at-home orders, and a global market crash. According to the latest analysis, at least one-quarter of the U.S. economy has come to a standstill, and more than 17 million Americans have filed for unemployment. With the closure of non-essential businesses and a nationwide shift to remote working, many small to mid-size businesses are acutely feeling the impact of the economic freeze. For those operating on tight profit margins, unexpected sales declines can have devastating impacts on solvency, making proper management of cash flow and liquidity increasingly crucial in the near term. In the long term, however, institutions have the opportunity to reevaluate both vulnerabilities and opportunities through long-range financial planning.
Possible economic recovery scenarios
1. Best Case: May Reboot
The best case scenario assumes COVID-19 cases peak in April, allowing for economic activity to gradually resume by mid-May. This outcome still involves slowed economic output, with close to a 1.6% decline in GDP over the year and an 8% uptick in unemployment by the fall.
2. Expected Case: Summer V-shape
This economic scenario means the peak of new cases occurs in May, meaning that the economy will not be fully functioning until summer. As a result, the economy would end the year with a 5.5% reduction in GDP, with unemployment rising to approximately 15% by the third quarter before falling to 10% by year’s end.
3. Worst Case: “Fall recovery”
In the final scenario, measures to “flatten the curve” push economic recovery into the fall, causing a 6% drop in GDP and 15% unemployment rate over a more extended period of time. Shocks to a variety of service sectors are also likely to be felt, along with a significant decline in consumer spending.
Implementing proper balance sheet management to withstand the current health crisis is paramount for any business, regardless of financial state, but it is also important to look ahead to a time when companies are back to being fully operational. The coronavirus pandemic has unexpectedly ushered in a new set of assumptions and business drivers, and scenario analysis is an important tool to help companies evaluate the impact that changing conditions have on business operations. Assessing various scenarios can not only pinpoint potential risks, but help companies proactively prepare in the event that best, worst, or expected cases occur.
Additionally, financial planning can mitigate the effects of reduced revenue streams by assessing the feasibility of certain cost-cutting measures. Analyzing costs may help sustain a business in the short term, especially during times of reduced economic activity, while improving profitability in the future.
Ultimately, optimal decision-making, especially during times of crisis, requires a holistic view of an organization’s financial position. The future trajectory of the coronavirus pandemic is still largely unknown, and economists continue to debate what U.S. economic recovery will look like – whether a sharp, short recession is in store, or a more prolonged downturn. Regardless, creating a sustainable business model capable of withstanding the next unexpected crisis is vitally important for the private sector.
Using financial modeling to plan for the unknown
While it is impossible to predict the future trajectory of COVID-19, it is our opinion that developing a plan for each of the discussed scenarios will enable your organization to prepare for a variety of contingencies and remain resilient.
Synario is designed to help companies identify key fiscal drivers, opportunities, and risks through user-driven scenario analysis. Unlike traditional spreadsheet models or budgeting and forecasting software, Synario does not rely on linear static projections. Instead, it utilizes real-time scenario-building tools that enables you to layer in sharp unforeseen discontinuities and strategic disruptions; ultimately providing the foresight needed for a swift and confident business response in a time of urgency.
These best practice approaches and tools can not only add insight into future budget risks and challenges, but they can also help communicate your story to key stakeholders involved in the decision-making process, which will impact options and resources going forward. Contact us today at [email protected], or visit www.synario.com to learn more.