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Claire de Weerdt shares an article designed to help your company prepare for an economic recession. 

How can you prepare for a possible recession? One method is to conservatively shore up reserves to mitigate risk for a worst case scenario, however, this may come at a high opportunity cost in the event of a soft landing, as resources may have been more productive elsewhere. On the other hand, if you take a bullish perspective, you may not be prepared for a more serious downturn, leaving a lot of exposure to risk. Since you can never really predict the future, scenario planning helps balance risk and opportunity in the face of uncertainty.

What is scenario planning?

Scenario planning is a simple exercise to test how a strategy or business operations may play out in an uncertain environment. Scenario planning is most useful for high impact, high uncertainty environments, such as the COVID-19 pandemic or navigating a potential recession.

Scenario planning can be done via four simple steps:

1) Define your scenarios

A basic plan will include ~3 scenarios that represent possible futures. They represent external environments that are fundamentally outside the control of the business. For businesses concerned about a possible recession, the scenarios could be: a) Soft landing b) GDP contraction for one quarter c) GDP contraction for at least two quarters. The challenge here isn’t to “predict the future” but to establish a range of possibilities, represented by the different scenarios.

2) Establish your indicators

Every set of scenarios should have clear indicators. For scenario planning in the current economic climate, this could be around GDP growth, inflation, interest rates, and unemployment. Indicators can also be more business-specific such as unemployment in tech sector, or even company sales.

3) Connect the scenarios to business performance

Take an “if then” approach for each of the scenarios and the indicators. For example, if interest rates increase, then debt payments will go up, or if the GDP contracts, then revenues will likely decline along with historic industry values. Here, it’s valuable to also develop a mitigation strategy; for example, if it’s a prolonged recession, then certain projects may need to be put on hold or discontinued.

Key points include:

• Defining scenarios
• Monitor indicators
• Developing a mitigation strategy 

Read the full article, With economic uncertainty looming, it’s a great time to initiate scenario planning, on LinkedIn.