Is your model just trying to predict a trend based on historical?
If Yes, it is time to shift from predicting trends to preparing for impacts.
Since the 2008 financial crisis, Entrepreneur and executives are forced to think differently about how to prepare for extreme disruptions.
We see leadership teams stress testing their business models against various scenarios to assess the impact and prepare an action plan for the worse.
It is important to plug in “Scenario Analysis” functionality into your model by using the same statistical methods as traditional risk management.
What this does is shift focus from “events” to “impacts”.
You may ask, how is this different from the traditional models?
While the traditional models focus exclusively on historical data to predict disruptions and develop a plan, scenario analysis simulates the financial impact of a series of events and uses the results to test the sensitivities of a company’s financial operating data against various risks.
For example, it can help a company understand how a change in demand for its products or services could affect the price.
So, how do you build one for your business?
While there are various ways build it out, below are few of the checkpoints that you should consider.
1. Does it clearly articulate the assumptions that underlie your core business?
2. Are you trying to achieve the set objectives/plan at an organisation level or functional levels?
3. Does it fully capture the array of risks that threaten the ability to achieve business objectives?
4. Does the outcome help you assess the pressure points and help you chalk out a strategy for significant scenarios?
Ultimately, scenario analysis should enable an organisation to look beyond impact and understand how it can use its core assets and relationships to not only withstand a disruption but to leverage it toward new opportunities and innovations.