Use Scenario Planning to Make Sound Decisions During COVID-19

Stover June 8, 2020 By: Lisa Stover, CAE

While the pandemic has forced associations to adapt on the fly, developing scenario-planning and financial models can help you navigate a path forward as you deal with uncertainty in revenue.

Imagine waking up one night to realize your house is on fire. You call 911, and firefighters arrive on the scene. They quickly go into triage mode: assess the situation, identify if people need to be evacuated, and determine where they need to focus their initial attention. Once the triage is complete, they need to act fast to execute their plans and save your house.

During the 2020 COVID-19 pandemic and related economic decline, many associations are waking up to realize that their house is on fire. Like those firefighters, association leaders leapt into action to assess the support programs available, lessen the financial impact of cancelled events, and provide support to their shaken members.

As much as you should all be congratulated for your fast responses, now is not the time to rest. Act now to prepare your organization to adapt during this time and plan for the new normal. To do that, develop financial models and leverage scenario planning to design your next stage.

The Components of a Scenario-Planning Model

As we prepare for this new world, let’s step back to define scenario planning. Scenario-planning models allow your association to simulate the impact of changes on financial performance and cashflow over a period of time. This can be helpful as your association considers how to move forward as variables change. The models can be further leveraged to develop longer-term plans. When developing your model, include the following key components:

  • The model should create actionable financial intelligence.
  • The model should help ensure that there is a consistent organizational understanding of the economic impacts of the variables.
  • The model should support an interactive, team-based approach to financial planning.
  • The model should be simple—focus on the big pulleys and levers and avoid getting distracted by too many details.

These components allow associations to develop meaningful models to assist in decision-making and planning for the rest of the year.

Act now to prepare your organization to adapt during this time and plan for the new normal. To do that, develop financial models and leverage scenario planning to design your next stage.

The Anatomy of a Scenario-Planning Model

A scenario-planning model includes several distinct parts. The parts (illustrated in figure 1) are defined as:

Baseline: This refers to historical financial performance, which is usually determined based on actual revenues and expenses, as well as the budget for the current year.

Dip: The decline from the current economic environment. It is important to estimate how big that dip will be and how long it will last.

Turn: The point in time when the organization begins its ascent to the new normal. You will need to consider how big the turn will be and how long it will take.

Recapture: How much of the lost revenue you expect to regain as we approach the new normal.

Figure 1

How to Identify Scenarios

When you begin developing a scenario-planning model, identify the circumstances for which you need to plan. This is a great time to engage your board and management team for input. Common scenarios that associations model include:

  • What will happen to my conference and event revenue and expenses if I cancel the event? How will moving it to a virtual event affect the organization? What happens if we postpone?
  • How will the economic decline affect membership acquisition and retention? What will happen if we offer discounts or different terms of payment to retain or attract members?
  • Should we use our reserves to support the organization during this time, or should we seek out debt options like a line of credit or a longer-term loan? Will I have the cash to repay the loan when the time comes?
  • How long can I afford to keep staff employed? What will the impact of furloughs or layoffs be?

Also be sure to define the assumptions you use in your model, as it will help you communicate it to others and use it as a decision-making tool.

How to Present the Financial Model

Management and governance decision-making is clear when aided by visual representations, such as charts and graphs (see Figure 2). A model with the ability to toggle assumptions allows you to see potential outcomes in real time. As you review possible scenarios, you can easily see the impact of different decisions when your model generates information in a format that can be shared and digested.

Figure 2

Now is the time to prepare your association to survive this challenging time. A carefully developed scenario-planning model serves as a critical tool, one that allows you to make sound decisions.

Lisa Stover, CAE

Lisa Stover, CPA, CGMA, CAE, is principal in the nonprofit section of CliftonLarsonAllen LLP in Washington, DC.