Our Blog - Subject 2

(2) What would happen if ... ? Do we have a Plan "B"?

What would happen if we lost one of our biggest clients? How would it affect the income statement? How much would change our Bankruptcy Probability indicator?

 

What if we opened a new centre with a specific forecast of revenues and expenses? What if in one of the countries where we are positioned there is a change in tax policy? What if ... ?

 

It is clear that a very important part of our Business Analysis must be dedicated to the Simulation of Scenarios, sometimes to foresee unwanted situations and other to predict consequences of possible decisions.

 

 

Detecting weaknesses

 

Continuous analysis is essential, following a precise plan and methodology, that is, we have to design a protocol analysis, in which there will be common sections to most of the companies (eg the analysis obtained from Financial Statements) and other specific sections of our company, which will depend on its nature, structure and functioning, and,especially, on the available resources for the information management.

 

Are there weaknesses in our company?

Could they be decisive for its future?

 

Of course, there are always weaknesses; we should devote part of our analysis to their location, design and evaluation of alternative plans in case we have any unwanted circumstance.

 

Here we see an example: We have used Business Intelligence to analyze risk concentration taking into account clients' turnover, and for this we have designed a report that shows clients distribution by intervals of year amounts invoiced and shows the relation number of clients / amount invoiced for each interval.

 

 

 

 

 

 

We can alternatively press on Detail and Summary to show or hide the clients of an interval (in our example we focus on the first interval).

 

 

Some conclusions from our sample report (Domestic Clients area):

• Very few clients (2.39%) bear most of of the turnover (64.47%).

• Most of our clients (86.92%) provide only 20.67% of turnover.

• Only one client (Client 4734) takes almost 30% of turnover.

• A small drop in the number of clients of the first interval involves a significant reduction in the total turnover.

• ...

 

Probably in the example company it can be heard phrases like "if we lose the Client 4734 we will have to close down". The question is whether we choose to apply the head-in-the-sand method, which will involve incorporating as part of our assets the "Sword of Damocles" or, on the contrary, we decided ...

 

 

 

• Analyze the reality and the evolution of the data to reach the current situation.

• Virtual simulations about the loss of the client hypothesis, taking into account the decrease in turnover and other involved actors (cost reduction, perhaps different conditions with suppliers, etc.).

• Design an alternative plan (Plan "B") in case it actually happens.

And parallel ...

• Create a Strategic Plan designed for decreasing in percentage the specific weight of that client (risk dispersion), without reducing its turnover obviously.

• Periodic review of Plan "B" to adapt to new situations, generated after the application of the Strategic Plan.

 

 

Simulation of Scenarios

 

Therefore, it is essential to consider as part of our Business Analysis the Simulation of Scenarios ...

 

• To analyze the potential consequences from unwanted situations.

   

• To predict results that could be obtained from different decision-making.

   

• To create "Business Viability" plans in the short-, medium- and long-term.

   

• For the preparation of Budgets, Forecasts and Targets, taking into account the results we want to obtain.

   

• ...

 

In any case, the simulation will involve managing all types of information, both accounting and non-accounting, and the decisions we make based on a simulation will have implicitly continuous verification of compliance with the expected results (budgets) and, otherwise, we will generate new simulations (forecasts) to try to rectify the situation toward our targets.

 

The importance of data in Business Analysis will justify a section of our blog.

 

 

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