Top tips for business planning in a volatile environment

Business planning assumptions

1. Data, data, data
   It’s an obvious one to start with, but make sure your plan is based on the most up-to-date data possible, and reviewed regularly. The days of running a single plan for the year are well and truly over. This doesn’t mean multiple updates to the approved plan are required throughout the year, but at the very least, scenarios using the latest economic data and forecasted cash flows (asset management and development – we’re looking at you...) should be run on a semi-annual basis to determine whether a formal update is necessary.
   
   
2. Plan prudence 
   In times of increased volatility, it can pay to have more conservative assumptions. Take the plan interest rate: having a 50 basis point buffer in your plan would have helped soften the impact of even some of the largest interest rate movements over the past year, reducing the need for mid-year formal updates.
   
   However, setting the right level of prudence remains critical. It should balance risk tolerance with avoiding unnecessary restrictions on capacity. This may even go as far as running two plans, one with only committed spending but a higher buffer and a second with all forecasted spending but a reduced risk buffer. This could help avoid a scenario where the prudent risk buffer is constraining longer-term capacity.
   
   As always, a planner will need to find a balance that allows for natural risk tolerance that should be included within the plan but avoids delving into stress scenarios, which should always be run as separate tests.
   
   
3. Engage with the business
   Business planners should be involved in the budgeting process to understand cost pressures and timings – not just for the budget year, but also into the near future. This ensures the plan reflects reality, rather than simply inflating costs by the Consumer Price Index and spreading them over arbitrary periods.
   
   
4. Showcase the plan 
   Building on point three, it’s important to highlight the impact the plan has on the business and why accurate data matters. Plans often remain a finance-only tool, but securing buy-in from the wider business can significantly improve accuracy (and reduce the audible groans when you request data updates).

Stress-testing

1. Quantity is no substitute for quality 
   Avoid the time sink of excessive testing; keep it focused. Single-variant tests should focus on key economic risks and major business-specific risks, assessed on how each would manifest. We find that most risks can be grouped by impact, so usually distilled into six to nine tests.
   
   The goal is to understand the business’s sensitivity to key factors and inform strategy, not to cover every possible cost scenario. Supplement single-variable tests with a few multi-variant scenarios that reflect real-world conditions.
   
   
2. Keep it real 
   A stress test should be stressful, but resist the urge to create apocalyptic scenarios. The right balance is critical. Tests should be meaningful and beneficial to strategy, not just a source of anxiety leading to the conclusion: “We’re doomed!”
   
   
3. Use the risk register 
   This should be the foundation of stress-testing, as it outlines potential scenarios. Regulators and funders will expect to see testing linked back to the risk register, while using it this way has the secondary benefit of ensuring it contains sufficient detail on potential financial impacts from risk. However, keep in mind point one: focus on high financial-impact risks rather than testing every possible contingency.
   
   
4. Sensible reporting 
   Reports should be designed with stakeholders in mind: board, regulator and lenders. While reporting on covenants remains critical, consideration should also be given to golden rules and other barometers of financial health. This is especially important following the shift away from EBITDA-MRI covenants, which can result in high resilience under stress, but mask underlying performance, even under high-impact stress scenarios. Stakeholders are increasingly prioritising golden rules, and these should also inform mitigation strategies.
   
   
5. Create a clear mitigation strategy 
   Developed as part of the stress-testing process, mitigation strategies need to be formed and targeted at stress-test outcomes. Centrus believes this is just as important as the stress-testing itself. A well-thought-out mitigation plan enables quick decision-making should a stress crystallise, informs strategy and ensures good financial control. Mitigations should be business-specific, but best practice includes understanding:

• • The cost savings a mitigation measure offers, as well as any initial costs to implement
  • The time required for implementation
  • Its impact on customers and the business.

We hope these tips will ease the pain of the business planning cycle.

Tom Miller, director, Centrus