However, if the last few turbulent years have taught us anything, it’s to expect the unexpected. This is especially true in the fast-evolving tech sector, which despite signs of resilience, has seen large layoffs, drops in valuations and will be impacted by the cost of living crisis. So how can you plan for the different scenarios that could unfold?
Scenario planning, as you may have guessed from the name, involves planning for alternative scenarios. In practice, this would involve creating different financial projections for your business based on different potential scenarios that could unfold, many of which will be outside of your control. This can help to ensure that the business is well prepared to weather any potential storms and emerge stronger on the other side or more positively, seize any opportunities that present themselves. As the old saying goes – fail to prepare, prepare to fail.
What are the advantages of scenario planning?
Some of the advantages of scenario planning for tech businesses can include:
- Improved decision-making: by creating projections for a range of different future scenarios, tech companies can anticipate and prepare for all different outcomes. This enables you to be agile in your decision-making about how to allocate resources and how to react to scenarios as they unfold earlier than you otherwise would. Perhaps certain scenarios will even require you to completely pivot your strategy (see our recent pivot blog), but planning ahead for any potential pivots in advance will make them easier to pull off if needed.
- Managing risk: scenario planning helps to identify and manage risks more effectively. By considering different potential outcomes, businesses can identify potential risks and put in place measures to mitigate them, such as any potential contingency plans or resources that should be set aside. If external funding or investment may be required, scenario planning can help identify this at an earlier stage to give founders enough time to start this often arduous process.
- Identifying opportunities: another benefit focuses that focuses more on the upside is that scenario planning could help with identifying areas for growth and investment. By doing multiple projections, it helps paint a picture of what the key drivers are for your business and how small changes to them can positively influence your business’s growth. This then allows you to dedicate your focus and resources where they’re best spent, capitalise on opportunities quickly and make better commercial decisions.
- Stakeholder management: of course, undertaking these scenario planning exercises may not just be for your own knowledge and benefit. For external funding and investors, this helps demonstrate that you have considered a range of potential outcomes and are prepared for alternative eventualities. Internally, this can also help build confidence in leadership and for certain key staff, this may help align their efforts with the business’s key drivers.
How might this work in practice?
As an example, let’s look at a tech business that is pre-revenue and anticipates launching its MVP in Q3 of 2023. A normal budget and forecast will be based on this assumption and many others, but scenario planning allows you to play out different scenarios. For example, what if the MVP is delayed until Q4 or into 2024, does the business have sufficient cash runway for the additional development costs? Should additional resources be allocated now to avoid this outcome? Should funding be sought to reduce risk? What if the product takes longer to gain traction once launched? How would changes to key drivers of growth such as the pricing model and customer acquisition cost assumptions play out? Scenario planning can help provide a steer on all of these questions.
How can we help?
At UHY (East), our Tech & High Growth department can support tech businesses at various stages in their journey with a range of management reporting, including scenario planning and forecasts. We’ll take the time to understand the key drivers and objectives for your business and help you to track your key KPIs and to forecast different scenarios based on both internal decisions and wider-market conditions. If you would like to discuss this or any other ways we can support you, please contact James Foster at j.foster@uhy-uk.com or your usual UHY advisor for further advice.
