Proven strategies for the treasury department to track scenarios effectively.

An overview of scenario analysis

Scenario analysis is a method for developing reactions to possible potential situations in order to reduce uncertainty and increase the likelihood of obtaining the desired goal. Managers use scenario analysis to determine or invent various courses of action to pursue so that the organization can lower its total risk and increase its value.

Stress testing is a sort of scenario analysis that focuses on best and worst-case situations. Such testing is commonly used in the financial industry to assess investment risk and asset adequacy. Stress testing is also used to assist in the evaluation of internal processes and controls.

Pitfalls in capturing scenarios

1. Evaluating trends only within specific regions/global regions.
2. Basing decisions on what is already known or being too optimistic.
3. Not performing scenario analysis frequently.
4. Outsourcing the creation of scenarios.
5. Planning only on seasonality, and ignoring irregularities.

How to minimize the pitfalls?

1. Review the trends likely to affect your industry or region.
2. Stress-test both worst-case and best-case scenarios.
3. Perform scenario analysis frequently.
4. Use reliable systems, resources, and technologies to perform scenario analysis accurately.
5. Assess the impact of all the scenarios and make adjustments to make data-driven decisions.

Best practices to improve scenario analysis

Three steps to improve scenario planning

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  Identify the difficulties in the face of ambiguity:

  
  

  When challenged with a crisis, financial leaders must construct numerous scenarios to swiftly define parameters for how the organization should respond. These scenarios are based on a set of assumptions about situations that could endanger the organization’s cash flows. In times of crisis, businesses must combine historical data through treasury management systems with potential outcomes to evaluate the implications of certain scenarios.

  
  
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  Create multiple scenarios:

  
  

  When creating various scenarios, the corporate treasury teams can easily become overwhelmed by the variety of possible outcomes. That is why it is best to keep things as basic as possible- finance leaders must prioritize and establish opinions on each of the possibilities of different scenarios based on their sales cycle or their type of business (midmarket/enterprise).

  
  
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  Create a quick-response strategy:

  
  

  Each scenario should be detailed enough to determine the possibility of various strategy options succeeding or failing. The scenarios should be captured in the forecasts accurately through stress-testing worst-case and best-case scenarios and should be monitored regularly. Moreover, the scenarios must be tracked in real-time so that the team can respond quickly in the future.

  
  

How treasury cash flow forecasting software can help track various scenarios

Treasury cash flow forecasting software helps treasury to track various scenarios in the following ways:

• It improves visibility into daily cash levels and provides manual override (spreadsheet-like functionality) to stress-test multiple scenarios with ease.
• It also helps project changes in a portfolio’s value based on the occurrence of various events. Treasury solutions can determine the degree of impact on cash flows due to distinct ‘what-if’ scenarios by making modifications into predictions. This will assist the treasury team in devising solutions to deal with possible financial challenges.

Advantages of tracking scenarios effectively

Here are some advantages of accurate scenario analysis:

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  Future-oriented planning:

  
  

  Treasurers can find investment opportunities ahead of time by forecasting best-case scenarios. This assists companies in effectively allocating idle cash. They can put their money to good use by launching new goods, growing or restructuring their business, acquiring another company, or expanding into new markets. As a result, they will be able to obtain a competitive advantage and plan for the future.

  
  
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  Proactive decisions and actions:

  
  

  A corporation can avoid or restrict losses caused by unpredictable causes by assessing events and situations that could result in repercussions and implementing aggressive preventive steps in worst-case scenarios.

  
  
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  Risk and failure avoidance:

  
  

  Scenario analysis enables corporations to borrow early to avoid higher interest rate fees and insolvency.