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Scenario Planning to Prepare your Business for a Recession

September 27, 2019
Scenario Planning
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After the Great Recession of 2007-2009, the mere mention of another recession may be enough to cause a sense of alarm. However, it's important to note that shallower recessions are much more typical and a natural part of the business cycle.

But still, two or more consecutive quarters of negative economic growth would surely be felt, from rising unemployment to dipping revenue generation - and it could disproportionately affect your industry.

In a recent survey, economists predicted an economic recession on the horizon. While a 2020 recession is by no means inevitable, if you believe these economists (or even if you’re skeptical) it’s time to leverage financial scenario planning to see how your business can cope in the coming years should the economy take a turn for the worst.

The first step to creating a plan to survive a recession is understanding what’s to come. What issues would it bring to your business operations and cash flow? Before jumping into how to leverage scenario planning, let’s take account of what we know. Then, with a clear picture of what possibilities the recession might bring upon us, we can start leveraging vision in financial planning for business.

What factors could indicate a 2020 recession?

Trade tensions between the U.S. and China, resulting in China’s current manufacturing slump and the trade war, are playing a major role in the potential economic recession in 2020—even though President Trump’s tariffs on imported goods have been delayed (at least until the 2020 presidential election). High levels of personal and corporate debt among Americans and American companies also play a role, especially mounting student loan debt that many Americans, especially American millennials, are experiencing.

The declining sale of luxury goods is a factor that has historically indicated the start of an upcoming recession, but the tell-tale sign of an economic recession is an inverted yield curve, where interest rates on short-term government bonds rise above rates on long-term ones. An inverted yield curve has been observed one year ahead of the beginning of every recession for the past 50 years.

Typically, 10-year U.S. Treasury bonds have a higher return rate than 2-year U.S. Treasury bonds. Long-term government, municipal, and corporate bonds are always a little riskier, but the higher rate of return motivates investors to purchase them anyway.

Recently, however, the reverse is true for U.S. treasury bonds. Long-term government bonds are being issued with lower interest rates than short-term ones. This is called an inverted yield curve. When this flip-flop occurs, economists signal a warning call for an upcoming recession.

An inverted yield curve is the number one indicator that an economic recession will occur within a year or two. That’s not to say that things can’t change between now and the 2020 (or 2021) recession, but it’s always a good idea to plan for the worst.

How to prepare for a 2020 recession with scenario planning

While there isn’t much any single person or company can do to stop an oncoming recession, there’s plenty you can do to plan for it.

Using scenario planning tools for what-if analysis could be your business’s ticket through to the other side of the 2020 recession. When you leverage scenario planning ahead of time, you can at least see what’s coming and aptly deal with it. Scenario planning allows you to speculate on multiple scenarios. You can’t predict the future, but you can use the information you do have about the economic climate and the tools available to you in scenario planning to help ease the blow of a recession.

Multivariate scenario planning can help you plan out what will happen to all aspects of your business if the economy goes south. For example, you can forecast scenarios involving multiple factors like the value of assets as well as cash flow, and see how things would pan out in multiple situations.

Depending on your industry, your business may suffer more from the recession than others. If your business is in luxury goods, you can project what-if scenarios that mimic decreased sales you might expect during a recession. You’ll be able to determine what your budget will look like and make decisions like whether or not you can afford big purchases in the coming months. From there, you could plan out what you need to do to stay profitable and be prepared for 2020.

If you have business loans to repay, you can use scenario planning tools to figure out the best way to cover payments even if the economy causes your cash flow to go down. You’ll want to focus on repaying any high-interest loans first to avoid having to pay more in the future. You can use scenario planning to zero in on the best way to pay off that debt.

Scenario planning can also help you decide if you need to liquidate any assets that might lose value in the upcoming recession. If you predict that your portfolio or other assets will drastically drop in value, you can decide to liquidate those valuable assets early on so you can put more money in savings, rather than waiting until it’s too late and they’ve lost value in the recession. With scenario planning tools, you can make sure to account for all of your assets, ensuring you don’t forget anything valuable that could help your economic situation in 2020.

Scenario planning can offer multiple scenarios if your primary industry is Manufacturing. If your raw material (sugar), pack material (oil resin, paper) or labor expenses are expected to increase due to an expected recession, all of these variables can be adjusted as drivers for various scenarios. It is common practice to develop a good, likely, and worst-case scenarios for just these reasons and track accordingly.

Don’t panic, plan ahead

Making a long-term plan for the recession won’t make your problems go away, but it will help you get prepared. Ask yourself: how much can my business save? What can we cut from the budget to set aside more? How can I cushion my business to brace for the fall? You can sit and think about the answers to these questions, or you can take a more informed approach.

Recessions aren’t permanent, but you’ll definitely need a plan in case one occurs. Rather than trying to crunch the numbers yourself, leverage scenario planning to figure out what you can do for your business in the case of a 2020 recession.

Maddie is a Content Marketing Specialist at G2. She loves words, cats, music, and the internet, even though she wishes she was alive in the 80s.

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