Why you should create scenarios now
The economic implications of COVID-19 are still uncertain and nobody knows what we will see at the other end. Many predict that we will go into a recession which would have far-reaching implications for startups (some of which have only ever operated in an environment of aggressive growth). Therefore it is absolutely crucial to plan for different outcomes and be ready to pivot quickly. We recommend that you create different scenarios to anticipate the range of financial impacts and build contingencies to maintain a sufficient cash runway.
Why you should create scenarios
It is particularly important to create scenarios during uncertain times like the COVID19 pandemic. Not only it helps you to get ready for unpredictable outcomes but also stress test your company and implement precautionary measures ahead of time. Scenario planning is also helpful with all big decisions like product launches or international expansion (Pudding is a great app to help with this btw) regardless of the economic environment.
Scenarios
Given the level of uncertainty, we need to identify and consider a variety of possible outcomes. Your scenarios should not be too simple like what happens if the growth is 30% faster/slower, but instead should be driven by certain business hypotheses (e.g. given my company’s high exposure to the travel sector I expect churn to increase from 2% to 6%). In a perfect situation, the scenarios should assume proving or disproving the stated hypothesis. Typically people create three main scenarios: base case, worse case and worst case in order not to overcomplicate things. However it does not mean that this is the only right way and the number of scenarios should completely depend on the complexity of your situation. It is a good idea to create a dashboard in Google Data Studio and watch which scenario you are approaching.
Base case
This is your average scenario, based on the current pipeline and cost assumptions — literally just where things are today. Have a look at how much of a hit you have already taken. Try to adjust your forecasts for this and model which way you expect your industry to head. Then adjust your costs accordingly. Given the uncertainty this will most likely be based completely on your gut feeling but this is okay.
Worse case
Things are not looking great, e.g. 40% of your customers are restaurants so you expect most of them to churn. However you still expect a V-shaped recovery so things should go back to normal in a few months. You need to start looking at unique component of your business like customers, employees, suppliers and see where you can get extra revenues or cut costs to maintain your cash runway. You will find the data from your CRM (e.g. Livespace is great for SMEs) helpful when analysing the current health of your customers and considering the efficiency of your marketing and sales staff. This scenario should be like a bottom that you can still recover from. If you plan ahead you will be ready when it hits.
Worst case
Imagine that everything just goes completely wrong, and in the short to medium term you lose nearly all of your customers and revenue. You need to consider all the outcomes that you have been too afraid to address. You will need to cut all costs which are not absolutely essential (perhaps move to remote first) to stay afloat. Think outside the box. Perhaps you can use the current situation to your advantage and pivot to make up for lost revenues from your base product (e.g. recenty Allset pivoted from offering efficient dining room experiences to improved takeout orders)?
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