Scenario Modeling for Our New Economic Reality: Leveraging Strategic Modeling to Understand the Financial Impacts of the Coronavirus
Scenario modeling on projected financial statements is important in any year, but the onset of the Coronavirus and its impact to the economy has dramatically increased the stakes for finance executives to understand the range of possible financial outcomes for their business. While economic time in terms of demand for many goods and services has seemingly stopped with most people hunkered down in their homes, financial time keeps ticking with bond payments, rent payments, and salary obligations still due. This dislocation necessitates an increased focus on how scenarios impact cash flow, liquidity, and balance sheet strength. Therefore, any scenario modeling solution should go beyond the Income Statement and provide insights into the Balance Sheet, Cash Flow Statement, and key metrics derived from those statements.
At Alithya, we have been implementing Oracle’s Strategic Modeling solution (and before that its on-premise equivalent Hyperion Strategic Finance) for nearly twenty years to help our customers run scenarios that provide insights to make business-critical decisions. While the Coronavirus is a new phenomenon, the current discussions we are having with our customers regarding their scenario modeling needs hearken back to the Great Recession of 2008 and the conversations we had with our clients then. Then as it is now, cash flow was king, and the ability to preserve liquidity and financial flexibility was paramount.
By leveraging Strategic Modeling’s out-of-the-box integrated financial statements, we build financial models that allow our customers the ability to immediately see how a change in volume or other key business drivers ripples through the Income Statement, Balance Sheet, Cash Flow Statement, and key performance metrics that are derived from financial statements. Our implementations of Strategic Modeling include credit metrics and ratios that allow our customers to evaluate how various scenarios will impact the metrics that banks, rating agencies, and internal management use in their analysis of the business.
Of course, no scenario modeling solution would be effective without best-in-breed scenario capabilities, and here is where Strategic Modeling shines. It has two primary tools in its What-If Toolkit that are of great benefit to our clients:
- Scenario Manager – this feature greatly facilitates the process of creating on-the-fly scenarios and comparing them against the base case or other scenarios. Scenario Modeling capabilities are designed for end users to create and run and provide immediate results to key strategic questions.
- Monte Carlo Simulations – this allows customers to forecast a range of possible input values for key drivers and then run thousands of trials or simulations to see the range of outcomes on key metrics in the model. This provides a probabilistic approach to modeling that helps to assess risk and the probability of certain outcomes occurring.
By combining the great scenario capabilities of Strategic Modeling with a set of fully integrated financial statements, we can help our customers answer the important what-if questions that senior management, the board, and external stakeholders are asking. In the uncertain time that we are living through now, this has never been more important.
We recently helped one of our clients in the healthcare industry adapt its Strategic Modeling solution to address the challenge of the Coronavirus and the multitude of scenarios it necessitated. Click here to view the details in this full case study.