Whether in uncertain economic times or times of growth, entrepreneurs constantly find themselves having to make decisions with less than perfect information. Thankfully, there is a powerful tool and one essential question, that can significantly aid in that process. What if? It is impossible to perfectly forecast or predict the future, but by having an intentional process to evaluate next steps and the myriad of possibilities, it can provide confidence to management teams and the all-important sleep at night factor to the CEO.
The question is established, now what? Here are some key best practices:
• Involve the team – Get input from the management team and key internal stakeholders. If this is an initiative for a new product for example, how does the sales team feel about it? What is operations saying about the ability to execute? Are their potential supply concerns leading to possible delays, or potential issues in production? From a financial perspective, what is the investment required depending on these factors? How much movement could there be in margins based on all these factors. Ultimately, what are the key factors of success? What are the possible impediments that could get in the way? Ask the team for multiple scenarios, perhaps a low, mid and high. Quite literally, ask the team “what if?”.
• Map it Out - Now that this information gathering process is complete, get things down on paper. This creates an ability to see the whole picture in one place and memorialize information. And just like in the first step, involve the management team in assessing this holistic picture. A common mistake is letting prior biases drive decisions too quickly, so having multiple brains to leverage can create new questions and answers in the process.
• The Key Drivers – With this picture, it will become clearer to narrow down the key drivers that will impact the outcome of the decision. Not every factor will ultimately be material in the process. Using our above example of a new product, the time to initial launch could be extremely important (such as the 4th quarter for a retailer), or not important at all for a business with no real seasonality or market pull. A similar approach will help focus in on those factors that really move the needle – capital investment, volume, cost, market demand, etc. Using financial models to move variables around is very helpful in this process. By capturing assumptions and then moving them, the impact of the change can be visualized and evaluated. What would the outcome be if costs are 5% higher than planned? Or if more payroll is required? What if sales are too strong? How does that impact internal supply?
• Build the guardrails – Small businesses are constantly operating with finite resources. A failure to execute as hoped can chew up capital and resources quickly. Growth can also have a similar impact if cash is tied up in production or if customer terms stretch more than expected. What are the bounds within which the business can operate? If the business is a car going down a windy road, the key is keeping the car from going off the cliff. Understanding and firmly establishing the guardrails on either side can serve as a great compass to navigate with.
• Observe and respond – The key here is that if the above process is followed, the business likely has already thought through the scenario that is actually occurring and can respond, instead of just reacting. This creates a proactive process where the business is able to nimbly pivot because it has already contemplated possible outcomes. If sales start out slower than expected, the business should have already contemplated how much additional capital it could use to support the ramp up, or perhaps other areas of marketing spend to explore to add more fuel to the engine.
This what if process can be used as part of the overall annual planning process as well as iteratively throughout the year as new business decisions are being explored. It is one of the most powerful processes we have seen businesses use, especially during the chaos of the pandemic in 2020. Seek input, take a step back, determine what moves the needle, and understand where the guardrails are. Entrepreneurs excel at driving the car, often quickly. This process can make the journey more successful and keep the car running at its best performance. Get behind the wheel and be confident whether that pothole appears, or the speed limit suddenly goes up.