“Preparing your company for recession” … and recovery

Back in January 2008 CFO.com published an article titled “Preparing your company for recession” about how smart companies can prepare themselves for recession by using predictive modeling techniques and Monte Carlo simulations. The same is true during economic recovery: predictive modeling and Monte Carlo simulations can help companies to better anticipate the upturn.

As CFO.com explained in 2008, financial crises are an inevitable part of the business cycle and companies that respond rapidly and wisely often emerge stronger. According to research from The Hackett Group, companies should (1) look for cost-savings from long-term structural changes, (2) seek ways to free cash from working capital, and (3) hone their planning and forecasting capabilities. Predictive modeling and Monte Carlo simulations help companies to address the latter by identifying key revenue and cost drivers.

Scenario modeling is especially useful in fluctuating and unstable market conditions. It’s much easier to make predictions of sales, prices, or costs in a steady, mature market. And it’s also relatively easy to make predictions in a constantly declining or constantly growing market. But if the decline or growth are unknown in size and duration, predictions become difficult. Here is where Monte Carlo simulation comes in.

As Hackett recommended, Monte Carlo simulation can help to forecast outcomes during financial crises, a very uncertain market condition. This uncertain market condition exits also during market recovery where the level and timing of recovery are unclear. Companies that applied predictive modeling and Monte Carlo simulations to manage uncertainty during recession will be able to apply these skills to manage uncertainty during the recovery.

But it’s never too late to apply sophisticated scenario modeling tools like Monte Carlo simulation. Monte Carlo simulation helps to identify a range of potential scenarios in an uncertain environment. The result of the simulation is a range of financial outcomes for the business. With this information companies can better manage uncertainty in the volatile economic recovery.

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