My barometer for the degree of uncertainty is the gold price, which is now approaching 2011-12 levels.
The global financial crisis (GFC) in Australia is defined as the period of extreme financial stress from mid-2007 to early-2009. The flow-on uncertainty came when non-performing loans started peaking in 2011 to 2013.
The heat map of government debt levels across Europe was like the current bubble graphs of COVID-19 infections by country.
Morgan Stanley forecasters in June 2020 were saying the COVID-19 pandemic was different to the GFC, with a sharper drop and a faster recovery (a V-shaped economic recovery).
But, with airlines now forecasting a return to normal air travel in 2023, that’s three years away, and Florida recording a new record number of cases – 15,299 at 12 July – there is a degree of uncertainty over what the future looks like. It’s probably going to be more a U-shaped than a V-shaped recovery.
Evaluating and planning
Business always has a degree of uncertainty or risk and COVID-19 has amplified that uncertainty.
A key part of reducing organisational anxiety is evaluating the situation and developing a plan based on the analysis. Documenting the key areas of uncertainty and the expected range of uncertainty is a good place to start.
A well-structured financial model will provide the ability to flex the key variables that you identify as being exposed to the current uncertainty. With the model structured in the right way, you can then perform accepted risk-based methodologies, such as Monte Carlo simulation (a technique used to understand the impact of risk and uncertainty in financial and other forecasting models), on your business’s model to get a range of possible outcomes.
The data and tools are available for businesses of all sizes to analyse the risks and likely ranges of their financial model. Accounting systems at every level are now capable of linking and exporting data to Excel.
Various off-the-shelf packages offer advanced statistical and risk-based analysis to support the decision-making process. You can source a virtual CFO to build your capacity to deliver this process to the owners of your business.
As we’ve identified in management of the coronavirus, there is no steady state and businesses need to be ready to adapt to the rapidly changing domestic and global dynamics.
For help with your business modelling, talk to Advisory Partner today.
Brett Plant
Director
P: 07 3106 3399