Using Financial Scenarios To Shape Business Strategy

"Should we hire or should we cut?" is a question I'm hearing often from small business owners right now, which is fair given the mixed economic signals. Some clients are seeing their best quarters ever. Others are watching pipelines thin out. Everyone seems to be asking, "How do we plan for what we can't predict?" This is where scenario planning becomes your survival tool; not just hoping for the best, but modeling the reality of different futures. Here's what we walk our clients through: 🌳 The Growth Scenario: For example, if revenue is expected to be up, we’re looking at potential team expansion and higher overhead. Looking at what that does for cash flow given the changes to expected expense changes. 🌱 The Steady Scenario: Where flat growth is expected and we plan to maintain current team, we’ll want to optimize margins and prepare for inevitable per team member increases. There will likely be some percentage increase YOY but we expect the core costs to stay the same. 🍃 The Contraction Scenario: On the other hand, if revenue is expected to go down, we want to look at strategic cuts that allow the team to run efficiently while preserving cash. For our clients, this is usually a mix of team, professional services, and travel. We also want to ensure that the resources kept are used efficiently. Each scenario gets its own financial mode where we map out cash flow, runway, and break-even points for 3, 6, and 12 months ahead. The command center for this? Fathom. We've been using Fathom since the beginning of Little Fish Accounting and it lets us build the scenarios in real-time with clients, showing exactly how each decision ripples through their financials. No more spreadsheet gymnastics or gut-feeling guesses. Ultimately, the founders who survive uncertainty aren't the ones with crystal balls—they're the ones with clear models and decisive action plans. And we're glad to be the builders 🧱

What happens to a company’s financial health when the economy takes a turn for the worse? Imagine: A business starts the year with a healthy cash reserve and manageable debt. But As the market shifts, they’re forced to dip into their revolving credit line. The cash cushion starts to shrink, and by the end of the forecast period, it’s gone. Meanwhile, current liabilities and short-term obligations that must be paid within a year remain high, putting added pressure on their liquidity. Now, Here’s where it gets tricky. Even though the company was paying dividends every year, their retained earnings were growing thanks to steady profits. But under this downside scenario, profits turn into losses. Retained earnings reverse course, and equity erodes. The balance sheet starts to tilt: liabilities rise, equity falls, and the company edges closer to breaching financial covenants. The lenders aren’t blind to these risks. They lower the loan-to-value (LTV) ratio meaning the company can borrow less against its capital expenditures. In the best-case scenario, they could secure 75% financing. But as the risk climbs, the LTV drops to 65%. Lenders also shorten the debt repayment period, ensuring they get their money back faster. This shift in capital structure is a stark reminder of how quickly financial stability can unravel. It underscores the importance of scenario planning in financial modeling preparing not just for growth but also for the storms that might come. According to a recent survey, 77% of CFOs identify liquidity management as their top priority during economic downturns. And yet, many companies still underestimate how quickly their cash position can deteriorate under pressure. This is why building a robust forecast, stress-testing your financials, and maintaining a proactive dialogue with lenders are more critical than ever. Have you experienced a shift in your company’s capital structure during challenging times? How did you navigate it?

💡 Financial Intelligence for SMB Owners - Nugget #9 💡 "I look at my financials regularly, but... I am unsure how they connect to driving growth, getting funding, or the valuation of my business." Though often worded somewhat differently by each owner I speak with, the concern they are verbalizing is essentially the same. This gets to the crux of the value that Embedded Fractional CFOs from FocusCFO® bring to our clients. Call it the "3 A's" of strategic financial management: ✅ Align ✅ Allocate ✅ Anticipate ➡️ Align: Strategy, Numbers, and Outcomes Most owners have goals for their business. But goals aren’t strategy. And even if there is a broad strategy, if there isn't someone that is tying the strateg to the numbers to develop the financial roadmap to execute, then.... do you really have a strategy? With this financial roadmap🛣️ , the fractinal CFO: 💠 Turns your vision into measurable outcomes and supporting narrative that speak directly to lenders, investors & buyers; 💠 Links the strategic initiatives directly to capital needs and cash flow targets; 💠 Establishes metrics that directly lead to achieving those outcomes, not just easily measured 'activity'. ➡️ Allocate: Capital, Cash, and Resources The capital allocation plan for the busines is the growth plan!💡A strategic-minded CFO will: 💠 Use scenario analysis to lead decisions, not react to them; 💠 Focus on real free cash flow (not just EBITDA), which is the lifeblood of growth; 💠 Take a hard, skeptical look at expected returns to ensure limited funds are allocated to growth intiatives that have the highest likelihood of achieving desired outcomes; 💠 Balance strategic investment in growth while keeping your business lender- and investor- and buyer- ready. ➡️ Anticipate: Risk, Gaps, and What Comes Next Basic financial reporting reflects what has already happened. A "superpower" of our Embedded Fractional CFOs is knowing how to enable leadership with foresight: 💠 Spot red flags in liquidity, debt service coverage or solvency before they cause problems; 💠 Build a rolling forecast that’s actually useful to spot opportunities and manage risks; 💠 Facilitate informed conversations amongst the leadership team about how to smartly grow the business (and its value); 💠 Pressure test your plan like an investor or buyer would. Financial Leadership ⏩ Business Strategy