A recent meeting with G7 leaders resulted in 100 million barrels of diesel and oil to be shared from reserves, following threats of oil embargoes and further price rises.
The price of diesel continues to hit historic highs in the UK, with RAC data showing the average price topping two pounds per litre for the first time.
UK businesses are reeling from the soaring fuel prices, which are having a direct impact on overheads, supply chains, profit margins and cash flow.
While the G7 announcement may lead to some financial relief, price drops may remain short-lived due to global supplies remaining heavily suppressed by ongoing geopolitical tensions.
Instead of waiting for prices to fall, businesses should focus on building resilience into their everyday strategies to help prepare for future price rises.
How does scenario planning work?
While these record fuel prices may have seemed unheard of a year ago, circumstances change and businesses are left picking up the pieces.
This is where scenario planning comes in.
Business scenario planning is a method for map out several possible futures and planning how each should be responded to.
By exploring multiple potential outcomes and preparing for them in advance, businesses can mitigate risk and stay resilient throughout uncertainty.
Scenario planning happens in five critical steps:
- Identify driving forces – This involves identifying the key shifts or trends, like rising fuel prices and assessing how they will impact your company
- Build the scenarios – Find two or three of the most important uncertainties and create a small set of plausible, distinct futures
- Assess the implications – Work through what each scenario would mean for aspects of your business, such as cash flow and supply chains, and stress-test where the current strategy breaks
- Plan responses – Develop actions for each scenario, separating those that help in every scenario and those that are specific to certain circumstances
- Monitor – Set early warning signposts that will flag when a scenario is unfolding, keeping the plan regularly updated
Plans should be reviewed monthly and whenever something significant changes, such as fuel prices rising, borrowing costs increasing or losing a major client.
For SMEs in particular, there is less room for error and cost pressures can quickly eat margins, so planning can give you more time to respond, not suddenly react.
Where can an accountant add value
As good planning depends on good data, an accountant can provide the numbers needed to answer those what-if questions.
Once scenarios have been identified, accountants can translate uncertainties into financial models to stress-test outcomes.
For fuel prices, an accountant can help to model impacts on operating costs and profitability to determining where your business becomes unsustainable.
This might include testing how long a business could endure higher costs before prices need to rise or which services or products become unprofitable.
One of the biggest risks SMEs face during periods of rising costs is a cash flow shortage. Accountants can create rolling forecasts and identify months where extra capital is needed.
With fuel prices remaining volatile and uncertainty becoming more commonplace, scenario planning can help you remain resilient to further cost increases.
Feeling the pressure of rising costs? Speak to our accountants for help with scenario planning and forecasting.
