Operational flexibility is just the first step in being prepared for an uncertain future: Financial modeling of scenarios is the necessary second step.

Some business leaders are prepared for surprises. One title company executive asks his managers to be ready for a 40 percent drop in activity, because he’s lived through such episodes. A manufacturing company owner tells me he is always ready to expand production by 30 percent in a 90 day period. He’s lived through several episodes in which flexibility allowed him to profit from surging demand. If you have learned how much flexibility that your company needs in operations, good for you.

The next step is to combine financial modeling with your operational plans. That title company should make sure that it can meet its financial obligations, including loan covenants, with a 40 percent drop in sales. The manufacturer should see if working capital would be adequate to buy raw materials and pay additional workers, given their customers’ normal payment terms.

Scenario modeling is the obvious solutions to these challenges, but a recent study by Axiom EPM found that only 24 percent of companies are doing that. (Axiom sells planning and forecasting software that makes the process easier, so they are not impartial on the topic.)

I’m sympathetic to the reason companies give for not doing more scenario modeling. Seven out of ten said that the biggest inhibitors are the time needed to create scenarios and lack of a system to do so. Done right, scenario modeling is an iterative process. The budget analyst roughs out a plausible high or low scenario, then meets with operations managers to learn how they would adjust spending. The analyst then figures out whether capital expenditures or other major cash flows should be altered, confirming the judgment with senior executives. For example, a negative scenario might trigger a delay in buying real estate for a new facility, while a positive scenario might reduce the need to roll over a loan coming due.