Scenario Planning Opportunities and Challenges

Prophix ImageProphix Nov 10, 2020, 3:24:00 AM

Strategic Planning Is Key to Business Success

If the hindsight of 2020 has taught us anything, it’s that we need to be flexible. Did anyone have a worldwide pandemic, murder hornets, and a Kanye West presidential bid in their scenario planning last year? If you had even two out of three, please let your boss know that you’re underpaid.

Of course, as much as we tend to compartmentalize 2020 as a “bad year,” there’s no reason to think the future will be less volatile. We live, as they say, in interesting times — and the way to survive and thrive is to plan early, plan often, and be adaptable when plans need to change.

We recently created a new guide, Scenario Planning for Finance: What, How and Why, to help Finance leaders navigate uncertainty and improve predicting capabilities.

For this post, we’ll focus on actionable advice from three experts featured in the guide:

Amie Roach, Chief Financial Officer, Lochmueller Group

Ken Fick, Director, Strategy & Transformation at MorganFranklin Consulting

Gabrielle Luoma, Co-Founder and CEO at MOD Ventures, LLC

Amie Roach Explains How Scenario Planning Leads to a More Informed Decision-Making Process

Chief Financial Officer Amie Roach emphasizes that scenario planning is a “vital tool to the success and continued growth in value” that has cemented Lochmueller Group as one of the leading engineering and environmental firms in the world. Such insightful plans are the key to boosting business resiliency.

COVID-19 may be the primary challenge facing businesses today. However, the pandemic wasn’t the first global event to throw a wrench in our plans, and it won’t be the last. So it’s crucial to implement smart strategies to prepare for what twists and turns can be around the corner. As Amie explains, “scenario planning helps prepare for both worst case and best case plans.”

Here’s how Amie makes good use of smarter scenario planning at Lochmueller Group:

“Using scenario planning, we are able to review current assumptions regarding revenue as well as discretionary spending. Having multiple scenarios allows us to make decisions with full visibility as to how any decline or increase in revenue and/or expenses will affect our bottom line income. As a new ESOP [Employee Stock Ownership Plan], it is more important than ever for our company to have visibility into how we are affecting future cash flows and business sustainability. Scenario planning is a vital tool to our success and continued growth in value!”

Ken Fick Describes the Benefits of Accurate Scenario Planning

As the Director of Strategy & Transformation at MorganFranklin Consulting, Ken Fick has years of experience helping companies improve their financial performance. For Ken, accurate scenario planning is about smart analysis, not just quantity of data: “More data does not actually translate to better/more accurate scenario iteration,” he says. Ken applies a cadence of reporting around corporate financial planning and analysis to inform his decisions, all based on facts and rooted in meaningful metrics:

“Thinking of it in economic terms: The value of one additional piece of data, even assuming perfect prediction of that data point is both priceless and useless at the exact same time. It’s the actions that one takes around that data point that matter. All execution is flawed to one degree or another. The benefit of leveraging technology is the increase in velocity and volume of the scenarios that are able to be created. Multiple academic and professional studies have shown that the most successful firms are able to re-deploy capital to areas of higher growth faster than those that do not. By increasing the number of scenario iterations at a faster speed, managers can make more informed decisions, more quickly.”

By shifting to faster, more accurate planning, Finance leaders can increase the frequency of their reporting. Shifting from quarterly to monthly to weekly better equips the Finance department to handle new obstacles and capitalize on new opportunities:

“Instead of waiting until 15 days after month end to get the reporting package-- which includes the most recent actuals and the latest forecast--and then making decisions, you may be able to get the same level of detail weekly. In addition, instead of getting only a base, high and low case, you can get 10 different possible scenarios with varying assumptions based on the economy, consumers, complimentary products, competitors actions, etc. By moving to weekly reporting, a decision that was made a week ago, that did not produce the intended outcome, can be analyzed and the path altered. In short, the benefit of faster, more frequent, and more numerous scenario iterations is to allow poor decisions to be changed quickly, and to validate good decisions sooner.”

Gabrielle Luoma Advises a Comprehensive Look at Past and Present

Gabrielle Luoma, the Co-Founder and CEO at MOD Ventures, LLC, provides “virtual CFO” services to businesses of any size. She recommends being comprehensive in scenario planning — letting older data inform but not dominate the process. “Scenario planning can be tricky,” she says. “You need to understand what drives specific changes in your financials so that you consider all the changes up or down”

Gabrielle also cautions against letting too narrow of a viewpoint skew the process:

“I think the biggest obstacles people have is their own optimistic or pessimistic viewpoints. If they are too optimistic about how their business is going to do or how a revenue stream is going to do for them, they might predict a 30% increase without looking at all the data. Making that forecast in a bubble without looking at older data can throw off your scenario planning. The same could be said about being too pessimistic, as well. Use your historical data to help set expectations as you plan.”

Reevaluate and Plan Ahead for a Future

In hindsight, 2020 has been an unpredictable, even surreal year. but who knows what possible delights and disruptions 2021 may bring? In an uncertain and sometimes unstable world, scenario planning can empower Finance leaders to advise and guide the organization to greater success.

Download our Scenario Planning for Finance: What, How and Why guide to learn how to navigate your best course of action level up your planning process.

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