The why and how of scenario planning

Unexpected events, from natural disasters to macroeconomic shifts, put businesses to the test each year. Organizations that don’t just want to weather these disruptions but thrive no matter what the market throws at them use scenario planning. This simulates the potential impacts of various situations on their bottom line, allowing them to pivot as needed and make better financial decisions.

What is scenario planning?

Scenario planning is a set of assumptions on what the future is going to be and how your business environment will change over time in light of that future. Also referred to as what-if analysis (though the two have some key differences), scenario planning uses current data and assumptions to consider multiple, potential outcomes.

A scenario plan can help you explore different narratives to determine how to best support future business operations. By assessing how various variables will interact under distinct conditions, you can identify which variable will have the largest impact on your business. These variables can include the pricing of products, operational expenses, market fluctuations, and more.

All industries, across public, private, not-for-profit, and government sectors apply scenario planning as part of their financial planning and analysis. C-suite executives, senior finance leaders, and financial analysts are typically the individuals who lead the scenario planning efforts at their organization.

How do you use scenario planning?

Scenario planning is used to formalize variables that can affect your business’s bottom line into scenarios—essentially simulations of potential events. Organizations use scenario planning as part of their forecasting, to test the rigidity of their processes, account for events that could have serious repercussions on the business, and generally become more resilient.

For example, an organization might use scenario planning to evaluate the impacts of a worldwide pandemic that forces employees to stay home. It could then develop processes that would help weather this situation.

4 benefits of scenario planning

1. Surfaces the impacts of potential events

The chief benefit of scenario planning is a better understanding of how different events—from the benign to the disastrous—can affect the business. Without scenario planning, each team may have its own disjointed interpretations of these events, but centralizing that information in a plan is key.

2. Allows teams to prepare response plans

Scenario planning isn’t just for evaluating the impacts of unforeseen events, it’s about preparing for them. Once you know how they can affect your organization, you can figure out ways to mitigate the worst of it—or even find ways to thrive.

3. Captures the knowledge of various experts

The scenario planning process brings together experts from all corners of your organization. This gives them the chance to share knowledge that may not otherwise be surfaced. The result? A knowledge transfer that benefits the entire organization.

4. Creates documentation

After you’ve planned for a specific scenario, your teams are left with documentation that can serve as a reference point should that scenario—or a similar one—occur. This means teams can be more independent and use data to drive decision-making.

3 advantages of scenario planning

1. It covers the impacts of multiple factors

Unlike other forecasting methods—like sensitivity analysis—scenario planning allows you to test multiple factors simultaneously. This creates a robust analysis with multiple dependencies, reflecting reality more accurately than some methods.

2. It’s a great way to plan for the future

Too many organizations focus on optimizing processes for the present, neglecting the potential damage the future can cause. Scenario planning, while being a complex process, is essential for building a resilient business that can grow despite any eventuality. Planning for the future can seem daunting, but scenario planning brings clarity.

3. It formalizes informal processes

Every team has some way of thinking about the future, whether that’s in how they build their processes or infrequent “what-if” brainstorming sessions. However, these informal processes rarely translate into organization-wide awareness without formal scenario planning.

3 disadvantages of scenario planning

1. The scope is massive

While scenario planning is undoubtedly a crucial aspect of forecasting, it can create a massive amount of technical work, especially if the scope isn’t restrained. After all, there’s no limit to the number and type of factors that can contribute to a scenario. Be sure you have the resources to undertake this, especially if you’re not using dedicated tools.

2. Important factors can change

Sometimes, between the initial stages of your scenario planning process and the resulting reports, the factors you’re analyzing might change completely. This is why scenario planning has to be treated as an ongoing process rather than a one-and-done project.

3. It’s incredibly difficult (without the right software)

It isn’t just the scope of scenario planning that can get massive; the manual work can grow with it, too. Many organizations still use spreadsheets for scenario planning, which puts the onus on people to manage dependencies and complex scenarios. Dedicated scenario planning software can help to lighten the load.

What is scenario planning best suited for?

Scenario planning is best suited to predicting the impact of large-scale changes or disruptions. Examples of major changes include financial crises, labor disruptions, social unrest, or criminal activity. Conversely, scenario planning can also help you better navigate unexpected success, such as explosive growth, or sudden increased demand for your products and services.

Businesses need a scenario plan during an economic downturn when it’s uncertain how market volatility will play out. During major disruptions, what’s worked before simply doesn’t cut it anymore. Historical trends are no longer good indicators of future performance. Scenario planning should not be confused with sensitivity analysis. Sensitivity analysis only accounts for changes in a single variable, while keeping all others constant. To best predict the performance of multiple variables, you will need to use scenario planning to capture their impact.

Tools for scenario planning

For effective scenario planning, you will need to identify relevant data and assumptions. For example, you may want to consider company-wide data, market intelligence, and historical events. Collecting company-wide data from your ERP, CRM, and HR systems can help you see the bigger picture. Keeping track of new competitors or innovations in the market will also help you better prepare.

Keep in mind any historical events that have led to major shifts in your industry. If you can formalize the relationship between different data elements, then you can create a quantitative model. A key challenge to scenario planning lies in an over-reliance on manual spreadsheets. Spreadsheets can have missing data, inconsistent formulas, and broken links.

All these things can make the scenario planning process feel cumbersome and difficult to execute. Many organizations will need to consolidate data from disparate systems. Trying to combine data from your ERP, CRM, and HR systems into a cohesive scenario plan can be quite the feat. With so many systems, financial analysts may struggle to find relevant data in a timely manner.

Businesses that are serious about scenario planning will need a dedicated tool. It is essential to invest in a tool that was created with scenario planning and analysis in mind. Instead of traditional spreadsheet-based systems, innovative companies use financial performance management software to create scenario plans. Financial performance management (FPM) software allows finance leaders to easily create scenario plans based on existing actual, budget, and forecast data without the headaches of massive spreadsheets.

By using FPM software, finance teams can access relevant data at any time, and easily manage resources to improve decision-making based on opportunities and risks.

How to create a scenario plan with Prophix

By leveraging financial performance management software, you can create robust, comprehensive scenario plans quickly—without mountains of manual work. With Prophix’s Financial Performance Platform, you can do scenario planning with hyper precision, ultra-adaptability, and dramatic performance. 

You can learn more in our full guide for scenario planning, but here are the essential steps.

Step 1: Gather model requirements and data

Prophix minimizes the time and effort needed for scenario planning. Spreadsheets—still the scenario planning tool of choice for many organizations—can be error-prone and create more work than they save. In contrast, FPM software sync data from your ERP, CRM, and HR systems to ensure you’re working with valid data. Through data integrations, you can easily organize information from various systems.

Step 2: Determine the number of scenarios needed

While it’s tempting to outline and test as many scenarios as possible, the work involved can quickly make it unfeasible. Too many plans create confusion and tie up crucial resources that could be dedicated to mission-critical projects. That’s where Prophix’s Infoflex process comes in.

Infloflex transforms information using existing data or user-defined inputs dynamically. It can allocate data or increase data by a set percentage. This process is best suited for these three scenarios:

• Best case: Based on increased sales or a spike in demand. This could be due to sudden market changes or the introduction of new revenue lines. While this is a positive use case, the best case can still cause strain. You may need extra resources or headcount. You can target specific revenue accounts to increase with the Infoflex process.
  
• Base case: Deduces sales trends based on prior periods’ actuals. Prophix’s Infoflex process can read existing actuals to extrapolate. It can pre-populate future periods with projection data as a foundation for the base case. This scenario can highlight what you can do to change or maintain your current trajectory.
  
• Worst case: Assumes revenue or costs are challenging business continuity. This planning option often involves drastic changes to fixed and variable expenses. You can use Infoflex to target specific accounts for increases or decreases. Consider decreasing revenue accounts to align with current events and increasing expenses.

Depending on market conditions, you may want to focus on negative or positive scenarios. You can leverage responsive FPM models to create business plans that mimic macroeconomic conditions even as they’re shifting.

Step 3: Distribute your scenario plan

For scenario planning to be relevant, the Office of the CFO has to share it with leadership. With Prophix, your plans can be shared through Report Binders, allowing you to group related exports and send them out to the C-suite.

You can also use dashboards to share an overview of multiple scenario plans and the associated variables. Prophix can pull together key metrics from your various data sources and create different dashboards for each team, ensuring that the right data is being shown to the right people.

With Prophix, you can easily share your scenario plan dynamically instead of relying on single-use exports.

Scenario planning is a powerful exercise to reassess your organization’s financial health in both prosperous and challenging times. With the right financial performance management software, finance teams can quickly identify the key drivers, data, and assumptions needed to plan for a better future. Prophix’s Financial Performance Platform empowers finance teams to scenario plan with ease. With these insights, finance leaders can make better business decisions and improve business resiliency, regardless of what the future holds.