It’s no secret the most successful, forward-thinking organizations can adapt to change fast. They have an eye on the future, plan for different scenarios, and as a result – end up miles ahead of their competitors.
But while it’s a well-known tactic, many finance teams struggle to make scenario planning work in their own organization.
Of course, there’s no way to predict the future. But there are proven, practical steps you can take now to improve your strategic planning process and help your organization proactively respond to change.
What is scenario planning in finance – and why does it matter?
Scenario planning can be used across different departments, but it has a specific – and vital – application for finance teams.
According to Gartner, financial scenario planning is a strategic planning tool for improving financial forecasting by evaluating the uncertainties, risks, and opportunities of multiple potential future states.
For FP&A teams, this will help create agile budgets and forecasts that can influence the direction and performance of their organization.
Done right, and scenario planning can help your leadership teams to:
- Identify early warning signs of challenges to the business
- Test different actions and see how they influence outcomes
- Weigh up different options before making any decisions
- Respond to change quickly and strategically in times of stress and uncertainty
While scenario planning has long been part of the strategic toolkit, events in recent years have highlighted just how critical it can be. Finance professionals have recognized the benefits of scenario planning in helping their organizations respond to change, and now consider it their most favored forecasting technique.
Setting the right foundations
Scenario planning can be a valuable tool to help businesses perform through times of sudden change and unpredictability – but there’s no guarantee. Without the right foundations, it can become a drain on resources that produces little practical benefit or insight for decision-makers. You’ll need other things in place to make the process work and produce results that genuinely help your organization deal with strategic uncertainties.
A key first step is to centralize financial data. This includes making budgeting, forecasting, reporting, and planning accessible to people in your organization. By using the same tools, you can help align work across teams and help them understand how their behavior impacts overall performance.
Set the right business metrics
To monitor performance, you’ll need to look beyond KPIs and consider business ratios. KPIs are typically department-specific rather than cross-functional, so they fail to provide a broader business snapshot. Business ratios often combine both operational and financial elements, making them a better measure for understanding performance impacts.
Encourage active participation
Any new process or way of thinking takes time to change, and effective scenario planning is no different. Collaboration with peers and stakeholders will encourage information sharing, buy-in, and help create more accurate forecasts. Start with collaborative budget building, then follow up by showing colleagues how their decisions impact the bottom line. Facilitate the process with collaborative, secure workflow-enabled software.
4 tips for better scenario planning
After getting your foundations in order, it’s time to look at your scenario planning process. This is where teams can become overwhelmed with the possibilities and get unstuck. Gain clarity and focus with our top tips below:
1. Choose key uncertainties
The possibilities of what can impact your business are endless. There’s no way to predict them all, or plan for every scenario either. Avoid analysis paralysis by focusing on a few key possibilities that are likely to occur and/or have the biggest potential impact.
2. Be open to the future
The best scenario planning takes your future into account. Look beyond your existing business and think about where you want to be in the years ahead. Accommodate for any changes that may happen around future customer preferences, competitor moves, and the market overall.
3. Know your priorities
Every organization has critical factors and assumptions that are essential to survival. If they are threatened by a particular outcome of an event, you’ll need to quickly understand how they’re impacted and how to best respond. Draw on both historical data and forecasts to identify these critical factors and address them in your scenarios.
4. Keep it agile
Include enough detail with each different scenario so you can rank each on its likelihood of success. With this knowledge, your leadership team will be better equipped to make quick decisions on an ongoing basis.
Ready to reap the benefits of planning?
If you’re ready to build more efficient plans, Phocas Budgeting and Forecasting can help you get started.
With Phocas, you can centralize data, encourage collaboration, and explore different options with ease using various models. It also provides a single source of truth with a direct connection to your ERP (and other) systems, ensuring your planning is done using the most up-to-date, accurate data.
See the difference Phocas can make to your financial statement analysis with a free guided trial of Phocas.