Can scenario planning really improve your financial recommendations?

The problem is that plans are often limited to:

• The ambitious initiatives that your business wants to make happen
• The risks you think could arise and want to be prepared for

While those are all well and good, that list falls short. And even the best-laid business plans can become outdated very quickly.

In today’s uncertain times, your finance and executive teams deserve more. They need the ability to work with your existing financial data to create ‘what-if’ scenarios so they can generate viable solutions to a raft of increasingly complex and often real-time business challenges.

The beauty of scenario or what-if planning is that it allows you to consider different plans and see how each one plays out.

It gives your team the freedom to prepare a response to events (positive or negative) and plan confidently for the future.

While many companies have built sophisticated spreadsheet scenario macros and models – the problem arises when they try to leverage data from other systems (as well as the inherent problems that come with complex Excel spreadsheets such data errors and consolidation of multiple workbooks).

Automated planning solutions remove human bias from the planning process. They can extract data from other systems (e.g., CRM, HCM, ERP) and give you the ability to make data-driven, optimised decisions that factor in your pre-determined risks.

Scenario planning isn’t intended to forecast the future, nor does it provide predictions.

Its value is in testing ideas which generally fall outside of your company’s control (for example, supply chain disruption due to an environmental or political event) and gives you the opportunity to sound out how you can adjust your operations or processes for the best outcome should the scenario eventuate.

So, what does scenario testing look like in action?

What are some typical real-life business and financial challenges that you can test and apply a range of possible responses to?

Here’s an example:

Challenge: We want to make the right market expansion and development decisions (we can’t afford to get it wrong!).

With what-if planning you may model these scenarios:

• What-if we want to expand into a new market?
• What-if we want to increase market share in one market, retain in another and reduce in a third market?
• What-if we scale up our sales workforce and change their compensation plan (for example, from salary to full or part commission based)?

By using multiple ‘what-if’ scenarios rather than just one, you can determine the best, and lowest risk course of action – one that makes sense financially and operationally.

Challenge: We want to respond more accurately to rolling forecast predictions.

While spreadsheets undoubtedly serve their purpose, they’re not the answer to everything.

For example, when it comes to updating business drivers to determine how Q1 will impact Q4, they definitely won’t deliver. And even testing a small change like the impact of a petrol price rise on your business, can consume hours of your finance team’s time as they labour over a spreadsheet – manually adding variables.

By comparison, an automated planning option enables you to use Q1 actuals and test multiple drivers to have an always-on rolling forecast.

Challenge: How can I improve efficiency for my finance team when reviewing both top-down with bottom-up models and assumptions?

One of the challenges for your team is melding the top-down requirements (growth rate, profitability targets) with bottom-up inputs (raw material costs and transport routes). Generally, these two plans are done in different spreadsheets due to their specific requirements. Result: twice the work, twice the opportunity for error.

An automated scenario-planning tool enables you to bring these two worlds together where you can speculate, test different initiatives, and see how doing something new in one part of the business will affect other parts of the business.

With forecasting, many predictions will likely be wrong. But in the past, that wasn’t a huge problem. You don’t have to hit the bullseye as long as you hit the target.

But today, being wrong can easily mean being very wrong.

What happens if your supply chain is disrupted tomorrow, and you can’t get hold of a critical component?

What if the price of crude oil increases overnight by 25%?

What if the government suddenly imposes new border restrictions?

The 2022 BARC survey says that four out of five organisations are now complementing their traditional annual budgeting with automated planning products.

If you can identify what could happen, you are more equipped to effectively manage what does happen.

Like anything, scenario planning is not without its own dangers.

One pitfall is trying to account for every possible future. That’s just as paralysing as planning for only one. Typically, while the organisations we talk to identify a number of possible scenarios, they plan for only a few of them.

Another pitfall is identifying a single scenario, and then building a rigid strategy around it. A sound strategy leaves room for change as new information is identified.

However, powerful planning software can reveal those complex relationships with a degree of certainty that manual planning can’t even get close to.

And as this chart shows, there are still plenty of companies who are yet to get it. That creates a real competitive opportunity for those who do.

Will yours be one of them? (And what-if you’re not?)