Traditional budgeting and forecasting approaches are having to rapidly evolve to keep up with the current dynamic business environment. The unprecedented nature of this crisis means many FP&A teams are discovering that the future can no longer be predicted based on historical data; this is a period of too many ‘unknown unknowns’.
What is scenario planning?
Scenario planning is a thinking method that identifies a specific set of uncertainties and considers the alternative future realities they could bring about. These potential events are assessed for their likely impact on the company in question, providing analysts with likely outcomes and tangible data based on a range of assumptions.
It is an approach that allows us to make decisions quickly based on real data. This method has been widely used for years but it’s evolving and the available toolset is making it possible to carry out at scale and at pace.
Scenario planning vs traditional planning
A traditional forecasting method would assume a twelve-month span of predictability, with adjustments made quarterly or monthly. In conditions as volatile as we currently face, it isn’t possible to forecast that far ahead.
Scenario planning allows for ‘what if’ thoughts processes and models. This method creates new insights and is forward-focused – dealing with assumptions of what could happen – rather than based on what has previously occurred.
Transitioning to scenario-based planning
To enable scenario planning that drives quick and reliable decision making, businesses need the following:
- The ability to identify key drivers, the small number of variable which determine the majority of outcomes.
- Driver-based planning models which allow these variables to be truly flexible, rather than fixed or averaged as is seen in most spreadsheet-based models. (Consider the futility of trying to forecast with any confidence for a complex business subject to foreign exchange, international labour, transport and raw material costs, and international customer demand based on historical averages in this current climate.)
- Top-down budgeting aligned with bottom-up planning. This won’t happen overnight but efficient collaboration across the business is vital for agile planning.
- A modern forecasting tool. Excel is simply not sufficient for this planning approach. An automated forecasting system that can pick up inputs from operational systems and business intelligence and allows for real-time collaboration with business stakeholders is essential.
These tools are now within reach whatever your organisation’s size and budget. With the release of Planning Analytics Digital, organisations now have the opportunity to put these elements in place at a low cost and move quickly from basic planning and forecasting to strategic scenario planning.
Equip your team with everything they need to generate valuable insights and start acting on risks and opportunities based on a complete understanding of the ecosystem you’re currently operating within. Get in touch today to find out more about how you can access these tools.