FSN’s recent research, “Agility in Planning, Budgeting and Forecasting” identifies that only 4% of organisations regularly find time for scenario planning. It’s an understandable finding in the context of ‘business as usual’, where profitability levers and market conditions are well understood and predictable. But COVID-19 pandemic turned all of this on its head.
Previous years’ budget assumptions, ‘rules of thumb’ and precedents were swept away in an instant by the profound changes ushered in by the pandemic. Never, (certainly in living memory), have so many facets of business, for example, liquidity, supply chains, travel, staff deployment, accommodation and safety changed simultaneously, and many organisations found themselves completely ill-equipped to deal with the impact.
Fortunately, scenario planning, provides the set of tools and methodology to start tackling this unsettling situation and it’s prompted a surge in interest in scenario planning as CFOs look for better ways to plan for an uncertain future. So what is scenario planning?
Scenario planning is a strategic method of analysing alternative future scenarios and the outcomes and potential solutions for each sequence of events. It is very distinct from what people have mistakenly called scenario planning in the past, i.e. tweaking, of one or two variables in a pre-existing forecasting templates. True scenario planning is at a completely different level altogether. It’s a strategic assessment of market conditions, geo-political and macro-economic influences on the business as well as business specific challenges. The aim is to work through a comprehensive range of scenarios, (not the usual ‘best case’, ‘worst case’ and something ‘in between’), changing multiple assumptions simultaneously.
Unautomated, it’s a time-consuming exercise and practically worthless unless an organisation can simultaneously model multiple scenarios, assumptions and variables – something that is hugely challenging if not impossible within the limitations of a spreadsheet. It’s a key reason why FSN’s research finds that 96% of organisations fail to make sufficient time for scenario planning.
So, scenario planning needs to be underpinned by a modern forecasting application, that provides the agility to constantly pivot assumptions and scenarios. It also requires a firm foundation vested in rolling forecasts to provide a well-informed basis for strategic discussions.
There are also organisational issues to consider. While FP&A has a crucial role to play, the broad remit of scenario planning necessarily involves more of the senior management of an organisation. The process needs to engage with more stakeholders within and outside the organisation, and to consider risks as well as opportunities.
FSN’s research shows that for those that do make time, the benefits are comprehensive and substantial. Crucially, almost double the number of scenario planners can forecast a year ahead compared to non-scenario planners. Scenario planning also adds to the accuracy of forecasting, with 54% of scenario planners able to forecast to within plus or minus 5% of earnings and revenue, whereas only 36% and 41% respectively of non-scenario planners manage to forecast earnings and revenue with such accuracy.
The benefits are compelling and so accordingly, scenario planning is set to become a critical part of the CFO’s tool bag. In uncertain times, it provides welcome clarity, certainty, and control.