With the reported likelihood of a recession changing day to dayand based on who you ask, this leaves businesses unsure about how to plan ahead.
To cope with this, however, more organizations are using scenario planning to anticipate many potential business outcomes, then frequently adjusting their plans in real time as factors change.
Forecasting and scenario modeling are key processes that help finance teams stay agile and proactive. But according to Venas third annual benchmark report, The State of Strategic Finance: Vena Industry Benchmark Report 2022, 55% of survey respondents revealed they arent using scenario modeling before making forecasting adjustmentsmeaning a majority of companies arent in a position to mitigate risks in as timely a manner as they would if they were maintaining an agile forecast and scenario planning process.
To stay ahead of the curve, businesses need to be agile and responsive, adapting their strategies as the environment shifts.
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Image Source: Vena
Successful scenario planning plays a central role in achieving this level of agility, and FP&A teams play a key part in making it happen.
In this guide, well cover exactly how FP&A teams can use scenario planning to make their companies more resilient. By enabling your finance leaders to make smarter decisions for the future, you equip your company to weather any future storms that may lie ahead.
Scenario planning is the process of identifying multiple potential outcomes and proactively determining how your organization would handle each one. It relies on assumptions made based on current internal and external factors, which can include:
All of the above (and more) can impact your companys sales/revenue potential and overall financial stability. FP&A teams must take the lead on analyzing how different scenarios will likely pan out and helping company leaders make informed decisions about how to handle each potential outcome.
FP&A teams usually perform their own scenario planning for the company as a whole. However, they can also work with individual department leaders to understand how a specific business unit might be impacted by a situation and/or how a department-specific decision can impact the organization at large.
Lets look at how FP&A teams can successfully execute scenario planning in practice.
While any number of internal and external factors can impact the financial state of an organization, not every factor affects every company. The first step to successful scenario planning for FP&A teams is to understand the relevant factors at play.
For example: COVID-19 had a massive impact on industrial supply chains. It would have been a huge consideration in any scenario plan for companies with factory operations. A SaaS provider, on the other hand, wouldnt face the same level of disruption as they operate in the digital realm and could continue operations as normal for the most partregardless of the restrictions put in place.
There are four types of scenario planning and each is relevant for different situations. They are:
Choosing the right kind of scenario planning comes fairly naturally when you consider the situation at hand.
For example: In the early onset of COVID-19, companies conducted operational scenario planning to determine how the safety precautions would impact operations. On the other hand, a standard budget forecast is more suited for quantitative scenario planning.
3. Build the Right Planning Team
The team performing your scenario planning is just as important as the process you use. Build teams that include people with expertise in and professional relevance to each specific situation.
For instance, sales forecasting scenario planning would include your VP of Sales, CFO and other key sales leaders. Conversely, scenario planning for your future technology budget would include your CIO and tech leaders. Finalizing a high-level company plan would require approval from the CEO.
The takeaway: Determine who needs to be in the room for each scenario planning initiative and build the right support team around them.
In many casesespecially as it relates to overarching organizational plansits a good idea to build cross-functional planning teams that include varied (but equally reliable) perspectives.
As with most data-related initiatives today, scenario planning for FP&A is best performed with the support of AI-powered, highly automated planning tools. These tools provide key benefits that enhance the scenario planning process and its impact, including:
With the right scenario planning tools in place, it becomes an ongoing effort versus a periodic undertaking. Your organization can operate with greater agility and make the right decisions for any scenario based on data thats current and visible to those who need it.
Collaboration capabilities, according to Gartner, have become increasingly important over the past several years. Since 2019, the use of tools to store and share data and collaborate across roles and teams has jumped significantly.
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Image Source: Gartner
Whats more, given the continued rise of remote work, its likely that this trend will only continue on the same trajectory.
Despite the sophistication of predictive data analytics tools, no future scenario is a 100% sure thing. Furtheras the pandemic showed us like never beforeunexpected events occur that can throw your entire scenario plan off track. For this reason, its important to consider multiple scenarios in every analysis.
A best practice is to consider three primary scenarios:
Its tempting to stick with the base case because it seems most likely to happen, or become overly optimistic and assume the best case because you want it to work out that way. Its even common for companies to avoid worst-case predictions because its an uncomfortable prospect.
However, FP&A teams must take the lead in addressing all these potential outcomes head on to help leaders make the right decisions about how theyll handle each of them. In doing so, scenario planning gives FP&A teams an important seat at the strategic table.
After all, its FP&A professionals who understand their companys financial data best and can help contextualize it for various stakeholders to drive decisions in the right direction.
Scenario planning is notoriously stressful, but with Vena, your FP&A teams no longer have to feel like theyre scrambling for the right data, resources and time to execute confident plans. Vena Flexible Scenario Modeling Software has helped clients achieve faster reporting, all while streamlining processes and making them easier to execute.
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