How scenario planning helps with budget resilience

In the ever-changing landscape of business, adaptability is key to success. The ability to anticipate and respond effectively to unforeseen events gives organizations a competitive edge.
Yet, despite its importance, many finance teams struggle to implement effective scenario planning.

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 future events.

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 a variety of possible future scenarios.

For FP&A teams, this helps create agile budgets and forecasts that are more resilient and can influence the direction and performance of their organization.

When done correctly, scenario planning can help your leadership team members to:

• Identify early warning signs of potential challenges to the business: enabling finance teams to better prepare for and mitigate risks before they escalate
• Test different actions and see how they influence outcomes: enabling more informed decision-making as leaders can perform scenario analysis before committing resources
• Respond to change quickly and with strategic thinking in times of stress and uncertainty

Scenario planning has long been part of the strategic management toolkit. However, in today’s fast-paced business environment, finance professionals recognize the benefits of scenario planning in helping their organizations respond to rapid 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. 

Centralize data

A key first step is to centralize financial, sales and operational 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. 

The advantages of combining sales data budgets onto the GL is a game-changer. It removes complex spreadsheets and coupled with workflow and approval processes, ensures the business is only a click away from seeing the current status of budgets or forecasts." 

Jonathan Kemp, Epicor implementation partner at WD-40

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. 

I love that you are able to assign category/accounts to individuals for review, to ensure each department has a say in the budgeting process." 

Justin Capar, Controller at American Metals 

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 possible scenarios that can impact your business are endless. There’s no way to predict them all, or plan for every scenario either. Avoid scenario analysis overwhelm 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 the potential outcome of an event, you’ll need to quickly understand how the business is impacted and develop a best-case response. Draw on both historical data and forecasts to identify these critical factors and address them in your scenario planning exercise.

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 ensure quick decision-making on an ongoing basis. 

Scenario planning serves as a proactive strategy to strengthen your budget and forecasts by accounting for potential risks. By envisioning various scenarios and their potential impacts, organizations can identify and prepare for potential disruptions, ensuring greater resilience in their budgets. Moreover, when equipped with software that facilitates easy revision of budgets and forecasts based on evolving events or scenarios, organizations can maintain the relevance and value of their budgets over time. This dynamic approach ensures that budgets are not merely set-and-forget documents but living, adaptable frameworks that support informed decision-making in the face of an uncertain future.

Ready to reap the benefits of scenario planning?

If you’re ready to build more efficient plans, Phocas Budgets and Forecasts can help you get started.

With Phocas, data is pulled from your ERP and any other source into one centralized platform, so everyone is connected to the same up-to-date financial, sales and operational data. Human-friendly software lets you budget any way you like with pre-built budget templates as well as in-built workflows that deliver quick feedback and facilitate collaboration. Driver-based functionality enables sales forecasting, demand planning and headcount management. Live actuals can be compared to performance allowing for improved scenario planning and more accurate reforecasting. It’s the ultimate tool for flexible, connected budgeting and forecasting.