The Benefits of Scenario Planning Through Advanced Data Modelling

During times of uncertainty, scenario planning becomes even more of an essential tool in reducing risks and taking advantage of opportunities. Research has shown that organizations that take a dynamic approach to a crisis benefit over those who do not. Businesses that remain flexible and implement detailed strategies tend to see shareholder returns almost double over the long term [1].

Traditionally, scenario planning has been based around the act of “pulling levers.” What do we mean by this? Individuals look at the options and tools they have in front of them while assessing the impact of high-level variables and pull levers, many times at random, to achieve their desired outcome. This process is used to develop “best” and “worst” case scenarios and help determine how a business should respond. Even when done more formally and with more significant analysis of the impacts of each lever brought into play, scenario planning can risk being hampered by the cognitive biases of those involved in the process. Background knowledge, personal assumptions and beliefs, fear of the outcome, and overconfidence in one’s abilities can skew results and reduce the effectiveness of the entire process [2].

Used effectively, scenario planning needs to: 

• Be based on the most likely critical trends that will affect the business.
• Fully consider extreme eventualities to promote more creative thinking.
• Ensure that all voices are heard.
• Consider the implications of the various scenarios holistically across the organization.
• Be aligned with the organization’s “Purpose.”

However, one of the critical challenges in scenario planning is translating the hard work involved in coming up with potential implications and their financial impact. It’s not surprising that multiple, and particularly, more complex scenarios are not often considered. It becomes even more concerning when those tasked with being the stewards of the organization’s finances are forced to reject potential scenario approaches due to a lack of knowledge or experience to accurately measure potential costs and benefits.

Whether they are a small business or a growing and complex corporation with several financial streams that need to be accounted for, a more formalized and holistic scenario planning approach featuring cloud based Financial Planning & Analysis (FP&A) systems can be a benefit. Organizations can both enhance their decision-making with informed analytics and consider contingencies for greater risk mitigation. 

Understand the Complexities of Financial Planning and Analysis

A Financial Planning and Analysis Activity Footprint indicates and helps visualize the varying considerations that must be accounted for in effectively crafting scenarios that address both risks and rewards. As noted previously, the individual assigned to creating and assessing the company’s financial risks based on key scenarios may be unable to do so without bias, the required information, or background knowledge in finance, market trends, prediction analysis, and so on. How is a business to effectively create both positive and negative scenarios and accurately develop critical points of action while doing away with a randomized lever approach? With access to tools designed for this very purpose.