As the market uncertainty upends traditional economic assumptions and creates new challenges for businesses, scenario planning has become an increasingly important tool for FP&A teams.
By developing alternative plans and preparing for different outcomes, FP&A teams can help their organizations navigate uncertain times and make more informed decisions.
Read on as I cover the benefits of scenario planning and how FP&A teams use it to support mission-critical decision-making.
Why FP&A teams are increasingly utilizing scenario planning
There’s two factors overwhelming most FP&A teams right now: the obvious: changing economic landscape, and the silent yet firm push for greater productivity and efficiency.
Scenario planning ticks both these boxes, making it one of the hottest methodologies out there for CFOs and their teams.
As a refresher, scenario planning is a method used to navigate uncertain economic conditions by outlining likely and unlikely scenarios, visualizing the potential consequences, and deciding on the best course of action based on varying assumptions.
Pro tip: read my detailed guide to scenario planning with practical examples.
By providing an array of potential options, scenario planning can help FP&A teams quickly and easily adapt depending on their current situation, making them ready and able to navigate whatever will come their way.
FP&A today is less about static or period reporting, increasingly featuring continuous planning and insight generation. As your team sorts out 2023 priorities, scenario planning should be a key component to stay competitive in the ever-changing economic landscape.
How scenario planning helps better prepare for uncertainty
Let’s focus for a moment on how there’s so much uncertainty floating about this year.In such landscapes, workforce planning and resource management come to the forefront as important exercises to carry out.
Scenario planning can be an invaluable tool for FP&A teams to prepare for potential downturns, along with other unexpected detrimental events. Here are a few ways scenario planning helps prepare for an uncertain future:
- Frequently change assumptions fed into your predictive models
- Compare two vastly different scenarios side-by-side
- Ease the decision-making process by visualizing outcomes
- Anticipate potential risks associated with each decision
Your team essentially creates a playground to quickly and accurately visualize the outcomes of decisions before making recommendations. You’ll be able to preview what the future could look like across best case, worst case, and baseline scenarios.
Overall, scenario planning is a great way for FP&A teams to move beyond reporting into influencing strategic decisions and proactive action, with the power of data to back them up.
The key benefits of scenario planning for FP&A teams
We’ve looked at one of the biggest benefits of scenario planning for FP&A teams so far — navigating uncertainty with more confidence and agility. However, FP&A teams stand to gain other benefits from adopting scenario planning as well.
FP&A teams could potentially save hours of time on data collection, analysis, and decision making with scenario planning. During tough times, you could focus on proactive risk mitigation, while working on long-term improvements when the prospect is sunnier.
With scenario planning, FP&A teams can also improve their forecasting capabilities and better understand where resources should be allocated. This can help your team increase accuracy in forecasting models, save costs, and make faster decisions.
Of course efficient outputs require efficient inputs, so make sure you’re using a planning platform with native scenario planning capacity to truly see the impact.
A seat at the strategic table
Scenario planning provides FP&A teams with a powerful way to influence strategic decisions by weighing multiple outcomes, hidden risks, and potential rewards.
By analyzing what-if scenarios, your team presents executives with invaluable data and insights on how resources should be allocated, helping them make wiser financial decisions with fewer surprises down the line.
Ultimately, you enable your organization to plan ahead and maximize returns while keeping costs under control. This helps demonstrate the value you bring as a finance leader, to senior executives and other department heads.
Cross-functionally tackling problems
Speaking of department heads, when was the last time your company made a decision that was arrived at through a collaborative process? A truly collaborative process, with data collated from multiple systems, ease of cross-functional communication, and decisions based on a single source of truth.
It’s not likely unless you’ve intentionally invested in the right infrastructure and processes. In fact, it’s a difficult feat even with all the necessities in place.
Scenario planning is, by nature, the ideal candidate to fine-tuning your cross-functional collaboration flow. As you’re carrying out the process, asking what-if questions and tweaking data and assumptions, you’re bound to require input from sources outside your department.
The simplest example that tends to pop up in every recession or market downturn is hiring freezes or headcount reductions. The decisions made here influence multiple teams and directly impact the people involved in such events.
In conclusion, it would be dangerous not to incorporate scenario planning for high-impact, cross-functional decisions.
Risk and change management
By preparing plans in advance and running projections of potential scenarios, your FP&A team can stay agile even when large-scale changes occur.
Not only will this help you make informed decisions that could prevent high-risk events from taking place, you’ll also be better equipped to handle disasters in the event that they occur.
Scenario planning means that future shifts can be anticipated and that goals can be set realistically to maximize success for your organization. Considering multiple outcomes and mitigating various variables are key aspects of scenario planning — it's how you'll identify the best possible result while being prepared to tackle any surprises down the road.
It's no wonder why so many leading Finance teams rely on scenario planning as part of their long-term strategy; it's a great way to ensure sustainability while staying ahead of the curve.
Ultimately, scenario planning helps FP&A teams make informed decisions that maximize their chances of success in any given situation. By being proactive when it comes to financial planning and analysis, your team can strategically position yourselves and your organization for long-term success in an increasingly volatile world.
What are some best practices for using scenario planning effectively?
Start with establishing a set of best practices for the FP&A team as a whole.
With this threshold of an efficiently functioning finance org, aim to bring a similar level of excellence to your scenario planning with these best practices:
- Streamline your data sources — make sure your planning platform is connected to every data source you need for robust decisions, such as CRMs, ERPs, or data warehouses.
- Define a clear objective — do this by tying your “what if?” questions solidly to a desired outcome or decision
- Win buy-in from key stakeholders — decisions are made poorly, in a silo. Give your stakeholders incentive to be closely involved with your scenario planning process.
- Invest in the right tools for scenario planning — an integrated planning platform will save you hours of time in setting up and adjusting multiple scenarios in a single click
Interested in scenario planning for your FP&A team? We’ve got you covered — chat with us for a demo of our native scenario planning feature, one of the best loved features our customers rave about.
Want to learn more? Here's how our customer Algolia reduced time spent on what-if analysis by 90%.