Scenario planning is a key tenet for finance teams and CFOs.
Finance organizations are now faced with the challenge of navigating the volatile economy while positioning their department to respond flexibly and quickly to future trends.
The finance department needs to make sure that the organization has the means and resources to react to whatever might come. For some, this means focusing intently on profits and margins. For others, this means ramping operations up or down in response to the economic downturn.
In simpler terms, successful scenario planning enables the finance function to look both forward and backward to ensure that they can generate bolder discussions around strategy.
This is an opportunity for finance to generate deeper insights that unlock value and agility in resource-allocation decisions, thereby pointing business leaders in the right direction during difficult times.
2023 is ushering in a new era of business uncertainty. We strongly believe that scenario planning as a methodology will evolve into one of the most important tools for CFOs and their teams.
What is scenario planning?
Scenario planning is a methodology used to examine and evaluate scenarios to predict all possible outcomes for a single problem statement.
The method involves adjusting formulas, assumptions, and values to produce altered data sets that can help the organization assess potential challenges and opportunities. Armed with this data, leaders can create strategic plans that align organizational functions to goals and objectives.
In finance, scenario analysis helps the CFO understand the risks, impact of trends and macroeconomic conditions, and potential results of certain decisions.
Financial scenario planning involves looking at the big-picture metrics. Then, you can change the input to view the impact of different conditions on the cash flow, revenue growth, and net income.
Why is scenario planning important in 2023?
In 2023, economic uncertainty is a reality that businesses must prepare for.
Scenario planning is an effective tool to anticipate different scenarios and quickly pivot strategies in order to remain agile and thrive. By planning proactively, organizations can make informed decisions while staying ahead of inevitable changes in the market and ensuring their business success.
Here are a few more reasons to prioritize scenario planning moving forward:
Balancing inflation, changes in the market, and strategic outcomes
One thing is for sure: the specter of inflation is not going away anytime soon. Most likely, the focus for the next six months will be on inflation.
In 2023, CFOs must be equipped to take on the looming recession, instability in the global markets, and how their business models can adapt to such an environment. It is a good time for the CFO to ask, “what’s going to happen six months, a year, and five years into the future.”
Forward-thinking teams are already spending time thinking about the company’s strategic future, to answer the CFO’s questions.
With scenario planning, finance teams have a unique ability to:
- See across the company how the changes in one area of the business will impact others
- Set up the business for success as smaller changes made now will have a big impact on the company in the near future
Finance is one of the few (or only) departments whose scope and remit crosses the company and can help navigate challenges.
The role of the CFO in guiding the company through changes
Naturally, when change is at its most intense pace, people look for certainty. For businesses, this means turning to an officer responsible for maintaining stability, financial soundness, and adherence to standards: the CFO.
In this role, the CFO brings a comprehensive understanding of the big picture by taking into consideration specific details, a wide-ranging view of company operations, and tangible realities.
Amid the current financial background, most CFOs will need to replace traditional perspectives with a more aggressive one.
The current approach to forecasting, budgeting, and planning requires reexamining earlier assumptions about earnings and growth, as well as assessing how deep the downturn may be.
Using scenario planning, CFOs at forward-thinking companies have developed concrete macroeconomic and business scenarios and modeled the implications of each scenario for the business. Based on plausible future scenarios, companies can adopt a single budget but supplement it with alternative financial and business plans if necessary.
An important note here: contingency plans are not always applied to the entire organization. The changes can be specific to certain business units. Heads of the affected departments must then develop new budgets and reconsider capital and resource allocation and funding.
The importance of finding a path to profitability and achieving optimistic outcomes
At the onset of 2023, it is pertinent to think differently about the approach to overall company health. The “growth-at-all-costs” model commonly adopted by companies is no longer creating the same results as it used to.
The harsh reality is that the market and investors don’t value those companies the way they used to.
This brings us to an important point: rethinking the growth and profitability balance.
Businesses today are battling on two fronts: reducing cost pressures while struggling to both find top talent and reducing employee attrition (a phenomenon representing an existential threat to companies).
At the same time, the market focus has shifted beyond growth to profitability KPIs such as EBITDA (earnings before interest, taxes, depreciation, and amortization).
What’s more, companies will pay more attention to bottom-line growth: contributing to bigger savings and enabling the company to manage with fewer resources and support.
That’s where adjusting to a more balanced approach with scenario planning paves the way for optimistic outcomes.
Rethinking the use of data to drive opportunities
For CFOs and finance leaders, the key to more balanced growth in 2023 will be profitability.
Access to key financial information is critical for this.
While there are a lot of companies that talk about data, what the leadership wants is information: how does the data educate them or uncover an opportunity? For this, CFOs will need to link operational KPIs to strategic plans and provide real-time data about the effect of market conditions on the company.
If done well, finance can strengthen its position within the C-suite and become a core strategic partner to business leadership.
Why do spreadsheets fail at what-if analysis and scenario planning?
When your data sets are limited and the problem statement is straightforward, a scenario planning tool within the spreadsheet software might work fine.
However, when you need to make decisions that impact multiple stakeholders and departments, spreadsheet-based scenario planning has limited functionalities.
Have a look at a scenario planning example. What is the impact of a 10% headcount reduction in sales on total compensation costs?
A hard-hitting question like this has an impact on everyone involved. To decide the optimal path, you would have to thoroughly scope out multiple possible scenarios.
The three components you would have to look at are:
- Build the worst-case headcount reduction assumption scenario.
- Calculator the workforce strength using headcount planning.
- Build a comparison waterfall to choose to either freeze hiring or reduce headcount
Critical decisions like this can be made on a granular level with scenario planning on your integrated business planning platform.
In addition to this, scenario planning can help you determine the headcount you need to reduce to extend your runway. It also helps you determine where to invest and cut back based on real-time forecasts.
The extra step: visualization
The most effective scenario planning helps you answer questions at a glance. To communicate the urgency of each alternative scenario, you need:
- A side-by-side comparison of the best case, worst case, and baseline scenarios.
- View how the scenarios are structured in relation to each other.
Spreadsheets lack advanced data visualization capabilities.
And that’s why finance teams and CFOs are investing in the right technology for scenario planning.
Pigment for scenario planning
In most aspects of business, you rarely rely on guesses or intuition. Scenario planning is no different.
You need to make smart decisions based on complete and timely updates of data and metrics. During a recession, intelligence about the cash flow, operating expenses, capital structure, sales performance, and headcount planning empower executives to make the right decisions at the right time.
You need dedicated software to enable you to model scenarios, gain insights, and make forecasts as frequently as needed. An integrated business planning platform helps you perform scenario analysis as many times as you want, for endless use cases including campaign performance, workforce planning, and budgeting among many others.
Pigment’s native scenario planning feature enables what-if scenario problem-solving in the following ways:
- Curate data from multiple business applications such as CRM, HRIS, data lakes, and spreadsheets.
- Use scenarios without disrupting or modifying your existing data models.
- Presents beautiful visualization reports to get the stakeholder’s buy-in on actionable steps to achieve business goals.
- The intuitive and modern interface makes it easy for CFOs and finance leaders to get answers faster.
In 2023 especially, finance leaders and CFOs will serve as strategic business partners helping the CEO navigate the path to profitability.
The unusual depth of the current crisis is forcing companies to adapt more radically than expected, by breaking from the traditional approaches to scenario planning.
Modern business planning platform Pigment with its native scenario planning feature is helping companies make smarter decisions with more confidence.