Scenario Planning 101: How to Speed Up This Strategic FP&A Process

Emily Mason | Senior Content Writer

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An email notification flashes across the top of your screen.

“Hey, Head of Finance. Can you provide a few scenarios comparing outcomes if we trim sales and marketing spend to hit EBITDA targets for the quarter? We also may consider freezing hiring for a few months based on recent economic uncertainty and need to understand how that might impact revenue for the remainder of the year. By the way, this is for a presentation at the end of next week.”  

For 26% of FP&A teams, that triggers a prolonged struggle to produce the scenarios. Another 20% will have to say, “Sorry, that’s not possible.” 

Scenario planning is one of the key ways FP&A can support the CEO and leadership team. Finance-driven business partnership is in high demand. Strategic decisions require quick, collaborative, accurate scenario planning and analysis.

What is scenario planning in FP&A? 

Scenario planning is a process that businesses use to predict and analyze the effects of economic changes, disruptions, expansions, or any of the other ‘what ifs’ that influence decision-making. This allows a company to see how resilient its strategic plans are under different circumstances, promoting agility and confidence.

‘The three cases’ 

Finance pros are familiar with the base case, best case, and worst case. You begin with the status quo and predict outcomes based on things going better (or worse) than planned. But working overtime to produce these scenarios can be more trouble than it’s worth. This approach isn’t agile or collaborative enough to predict and advise on the wide range of possibilities each organization is facing. On-demand scenarios informed by real-time data and stakeholder collaboration are the new gold standard.

Scenario vs. forecast

A forecast typically represents a single outcome based on current trends and historical data, like predicting next month's sales based on current trends. Scenario planning involves adjustments to multiple assumptions in your plan to analyze and compare multiple, diverse outcomes. Scenarios are designed to explore a wider range of possible futures for your business than a forecast. 

Scenario vs. sensitivity analysis

The two are often confused, but there’s an important difference. Sensitivity analysis uses minor adjustments – tweaking one variable at a time (like changing the cost of goods sold) – to see how it affects the outcome (like net profit). Scenario planning, on the other hand, changes multiple variables simultaneously to see a range of outcomes, providing a more holistic view of potential risks and opportunities.

Why is scenario planning important for FP&A? 

Strategic finance teams use scenario planning for these top reasons:

  • Make informed decisions – Uncertain and volatile conditions shouldn’t force you into blind decisions. Scenario planning gives you a glimpse into possible outcomes to boost executive and investor confidence. 
  • Do your due diligence - Anticipate the benefits or risks or different decisions, and examine an opportunity from every angle.
  • Enable cross-functional decisions – Effective scenario planning requires integrated data from multiple business systems, and inputs from multiple departmental or operational stakeholders. Collaboration vastly improves the usefulness and credibility of the versions. 
  • Reach strategic goals faster – Opportunities for growth come and go in an instant. Don’t be left behind because stakeholders are holding out for evidence. 
  • Achieve FP&A business partnership – Go beyond basic planning and reporting to engage stakeholders to provide input and manage assumptions thereby increasing the accuracy and strategic value of your scenarios.

Learn More: FAQs on the FP&A Process

Why do FP&A teams struggle with scenario planning? 

If finance leaders know the importance of scenario planning, why is it such a challenge?

1. It’s one step too many

Scenario planning happens after the required monthly work of reporting and forecasting is complete. If those things take too long, scenario creation and analysis will always get skipped. 

2. It’s clunky, even with most FP&A tools

It’s difficult to duplicate and modify spreadsheet-based financial models and prevent errors from cascading down into your model. It may be possible to run a scenario with low disruption to the model, but anything requiring structural changes (and most scenarios worth the effort do!) will be a struggle. And many FP&A tools don’t make it easier, forcing analysts to rely on an inefficient mix of manual import workarounds or offline communications where inputs are lost. 

3. You don’t have the data you need 

Poorly integrated data can prevent you from modeling out scenarios like headcount changes, which require real-time HRIS data integration with an FP&A tool.

4. Reputational risk

Finance leaders are hesitant to commit to regular scenario planning or to deliver scenarios that haven’t been validated by other business partners. They want to move quickly and deliver scenarios, but the risk of an error (and reputational damage) outweighs any benefit. 

5. Lack of stakeholder involvement

When FP&A builds the scenarios in a silo, they’re less convincing to board members or executive leadership. You’re more likely to hear, “Who made this and how? Does “the team” know what’s being proposed here? Why should we act on it?”

How can FP&A do scenario planning better? 

How can finance become the trusted driver of business strategy and deliver scenarios that support business growth? 

Prioritize these capabilities as you improve your scenario planning process. 

1. Speed 

Choose an FP&A tool with automations to speed up your reporting and forecasting process. This will provide ample time to build and analyze scenarios before sharing with management.

2. Version management controls 

In effective scenario planning, every change you make needs to translate down through the model consistently. There are hundreds, if not thousands, of dependencies for a single assumption. Prioritize version management features that protect your master data hierarchy while still providing flexibility to propose alternate structures and plan while allowing simple and consistent adjustments across duplicated versions.

3. Stakeholder collaboration

You need their input and buy-in, whether to validate data and assumptions, or input directly into the scenarios in a connected process. Powerful collaboration management features also promote accountability and provide an understandable audit trail.

4. Integrated business logic 

Driver-based modeling and planning in the language of business make collaborative scenario planning infinitely easier. Changes to the model don’t require specialist support or complicated formulas. 

5. A team with the right mindset 

Are your financial analysts ready to dive into more strategic work? You need a team who knows their job is more than publishing reports and punching out a budget on demand. They have a responsibility, and the unique perspective, to contribute valuable work that improves business performance.

Confident and informed scenario planning

Imagine receiving that same email from before – requesting a scenario on relatively short notice for a big decision. Now imagine reporting back only a few business days later and being able to say: 

“Here are two scenarios we created last week and recommend sharing with the executive team to facilitate decision-making. We worked through three rounds with each business unit leader, reviewing and adjusting their inputs across several areas of the operating plan. We’re confident that operational leadership is familiar with these proposals and understands the actions they’d need to take depending on the decision. Each of these scenarios is consistent with historical performance and existing business unit capacities.” 

We all know the future is still uncertain. But this approach to scenario planning breeds so much more confidence than saying, “FP&A produced this solo, using whatever data was available.” 

There are big roadblocks to scenario planning, but it’s not an impossible challenge! The right mindset and supportive tool can help you move from sharing occasional, timid scenarios to reliable and informative glimpses into the future that drive confident decision-making and business success.

Last Updated:
July 4, 2024

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