By CFO Brew Staff
less than 3 min read
Definition:
It would’ve been the perfect garden party. You had those fancy little sandwiches. You carefully crafted name cards. You neatly ironed the tablecloth.
So is it really your fault that you didn’t see the torrential downpour in the forecast, or that you conveniently seated two feuding exes right next to each other? Seems like you just forgot to engage in some good ol’ fashioned scenario planning.
Scenario planning, which typically applies to finance teams more than garden parties, is a financial planning tool that helps leaders anticipate a range of potential best-case and worst-case scenarios. Teams determine the financial impacts of those hypothetical events, as well as how the organization would respond in various scenarios.
Scenario planning, which typically applies to finance teams more than garden parties, is a financial planning tool that helps leaders anticipate a range of potential best-case and worst-case scenarios. Teams determine the financial impacts of those hypothetical events, as well as how the organization would respond in various scenarios.
Why is scenario planning important for finance? In an increasingly uncertain world, scenario planning becomes important as it allows leaders to anticipate a wide range of outcomes, rather than just locking into one solution or one problem. The method also encourages companies to stay proactive when dealing with uncertainty, instead of just reacting as problems arise.
What are some of the challenges with scenario planning? Scenario planning can be a lengthy process, and may require specialized input from subject matter experts for certain elements. Additionally, scenario planning tends to remain an ongoing project, given uncertain and constantly changing economic conditions. Most organizations, however, determine that these costs don’t detract from the benefits of staying agile and proactive.
How is scenario planning different from forecasting? Unlike forecasting, which is dependent on historical data for anticipating future risks, scenario planning allows for totally unexpected events, like, say, pandemics, as well as multiple, interconnected scenarios, like supply chain challenges and labor shortages. While forecasting is often beneficial for shorter-term planning, scenario planning allows organizations to look at a longer time horizon, making it particularly useful in times of uncertainty.
