Understanding the importance of scenario planning and sensitivity analysis

Scenario planning focuses upon preparing for a range of possibilities by modelling the financial impact of each scenario. It is not about predicting the future, but rather about preparing strategies to maximize the long-term benefits, should any of your scenarios arise.

During this video, experienced finance leader Catherine Marks shares thoughts regarding how to approach scenario planning and how best to maximize its benefit to your company:

Your financial models should allow you to quickly run scenarios based upon the real drivers of your business to move from predictive to prescriptive analysis.

This should form a key part of your regular planning exercise to reflect your latest thinking across each key driver, including customer demand, liquidity and supply chain stability.

Best Practice

Your scenario planning is a vital tool that should provide agility so that you can quickly model the impact of any potential variances. It is important to understand your range of possible outcomes and to make this a fluid process. 

You should document and adjust your input assumptions as things change so that you can remain focused on the future and allow sufficient time to implement any actions. Ensure that you have processes in place to capture data both accurately and efficiently from other your other systems. This may include both financial and non-financial information.

Carefully consider the timing of your scenario planning so that it is aligned with your planning cycles and any other key requirements from your business. Select the best tools to model your scenarios and illustrate their impact on your business to help evaluate your business plan and support any key decisions that need to be taken.

Top Tips

Catherine suggests the following top tips for creating an impactful scenario plan:

1. Focus on no more than 6 to 8 scenarios. Consider some more extreme scenarios, in addition to the most likely ones.
2. Keep it simple with a limited number of variables. Find a balance of external macro factors and company specific variables. 
3. Provide the right amount of detail to help you quantify each scenario’s impact on your business and to develop an appropriate response plan.

Your scenario planning should result in a tangible plan that addresses the impact of the business under each scenario and that supports your decision-making.

Summary

In summary, scenario planning should help you to assess the impact of each scenario on your business and to determine an appropriate strategic plan. This allows you to optimize your decision-making and to maximize the long-term benefits should any of your scenarios arise.

Assess Your Model

How agile are your scenario planning models?

Do these provide a clear business impact and action plan?

What tools do you use to model your scenario plans?

How many scenarios do you typically model as part of your business plans?

Do you consider a wide range of scenarios include extreme versions?

When do you model such scenarios and how often do you update them?