Scenario planning: a practical guide
This guide, created exclusively for Business and Management Faculty members, sets out one approach to scenario planning which finance professionals may wish to consider when planning for the future. The information in this guide is intended to be practical and helpful, but because every business is different in so many ways, the guide shares general guidance only and you should take appropriate professional advice on the circumstances of the business.
How does scenario planning differ from budgeting? The latter is described in a recent ICAEW paper:
"Traditional planning and budgeting creates a financial plan to guide the organisation. It tells you when things are going off plan; acts as a control; and in stable environments can be very accurate."
This approach has a number of problems:
- Financial numbers are an outcome, not a driver.
- It considers only a single set of outcomes.
- We live in a VUCA world*, not a stable environment.
* VUCA – a world of Volatility, Uncertainty, Complexity and Ambiguity
Whilst most of us, fortunately, will not face decisions of such importance in our daily lives, the model is directly applicable. Organisations exist in a VUCA world and are in competition with others directly (for market share, resources, information) and indirectly (sector attractiveness, political attention). If a business can make better decisions faster than its competitors, it can get inside their decision cycle and they will fall increasingly behind.
To do this, businesses need to be prepared for the unexpected and unlikely so that they can respond efficiently and effectively. Scenario planning gives that preparation.