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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.

Overview

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."

ICAEW Know-How: Scenario planning

Business and Management Faculty members can download this guidance in full.

View the guide

This approach has a number of problems:

  1. Financial numbers are an outcome, not a driver.
  2. It considers only a single set of outcomes.
  3. We live in a VUCA world*, not a stable environment.

* VUCA – a world of Volatility, Uncertainty, Complexity and Ambiguity

Scenario planning as described in this guide is based on a model developed in the US military which enables them to respond to the chaotic environment of the battlefield and make decisions quicker than their enemy. This reduces the chaos for the decision maker and increases that for the enemy, rendering them increasingly ineffective.

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.

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