Exploring Multiple Scenarios

Scenario analysis is a method used to analyze the impacts of future events by investigating possible outcomes (or scenarios) – and using these findings to assess and minimize risk while accelerating innovation. Scenario analysis helps business leaders be prepared for unexpected future situations, providing clear data-informed options to pivot when the need arises.

Traditional scenario analysis will include at least three types of scenarios:

Base-case scenario: the most likely expected outcome based on current assumptions, if no major changes were to occur.

Best-case scenario: the most optimal outcome, assuming everything goes exactly according to plan.

Worst-case scenario: the least favorable outcome, assuming severely negative events.

Relying on three scenarios to imagine how the future will unfold can be alluring in terms of simplicity, however, if COVID-19 taught us anything, it is the importance of being well-prepared for the most unexpected situations. Base, best & worst case analysis for one element of your business does not give you a full-field view of the options you may have available. Let’s say that sales revenue is an important priority, but you are also concerned about the impacts of your investments (specifically ROI). Since both variables could exist independently, they should be considered individually and collectively. To do this analysis, you would start out with your three scenarios relating to revenue (base, best, worst) and multiply them by your three scenarios relating to your investments (base, best, worst) – effectively proposing nine relevant scenarios instead of three.

The additional six scenarios illustrate a much clearer representation of your financial possibilities. However, even at this rate, nine scenarios still only take two elements of the business into account (Revenue/ROI), so ideally you would need to include more variables (compensation, capital planning, rate analysis, etc.) to get the most accurate picture. In fact, imagine the insights you could get if you explored sixteen or twenty-five, or even a hundred scenarios – it could be a game-changer.

But who has that kind of time? Building financial models using spreadsheets is complex and time-consuming – requiring hours or days of work, only to be subject to further editing and version changes when a new perspective needs to be investigated. Most finance teams do not have the capacity to undergo such an intensive endeavor, especially when speed and accuracy are key to agile financial planning.

Thankfully, new advances in software have allowed FP&A teams to perform scenario analyses faster and more in-depth than ever before. Synario features a unprecedented patented Multiverse Modeling™ technology that enables its users to analyze an unlimited number of scenarios, as well as the flexibility to mix and match different assumptions with ease. Other financial software products have made similar claims, but Synario's state-of-the-art modeling platform as well as our expert modeling team make up our secret sauce.

Unlike spreadsheets, in Synario – alternative assumptions and formulas can coexist in the same model at the same time without complex conditional logic. Synario was created for the purpose of alleviating the inherent pain-points associated with spreadsheets, and our platform makes modeling, analysis and collaboration easier. Instead of building time-consuming, error-prone spreadsheets with multiple versions, Synario provides answers in real-time, empowering finance teams and their stakeholders to model the way they think – testing any assumptions as quickly as they come to mind all in the same financial model. 

The role of financial leaders is steadily evolving, and one of the best ways to stay ahead of the curve is to be receptive to new FP&A technologies that are purposefully designed to automate outdated manual processes. By doing so, finance teams can mitigate risk by updating their forecasting processes and providing the information necessary for leadership to make sound business decisions for any situation. The importance of smart scenario analysis can't be understated. When used correctly, scenario analysis enables you to future-proof your organization. It helps you to not only anticipate and be prepared for risks in an uncertain world, but also to capitalize on opportunities to set you up for financial success.