F. Scott Fitzgerald once said, “The test of a first-rate intelligence is the ability to hold two opposed ideas in mind at the same time and still retain the ability to function.”
Organizations using scenario planning to identify and analyze potential futures need to keep Fitzgerald’s quote in mind. Too often, even if you think you’ve hedged your bets, you end up trapping yourself by considering only a narrow set of outcomes. We’re usually either too optimistic or too pessimistic based on past experiences.
The kind of objectivity that leads to true clarity is rare. Some might even say it’s invaluable.
For example, consider how one investment bank modeled a 5% revenue decline as their worst-case scenario in 2001. That turned out to be far too optimistic, as the dot-com crash hit them hard. The bank simply wasn’t prepared. After all, how can you prepare for something worse than your worst-case scenario?
With scenario planning, you have to push beyond what’s comfortable to see a wider range of futures. This way, you can see every possible outcome of your choices and better prepare for and navigate through the unexpected.
Returning to F. Scott Fitzgerald’s quote, you must learn to function knowing a variety of futures could happen. To do that, you not only need financial analysts who can competently conduct scenario analysis, but also streamlined processes and the right scenario planning template.
Let’s review scenario planning templates that can help you get the most out of scenario analysis and planning.
What Your Scenario Planning Template Should Achieve
Scenario planning is an exploratory process. It should serve as a tool to see and prepare for futures that may not be so predictable. Because even if you think you have it right, you might be overlooking something.
As an example, Aimbridge Hospitality decided their worst-case scenario would be an external, catastrophic event similar to 9/11. Revenues for the company declined by 17% and 22% in the following two years. Aimbridge believed that, by preparing for a scenario like 9/11, they were already prepared for the worst.
Then, COVID-19 hit. And that previous worst-case scenario didn’t look all that bad anymore. In fact, Aimbridge fared far worse through the pandemic.
This is why every business needs to master scenario planning. With the right scenario planning, you can avoid the financial catastrophes caused by black swan events like COVID-19. Even if black swan events don’t happen, scenario planning helps reduce costs, capture new opportunities, and create a more financially sustainable organization.
Through your scenario planning template, you should aim to do the following:
- Identify trends that could shape the future.
- Broaden your outlook by challenging biases, assumptions, and overconfidence.
- Consider all plausible futures, even those that seem beyond best or worst-case at first glance (as well as surprising scenarios).
- Create a fact-based, open dialogue that leads to greater organizational clarity when it comes to strategic decisions.
- Provide a sober, clear outlook that balances optimism and pessimism.
Steps to Building a Scenario Planning Template
You don’t know what will happen in the future. That’s why it’s important to build an organizational culture with frameworks that expect the unexpected and challenge biases and assumptions through open conversations and analysis.
However, changing company culture is difficult and a long-term process. In the short-term, utilizing a dynamic, intelligent scenario planning template can help you plan around uncertainty immediately.
Most often, organizations use a two-by-two matrix as their scenario planning template:
Use the impact probability matrix above as your scenario planning template. Plot out scenarios that cover the whole spectrum of possibilities. You can categorize scenarios as follows:
- High impact and high probability: An example of this would be a bank planning for greater mobile payment usage. If banks ignore mobile payments, it will have a detrimental effect on future business.
- High impact and low probability: This could be a black swan event, such as the COVID-19 pandemic. Sure, such an event doesn’t happen often. But the consequences are so great that you must be prepared. We all know how certain industries, such as airlines, have been devastated during the pandemic.
- Low impact and high probability: These trends are typically easy to see. For instance, if you oversee an elder care organization, the aging US population should be a signal to make preparations for increased demand.
- Low impact and low probability: These are usually flash-in-the-pan trends that fade away. If you’re a fashion retailer, you’re probably all-too-familiar with short-lived trends.
As you continue working with your scenario planning template, your team should:
- Identify major trends. What are the driving forces that could shape the future? What are the important shifts happening in your industry and the larger news and trends in technology, politics, and economics?
- Identify critical uncertainties. Which of those driving forces and trends could impact your business the most? Use financial models and scenarios to get specific numbers. You need to make decisions. As Geoffrey Moore, a management consultant, states, “Without big data, you are blind and deaf and in the middle of a freeway.”
- Identify a specific range of plausible futures. A good rule of thumb is to start with four scenarios: your base case, best case, worst case, and possible surprise cases with low probability but high impact.
- Discuss potential consequences. Talk about the possible and negative outcomes of each scenario before developing a plan for surviving and, if possible, thriving.
Analyzing Scenarios with Your Planning Template
Once you know the most impactful scenarios, you should crunch the numbers. Your calculations should guide decision-making. For example, analysts may use:
- Cash flow analysis to gain a better understanding of how decisions could impact future cash flows
- What-if analysis to see how well the business would do if something unexpected disrupted the business, such as a natural disaster
- Sensitivity analysis to obtain insights into risk exposure to certain trends
While scenario analysis and planning requires you to imagine the future to a degree, your decisions must be informed by data. Without hard numbers, you’re driving without a GPS (and maybe squinting through a dirty windshield, too).
For most finance teams, scenario analysis and planning happens within spreadsheets. This works fine if you’re calculating one scenario at a time. However, the future is uncertain and ever-changing, with multiple scenarios occurring at once.
How can a spreadsheet let you adequately analyze that level complexity?
Spreadsheets are one-dimensional and static. If you have to manually update them or even make a new one from scratch to account for small changes, your model is vulnerable to human error. It’s also just a time-suck.
Plan Twice as Far in Less Than Half the Time
At Synario, we spent years working with nonprofits, higher education, and finance clients before deciding that scenario planning is simply too important to do in Excel. That’s why we built our own dynamic solution, featuring:
- Customizable, pre-built algorithms: Quickly adjust and test multiple scenarios without manually altering the underlying math (which is always risky).
- Run (and present) multiple scenarios at once: Thanks to our patented multidimensional layering technology, you can simulate a more realistic, complex future in which multiple scenarios may occur at the same time.
- Photoshop-style on/off switches: Within our scenario builder, you can quickly test scenarios by toggling input and output variables on and off. You can also adjust customizable value sliders—all within a single model.
- Integrated financial statements: A change in your balance sheet will automatically reflect in your income sheet and cash flow statement. Synario’s automated Presentation mode makes visualizing and presenting your financial easier than ever.
It’s time to toss all those different spreadsheet versions in the Recycling Bin and choose a more modern, dynamic solution. Broaden your outlook, imagine a wider range of futures, and gain more accurate data-driven insights.