Scenario planning template

Predicting the future is never easy, and that’s particularly the case when developing business plans. Budgets can become outdated or even an impediment to financial decision-making. How can you rise above this problem?

Key variables

Sidestep this problem by identifying the key variables, or drivers, that affect financial performance and using scenario analysis to evaluate how changes to these key drivers could affect your business. Use the results to develop strategies to mitigate the impact of the uncertainties.

Start your scenario analysis by listing what you know based on the past. For example, for sales budgets, review historic sales data and analyse by product, customer, geography or distributor. From your analysis, identify the key issues that have affected past financial performance. For example, if sales have fallen/increased for a particular product, what was the cause? Then use your analysis of the root causes to help identify the key drivers (the risks and uncertainties) that could affect future results. It could be a full range of variables.

Finally, rank the key drivers by giving each a score out of ten for the potential range of variation and a score out of ten for the size of the potential impact on your business. Multiply the two together and select the two or three most important ones, i.e. those with the highest scores.

For example, overseas demand for your products is difficult to predict but has a big impact on your sales so you give it a variability score of 8 and an impact score of 9 - total 72. The price of raw materials may have the second highest score of, say, 70.

A matrix of results

On the input data sheet of our Scenario Planning Template you set values for the key drivers. In our example, we consider that overseas demand has a range from a decline of -20% to growth of +30%, and that price increases for raw materials have a potential range from +20% to +80%. Then you create scenarios using a grid (matrix) containing the best and worst case scenarios. If you have two key drivers, your matrix will have four scenarios (2x2). If you have three drivers, the matrix will have nine (3x3) scenarios. It’s an exercise that’s really worthwhile undertaking.

Ultimately, examine each of the scenarios with your department managers to quantify the impact on the business and develop appropriate strategies or tactics that you would employ for each scenario. Use our scenario planning template summary sheet to pull all your analysis together for presentation to the board.