Navigating 2023: Scenario Planning in Economic Uncertainty

During times of economic unrest, the challenge of building a forecast is greater. It is nearly impossible to use historical data from the last 3 years; and with trickier times to come - assumptions about the stability of the macroeconomy or the buying power of suppliers could be unreliable. 

Nevertheless, businesses need to plan for what’s next.  

In this article, we define what financial scenario planning is, and how businesses can use it to strengthen their financial forecasting during periods of uncertainty and beyond.   

What is financial scenario planning?  

In short, scenario planning helps decision-makers identify ranges of potential outcomes and impacts, evaluate responses, and manage for both positive and negative possibilities.   

This process helps to understand potential risks and opportunities and supports businesses in making proactive decisions versus reacting to events.  For finance teams, scenario planning assists with managing cash flow, expenditure, profitability, and overall financial health during uncertain times.  

By providing what-if analyses for several outcomes, financial scenario planning gives leaders the ability to make informed decisions to the advantage of the business.  

Financial scenario planning during economic uncertainty  

If anything amplifies the value of effective financial scenario planning, it’s the reality of the last three years – pandemic, economic crisis, and soaring energy costs, even if very few could have predicted it. For businesses, scenario planning is a way to regain control in turbulent times by identifying assumptions about the future and determining how best to respond.  

By building organisational awareness of what could happen, warning signs may be easier to spot and manage. And when a worst-case event arises, scenario planning documents support by providing multiple outcomes and listing the steps required to contain damage.  

With the current economic climate in a state of flux, using a structured methodology to analyse the financial health and resilience of a business under different scenarios is crucial. This not only ensures short-term survival but sets organisations up for long-term success.  

Looking ahead 

With the unpredictability of the last three years, many organisations are prioritising the next twelve to eighteen months in their forecast models. Short-term resilience is vital, but it is also important to plan for longevity.  

Recent events have accelerated digital transformation, creating more interest in tools to improve business efficiency and agility. Driver-based forecasting models should therefore be dynamic and flexible, with the ability to incorporate different scenarios so that businesses can make strategic decisions for the longer term; and digital solutions make it much easier to manage multiple models compared to spreadsheet-based forecasting.  

How to implement long-term financial scenario planning 

Here are several steps that support finance teams in implementing future-proof scenario planning: 

• Gather intel 

The first step is defining key business drivers and influences on financial performance, by analysing both historical internal data and external factors for correlation. This should not only include relevant departmental data, but also social, economic, and political factors such as purchasing power and other macroeconomic data.  

• Build scenarios

Once these drivers have been defined, they can be compiled into a range of diverse scenarios and highlight trends. These results can then be calculated using a dynamic forecasting model like CCH Tagetik® to produce a range of future scenarios. This will help determine any potential financial impact that a particular scenario will have.  

• Stay agile

Building scenarios will allow finance teams to identify the best measures and strategy for managing the organisation in the current climate. Scenario planning allows for adjustments to be made until the desired impact is achieved in a simulated setting – that way businesses can produce an agile set of measures that can be adapted to suit multiple scenarios in the future.  

Find out more 

MHR has an incredibly successful record in enabling both private and public sector organisations to put world-leading CPM solutions to work. Customers are benefitting from financial forecasting and integrated business planning all in one place. For the finance function, it means a much more accurate view of the health of the business, along with a clear opportunity to add strategic value.  

Learn more about how to achieve financial forecasting freedom within your organisation by speaking to one of our consultants today.