How to identify risks, opportunities through scenario planning
Scenario planning can help companies identify both risks and opportunities to drive more effective business decisions.
Forecasting expert Steve Player, CPA, CGMA, North American programme director of the Beyond Budgeting Round Table, provides advice on how companies can use scenario planning to maximum effect:
Go beyond just considering the best- and worst-case scenarios. “By planning not only for what you think is the most likely thing to happen, but [also identifying the incremental] up scenarios and down scenarios as well, you get a range of different actions that pre-think what you would do.”
Plan for best and worst scenarios outside the range of possibility. “We recommend four to seven scenarios. We want one so good that you can’t spend all the money you’re making, and one so bad that it threatens your very existence. … In thinking through those things, your planning department will come up with ideas that spur further innovation and further growth.”
Use the worst-case scenario to identify opportunities to free up cash. “In a downside scenario, you usually have to free up cash. You have to sell idle assets to raise cash to weather the downturn. Well, in a normal year, why don’t you sell some of those idle assets to develop the cash to invest in some of those upside potentials? And then you can grow faster and never run into those kinds of troubles.”
Develop early warning systems. “Begin to think about the leading indicators of whether those possibilities are coming through, whether you can grow faster or do enough to defend and protect cash flow to finish executing your plans. So you look for those leading indicators, and they tell you which way to go.”
Develop a playbook. “It’s like a sporting team analogy. A playbook is a series of [actions] you’re going to do [in certain situations]. If this happens, here are the things you can do to counteract it. Or, here are the things you can do to take advantage of it. Scenario planning is not just about downside risk, it’s about upside opportunity.”