Scenario Planning and What-if Analysis – more important than ever

scenario planning

The current and on-going COVID-19 crisis has created extraordinary uncertainty, amplifying but also complicating the finance teams’ support role in the Decision Making Process of all businesses. Finance teams are being asked to analyse pressing issues related to cost management, cash management, and revenue and resource planning and many others critical issues, but many don’t have the latest data, time, or tools to be able to do this to the level expected.

I recently tuned into a very interesting webinar presentation from the head of finance at Sydney Airports Corporation, obviously seriously affected by the crisis. She said they were so fortunate they had implemented a modern CPM solution over the last few years as they were able to model things like the impacts of JobKeeper and other key factors, and make informed and considered decisions without knee-jerk reactions. At the start of the crisis they had no idea how long it would last so they had to build in scenarios that would allow for a quick recovery when required.

I came across an interesting article from our friends at Gartner and it gives some good perspective on scenario planning and what-if analysis.

Here is a summary of the article ….

What-if Analysis

Recognizing that traditional forecasting based on a single set of assumptions is insufficient for decision-making purposes during times of high uncertainty, most Finance teams are performing extensive “what if” analysis (or sensitivity analysis) to develop multiple forecasts or scenarios. While some are adjusting their financial models to assess the impact of different lengths of shutdown (e.g., 1 month, 3 months), others are modelling the impact of different percentage reductions of revenue or market demand (e.g., 10% or 20%) and even different economic recovery patterns (e.g., V-, U- or L-shaped).

Whilst this type of analysis is useful for understanding which assumptions may have the greatest impact on the model’s outcome, it falls short in helping the business make decisions based on that analysis. Often, the changes being modeled are somewhat arbitrary and do not correspond to how things are shaping up in the real world. For example, teams may model the impact of a 10% or 20% revenue drop but that does not help them understand what might lead to one versus the other, or what decisions the business must make given that uncertainty. Moreover, sensitivity analysis typically models the impact of change to only 1 or 2 input variables at a time, when in reality such changes don’t occur in isolation. It’s no wonder that despite engaging in extensive sensitivity analysis, Finance leaders continue to have low confidence in that analysis.

Scenario planning

Companies should use scenario planning to improve decision making during times of high uncertainty, scenario planning is a more useful tool for Finance leaders to rely on because it removes the element of surprise and allows decision-makers to prepare ahead of time. Finance leaders should use this tool to explore future possibilities in a more structured manner and to connect real-world situations with the changes they model from a financial perspective.

The problem is that a lot of organisations do not have the technology in place that allows them to quickly create and test the various scenarios and what-if analyses. A lot are finding they are dependent on old Excel based models which are limited in the amount of data they can use, or haven’t been built to cater for the number of variables/drivers that are now needed to create viable scenarios and what-if analysis.

Furthermore, the reliance on the validity and the timing of the data being used in the process is now more critical than ever. Near enough is not good enough.

The current business environment is highlighting the importance of constant monitoring and modelling of key indicators both internal and external to the business and easily developing multiple scenarios and sharing this information across the organisation.

We are getting more inquiries than ever about modern budgeting, forecasting, and reporting systems and their ability to enhance sensitivity and what-if analysis capabilities.  If you would like to have a chat about how your business may benefit please contact us. We have solutions to cater for all sizes of businesses and budgets.


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