See the road ahead. Plan for future scenarios to assess their impact on your organization's financial performance to drive proactive decision-making and mitigate risks.
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Scenario planning is a method of forecasting and analysis that takes a variety of assumptions to drive different outcomes in the future. The most common example is drawing various outcomes from an annual operating budget to improve business decisions around resource allocation and adjustment.
Scenario analysis, as the name suggests, is a way to consider and react to future changes in a business plan. It creates a baseline financial model and allows a planner to manipulate variables to show how it changes outcomes.
The main goal of scenario planning is to aid in decision-making. If companies know the potential outcomes various value drivers could derive, companies can make plans (including backup plans) and make decisions quickly.
There are three main steps to scenario planning. First, identify significant goals for the business. Then, build plans around those goals. Finally, perform what-if analysis and best/worst-case scenario planning to map out backup plans beyond the base plan.
Financial modeling is a crucial aspect of scenario planning. While creating models is vital to understand possible financial outcomes, scenario planning takes things one step further and builds plans and further analysis informed by financial models.