Budgeting and forecasting are crucial for managing the financial aspects of organizations. However, they often rely on one set of assumptions for a fixed period of time (typically twelve months). Today’s uncertain, ever-changing environment requires organizations to be nimble and respond quickly to unanticipated challenges, and financial scenario planning is a great way to set your organization up for success, no matter what comes your way.
What is scenario planning? It is an integrated approach that identifies critical uncertainties, defines leading indicators, assesses potential impacts and prepares mitigating actions. The most simplistic scenario plans start with three scenarios resulting in a three-tier financial strategy with specific actions based on the occurrence of certain events.
For example, consider a nonprofit that provides weekly tutoring classes to students at a reduced fee. The organization’s primary fundraising “Casino Night” takes place every November and is budgeted to provide 40% of annual revenue. However, due to the current COVID-19 pandemic, significant uncertainty surrounds the event this year. Below are several scenarios for how things could play out.
- Scenario A: The shelter-in-place order is resumed, and no in-person gatherings of large groups are allowed (20% of budgeted revenue expected)
- Scenario B: The event is allowed to take place but at a reduced capacity with social distancing required (60% of budgeted revenue expected)
- Scenario C: The event will take place as originally planned due reduced COVID-19 cases and an effective vaccine (90% of budgeted revenue conservatively expected)
Each of these scenarios will have different impacts on the organization’s financial results for the year, all of which will vary from the original budget. The organization must make decisions related to other aspects of their financial operations based on each scenario. In this case, the fundraising event is the leading driver of future decisions, including changes in anticipated facility construction, staffing and program offerings.
- Scenario A: Construction is postponed to 2021, staffing is reduced by 25% and four weekly tutoring sessions are cancelled
- Scenario B: Construction is postponed to 2021, staffing is maintained and two weekly tutoring sessions are cancelled
- Scenario C: Construction proceeds as planned, staffing is maintained and one weekly tutoring session is added
As you can see, even the most basic scenario plan will give organizations defined next steps based on potential future events, while also allowing for ongoing customization based on changing circumstances.
For a more comprehensive plan, layer in additional scenarios onto the original leading driver. For instance, in addition to the aforementioned nonprofit’s scenario plans for the fundraising event, they need to consider how the current pandemic will affect their ability to provide weekly tutoring sessions.
- Scenario D: No formal gatherings are permitted, causing a shift to virtual learning platforms (30% decrease in program revenue, 40% increase in technology costs)
- Scenario E: Reduced onsite capacity for weekly sessions, no shift to virtual learning (50% decrease in program revenue, no additional technology costs)
- Scenario F: Onsite capacity maintained with no restrictions (20% decrease in program revenue, no additional technology costs)
By combining scenarios D through F with scenarios A through C and creating custom plans for each resulting combination, the organization would be prepared for a total of nine potential scenarios that could be easily adjusted as the situation unfolds.
- Scenario 1 = A + D
- Scenario 2 = A + E
- Scenario 3 = A + F
- Scenario 4 = B + D
- Scenario 5 = B + E
- Scenario 6 = B + F
- Scenario 7 = C + D
- Scenario 8 = C + E
- Scenario 9 = C + F
Scenario planning is a great tool to practice proactive strategic thinking and preparation, especially in today’s uncertain environment. Traditional spreadsheets and manual analysis can be used to navigate the scenario planning process, but organizations can work smarter with cloud-based solutions that provide accurate scenario analysis in much less time. Cloud solutions also give leaders the opportunity to continually change and layer scenario drivers, producing accurate results at the click of a button and shifting focus from manual analysis to informed decisions.
For more helpful information regarding scenario planning or how to start preparing using cloud-based solutions, contact SST’s CAAS team today.
Thanks for SST Partner Emily Cook for providing the content of this post. Click here to learn more about Emily.