Recently, SST Manager of Client Accounting & Advisory Services (CAAS) Simeon May, presented the following guide to scenario planning for faith-based organizations to The Church Network Dallas Chapter. Below is an overview of his presentation.
For more information or guidance on implementing scenario planning for your faith-based organization, contact Simeon today.
What is scenario planning?
In simple terms, scenario planning provides a structured method for organizations to evaluate alternative views of what may happen in the future as an aid to strategic, operational and financial planning.
Why do we need scenario planning?
Businesses, including churches and ministries, are being severely impacted by COVID-19. Doors have been locked. When allowed to re-open, the number of people allowed has been curtailed. Additionally, many church members may have suffered a major loss of income, thereby affecting their ability to make the same level of charitable donations as they did before the pandemic. Unfortunately, uncertainty doesn’t seem to be going anywhere soon.
Budgeting and forecasting are crucial for managing church and ministry financials. However, they often rely on one set of assumptions for a fixed period of time, typically 12 months.
Today’s uncertain, ever-changing environment requires ministries to be nimble and respond quickly to unanticipated challenges. Financial scenario planning allows your organization to be flexible and set up for success, no matter what comes your way.
Scenario planning is largely focused on answering two questions:
- What could happen?
- What would be the impact?
Scenario planning anticipates potential or even likely events that would most impact your organization’s financial health. Specific actions are outlined to guide response if, and/or when, the scenario occurs. This process includes four key steps:
- Identify critical uncertainties or key variables to be evaluated
- Define key drivers likely to influence future scenarios
- Assess potential impacts
- Prepare mitigating actions
While scenario planning can become quite complex, introductory plans generally start with three scenarios. A tiered financial strategy is then developed with specific actions based on the occurrence of certain events.
For example, consider a church that, pre-COVID, was renting space inside a school for worship. When the pandemic hit, the school no longer allowed outside groups to use school facilities, so the church had to shift to online worship only.
How would this affect attendance and donations? How would this affect various expenditures?
Below are several income scenarios that could play out.
- Scenario A:Donations decline by 20% from original budget
- Scenario B:Donations decline by 10% from original budget
- Scenario C:Donations remain at originally budgeted levels
The next set of scenarios are related to expenses. These will have different impacts on the organization’s financial results for the year, all of which will vary from the original budget. Church leaders must make decisions related to other aspects of their financial operations based on each scenario.
While donation levels are the leading driver of future decisions, the pivot to online worship also requires changes in anticipated technology needs, staffing and facilities.
- Scenario D:Budgeted technology expenses increase by 20% in order to accommodate the online worship model, staffing is reduced by 15%, facility rent is reduced by 70%
- Scenario E:Budgeted technology expenses increase by 20% in order to accommodate the online worship model, staffing is reduced by 10%, facility rent is reduced by 70%
- Scenario F:Budgeted technology expenses increase by 20% in order to accommodate the online worship model, staffing is maintained, facility rent is reduced by 70%
As you can see, even the most basic scenario plan will provide defined next steps based on potential future events, while also allowing for ongoing customization based on changing circumstances.
By combining scenarios A through C (related to donations) with scenarios D through F (related to expenses) and creating custom plans for each resulting combination, the church 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
Some experts recommend having only between two and four scenarios, as having more than four can be confusing and counterproductive. Our above example has a total of nine scenarios, however, it only has three scenarios related to income and three related to expenses. While having three each does create a total of nine in combination, having only three revenue and three expenditure models is certainly manageable.
Another consideration is the use of flexible time periods. Churches typically look at 12-month periods when planning financials, but you should also consider the short-term. Without complicating the process, consider short, medium, and long-term forecasts to ensure all bases are covered.
Obstacles might be encountered.
Here are a few examples of some of the issues that might be encountered within the scenario planning process.
- Too many scenarios are defined. This is addressed above.
- Scenarios could be perceived as being too subjective. Make sure your scenarios are as credible and realistic as possible.
- Some could become fixated on a single scenario. Again, make sure your scenarios are realistic and offer credible options.
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 ministries 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.
While creating a strategic financial scenario analysis should be top-of-mind, it’s difficult to determine where to start – especially since ministry leaders are often pulled in a myriad of directions with constantly changing priorities. To kickstart the process, consider appointing a financially minded point person, whether an internal or an outsourced expert, to lead the scenario planning effort.
This person would lead the exercise, but it should still be a collaborative effort. Another helpful first step is to identify the best tools and processes for your organization to monitor results and action items. Having these tactics in place will help the entire scenario planning process run smoothly and efficiently.
The experts at SST are equipped and available to guide your ministry through the scenario planning process. For more information, contact us today.