Scenario Planning to Protect Your Financial Future

In today’s fast-changing world, financial scenario planning is a great way to set your organization up for success, no matter what unanticipated challenges may come your way.

What is financial scenario planning?

Financial scenario planning is an integrated approach that identifies critical uncertainties, defines leading indicators, assesses potential risks and prepares mitigating actions. By building organizational awareness of what could happen, leaders may spot warning signs of brewing challenges and respond accordingly. When a worst-case event arises, scenario planning adds significant value by providing your team with an outline of immediate next steps based on the type of scenario at hand.

Basic plans start with three scenarios, resulting in a multi-tier financial strategy with specific actions based on occurrences. Managers typically begin with the following:

  • Base Case Scenario – The most likely result.
  • Worst Case Scenario – The most severe/negative result.
  • Best Case Scenario – The ideal result.

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 December and is budgeted to provide 40% of annual revenue. However, due to inclement weather forecasts, significant uncertainty surrounds the event this year. Below are three scenarios for how things could play out:

  • Scenario A (Base Case) – The roads are a bit icy, and many people opt to stay home. Only 60% of budgeted revenue is now expected.
  • Scenario B (Worst Case) – Roads are untravellable, and the event is canceled. However, online donations will still be accepted. Only 20% of budgeted revenue is now expected.
  • Scenario C (Best Case) – The meteorologist predicted inaccurately, and the weather is great. 90% of budgeted revenue is conservatively expected.

Each of these scenarios differently impacts the organization’s financial results for the year, and all vary from the original budget. This means the organization must now consider strategic financial pivots in response to each identified scenario. In this case, “Casino Night” is the leading source of funding for facility construction and improvement projects. This could result in the following outcomes:

  • Scenario A (Base Case) – In-progress construction projects are prioritized, while other projects are deferred until next year when better attendance at “Casino Night” results in increased donations.
  • Scenario B (Worst Case) – All projects (both planned and in progress) are postponed indefinitely.
  • Scenario C (Best Case) – All projects proceed as planned.

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.

Spreadsheets and manual analysis can be a great place to start, but at SST Accountants & Consultants, we combine cloud-based solutions with our team’s proven expertise to provide accurate recommendations based on your organization’s unique needs. Connect with us today to learn how we can assist you with scenario planning for the new year and beyond.