In a perfect world, it’s easy to plan for the best-case scenario. However, we’re living in unprecedented times, and the best-case scenario is rarely the reality. Roadblocks arise, industry trends shift, or unexpected opportunities catapult a business forward:
What happens if your business doesn't hit revenue targets?
What if it receives a round of funding?
What if another global pandemic strikes?
Businesses are expected to know how to navigate these uncharted waters. This can only happen through proper preparation. Does your company have a best-case scenario mentality or are they planning for reality?
As we've all learned heading into 2025, planning for the unexpected is the new normal. By preparing for the future, organizations can better course-correct as needed. While companies can't predict what's to come, they can still plan for the unexpected. This can be done through strategic scenario forecasting and planning.
In this article, our experts at Abacum will dive into the ins and outs of the different types of scenario planning so your team can continue to grow and excel no matter what the future holds.
What is Scenario Forecasting?
Scenario forecasting is the process of making assumptions about the future and predicting how your business will be affected. By preparing for what could happen, you'll be better able to react and respond to forthcoming obstacles. This process gives organizations the power to go from reactive to proactive in their strategic planning initiatives.
Simply put, scenario planning allows organizations to plan for the future with multiple outcomes. For an organization to achieve this level of preparation, it must identify the potential circumstances and their corresponding outcomes.
These circumstances can be both positive and negative. However, the main purpose is to better prepare business leaders to make the right decisions that support growth. Unfortunately, 46% of FP&A time is spent on data collection and validation instead of analysis, severely hindering organizations' strategic agility.
Scenario vs. Traditional Forecasting
Traditional forecasting relies on linear assumptions that treat the future as an extension of the past. Scenario forecasting explores multiple possible outcomes, helping finance teams stay agile when facing uncertainty.
How does Scenario Planning Work?
As the name suggests, scenario planning is all about outlining different business scenarios and uncovering an organization’s possible responses. By raising awareness of the plausible scenarios, leaders are better able to react as needed.
There are four basic steps when it comes to the scenario planning development process.
Identify the main drivers
Spot the key internal and external forces that shape your organization's future.
Pinpoint critical uncertainties
Focus on factors like market demand, regulatory changes, or competitive moves that could drastically impact outcomes.
Develop multiple scenarios
Build different forecasts representing best-case, worst-case, and mid-range outcomes.
Map pathways to action
Once these steps have been completed, senior management can brainstorm to discuss how their organization may change or evolve in the future. This kind of strategic thinking allows finance teams to quickly adapt and identify the potential impact of any potential scenario.
Why is Scenario Forecasting Important?
We know that practicing scenario planning allows leaders to stay agile in an ever-evolving environment. However, what are the other advantages that come with a scenario plan?
Finance teams that prepare for different scenarios are more likely to have a competitive advantage. Let’s take a moment to recall what happened during COVID-19.
No one expected our economy to come to a sudden halt. That’s a scenario most companies would have never seen coming.
However, organizations that quickly adapted to this massive shift were the ones that survived.
Aside from mitigating risks and improving agility, scenario planning also allows senior management to make more strategic decisions for their organization. By having a clear scenario planning framework, leaders within an organization have greater insight when it comes time to create their financial forecasts.
Common pitfalls in scenario forecasting
One pitfall is focusing exclusively on best-case outcomes, ignoring negative possibilities. Another is failing to involve cross-functional teams, which can leave your plan incomplete.
What are the Different Types of Scenario Planning?
Finance teams have several methods of putting this principle into practice. The fundamental types of scenario planning include:
Quantitative scenarios
Quantitative scenarios include best-case and worst-case scenario planning model outputs. Finance teams can quickly adapt models by changing minimal factors.
By assuming key variables and their corresponding relationships, teams can easily create financial forecasts and budgets as needed.
Operational scenarios
Operational scenarios, or event-based scenario planning, are some of the most widely used scenario planning models used by finance teams today. This model reviews the immediate impact of a specific event and how an organization will respond to it.
Normative scenarios
Normative scenarios, also known as prescriptive scenarios, are used to predict a company's most desired outcome. They help an organization see how it would like to operate in the future.
Once there's a clear vision of the end goal, the team can then work backward to identify the path to get there.
Strategic management scenarios
Instead of focusing on the actual company, strategic management scenarios strive to paint a picture of the overall environment in which the organization operates. When it comes to this type of scenario planning, professionals shift their focus from more minor issues to greater challenges that may affect their organization.
How to Turn Scenarios into Strategy
So now that you know what strategic scenario analysis is, it’s time to bring these ideas to life.
When you first start implementing a scenario planning strategy, keep it simple. One of the biggest mistakes finance teams make is overcomplicating the process.
Of course, there are endless scenarios that could play out. Instead, focus on the most relevant or realistic cases for your organization.
By focusing on two to three scenarios, your team will be better able to prepare during the planning process.
When fleshing out alternative scenarios, include the different stages for each outcome. Have a clear idea of the average case, best case, and worst-case scenario.
This provides greater insight into the plausible scenarios and helps maintain a consistent framework for future planning.
Re-watch Christian Wattig's webinar on how to supercharge your budgeting process with scenario planning
How can the finance function support scenario planning?
In times of uncertainty, companies have no choice but to stay agile. When building models and budgets, unexpected circumstances like economic shifts, new opportunities, or even global pandemics can arise.
To push forward, teams must remain on their toes and adjust as needed.
By having more strategic foresight when conducting financial forecasting and planning, teams can reduce risks and align on organizational objectives. In addition, by following best practices and implementing the right tools, financial analysts can use scenario planning to drive valuable insights and be more strategic in their everyday work.
To equip your team with the right resources, you need to go with a strategic finance solution that supports quick scenario analysis and can uncover the potential impact of any possible outcome.
Scenario Forecasting Tools to Consider
Leading FP&A platforms like Abacum offer flexible modeling and real-time collaboration to streamline your scenario analysis. Evaluate which solution best aligns with your organization's finance goals and workflows.
Abacum’s scenario planning software is the perfect solution if you are currently looking to improve your team’s financial management and strategy. To learn more about how our company can help future-proof your financial planning, contact our experts today.
