How can you use scenario planning to align FP&A with strategic planning?

Scenario planning is a powerful tool for financial planning and analysis (FP&A) professionals who want to align their forecasts and budgets with the strategic goals and vision of their organization. By creating and comparing different scenarios based on possible future events and uncertainties, FP&A can support strategic decision-making, risk management, and innovation. In this article, you will learn how to use scenario planning to align FP&A with strategic planning in six steps.

1 Define the scope and purpose

The first step is to define the scope and purpose of your scenario planning exercise. What are the key questions or challenges that you want to address? What are the time horizon and the level of detail that you need? Who are the stakeholders and the users of the scenarios? How will you communicate and present the results? By clarifying these aspects, you will set the direction and the boundaries of your scenario planning process.

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Renato V.

Co-Founder/CEO @ GetParallel.com
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The most important aspect of scenario planning is knowing what are the variables you are changing in each, how likely are they to change, and what could you do if they do change? For most companies going into a year where company's are tightening spend it might be saying "What if sales continue to stay flat?" and developing applying that assumption, but then also showing what would happen if they decreased or increased. By getting a gauge for how sensitive a company's performance is to specific variables you can then start planning resources accordingly. You might start planning for the worst case because of how sensitive the business is to that.

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2 Identify the drivers and uncertainties

The next step is to identify the drivers and uncertainties that will influence your scenarios. Drivers are the factors that have a significant impact on your business performance and strategy, such as market trends, customer preferences, competitors, regulations, technology, etc. Uncertainties are the events or outcomes that are unpredictable or unknown, such as economic shocks, political changes, natural disasters, pandemics, etc. You can use various sources and methods to gather and analyze data on drivers and uncertainties, such as external reports, internal surveys, interviews, brainstorming, SWOT analysis, PESTEL analysis, etc.

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3 Create the scenario framework

The third step is to create the scenario framework, which is the structure that defines the main dimensions and themes of your scenarios. You can use different approaches to create the scenario framework, such as axes, clusters, morphological boxes, etc. The most common one is the axes approach, which involves selecting two key drivers or uncertainties that have a high impact and a high uncertainty, and using them as the axes of a matrix. Each quadrant of the matrix represents a different combination of the two drivers or uncertainties, and forms the basis of a scenario.

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4 Develop the scenario narratives

The fourth step is to develop the scenario narratives, which are the stories that describe how each scenario unfolds over time. You can use various techniques to enrich and refine your scenario narratives, such as storytelling, backcasting, cross-impacts, consistency checks, etc. The scenario narratives should be plausible, coherent, relevant, and diverse. They should also include quantitative and qualitative elements, such as key indicators, assumptions, events, actors, actions, consequences, etc.

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Renato V.

Co-Founder/CEO @ GetParallel.com
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You have to sell the story on the scenario. Finance is always known for planning for the "worst" case, but in reality is about presenting unbiased data. For example, you might show that interest rates are not expected to drop, and show why there is still chance they could increase and show examples of why. It's a lot more simple to get buy-off on scenarios when you show them that those scenarios have happened before and how not preparing for them from Day 1 has been the reason other companies failed.

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5 Evaluate the scenarios and implications

The fifth step is to evaluate the scenarios and implications for your business performance and strategy. You can use various tools and methods to assess and compare the scenarios, such as sensitivity analysis, gap analysis, scenario dashboards, scorecards, etc. The evaluation should help you identify the opportunities and threats, the strengths and weaknesses, the risks and rewards, and the trade-offs and synergies of each scenario. You should also consider how your current strategy and plans would perform under each scenario, and what adjustments or alternatives you would need.

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6 Align FP&A with strategic planning

The final step is to align FP&A with strategic planning based on the insights and learnings from the scenarios. You can use the scenarios to inform and improve your strategic goals, vision, and direction, as well as your financial forecasts, budgets, and plans. You can also use the scenarios to monitor and update your FP&A and strategic planning processes, as well as to communicate and collaborate with your stakeholders and users. By using scenario planning, you can align FP&A with strategic planning in a dynamic and flexible way, and prepare your organization for the future.

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Renato V.

Co-Founder/CEO @ GetParallel.com
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You have to align resources with the likelihood of scenarios and a lot of times scenarios are simply targets. You might say that a department can hire X amount of roles, if X target gets hit. The reason you aren't approving that additional expense yet is mostly because of the fact that there is a chance it isn't based on different scenarios you've run. Aligning department leaders to pull in the same direction, understand why those scenarios apply to them, how likely they are, and what will happen if they don't prepare now is key.

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7 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

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Katerina Novichkova

CFO / Finance
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Key elements for effective scenario planning include: Identification of Key Drivers: During sensitivity analysis, identify drivers that significantly impact the business. Risk Mitigation Strategies: Develop strategies to reduce these risks, potentially using hedging instruments. Integration with Other Systems: Scenario planning should work in tandem with analytics, plan-fact analysis, and forecasting for a comprehensive approach. Dynamic Adaptation Feedback Loop with Plan-Fact Analysis By aligning scenario planning with these elements, companies can effectively navigate uncertainties, manage risks, and achieve strategic goals.

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How can you use scenario planning to align FP&A with strategic planning?

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1 Define the scope and purpose

2 Identify the drivers and uncertainties

3 Create the scenario framework

4 Develop the scenario narratives

5 Evaluate the scenarios and implications

6 Align FP&A with strategic planning

7 Here’s what else to consider

Financial Management

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