Never plan without preparing multiple scenarios
Anders Liu-Lindberg
Leading advisor to senior Finance and FP&A leaders on creating impact through business partnering | Interim | VP Finance | Business Finance
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Every startup business goes through a stage of gazing in rapture at an Excel spreadsheet predicting riches beyond imagination and believing that with honest hard work the plan must come to pass.
This mindset can prevail long into the development of a business, especially when the early years come with a fair tailwind. It’s not helped, either, by external stakeholders from early-stage investors to the stock exchange demanding a return on investment that matches the plan.
But we know the truth. That plan will never come true. Those precise activities will not generate that precise bottom line, however hard you work, trying to react and develop a new plan in real-time can spiral into disaster.
You need to start planning alternatives from the get-go, and that doesn’t mean a finger-in-the-air sensitivity analysis on the headline numbers to tick a box on the management to-do list.
How do you prepare multiple scenarios without losing focus on the ultimate direction of travel, and what happens when the real world delivers an unexpected kick in the balance sheet?
High/low vs. real alternatives
The simplest scenario planning, high/low, is the litmus paper of realism and robustness. The worst case is a test of survival. It throws into sharp focus the point at which the business fails. The best case is a test of resources. It highlights scarcity and impractical assumptions.
Of course, like the original plan, neither the best nor the worst-case scenarios are going to happen. They are tools for improvement. They give planners an opportunity to test their first-pass assumptions, reflect on the original forecast, and identify the critical drivers and milestones that will make or break the company on its journey.
It’s part of the planning feedback loop, the starting point for the creation of not only a better forecast but more realistic and actionable contingency plans.
Real alternative scenarios will emerge from what is learned here. That critical milestone will be your trigger to bring in investment in resources, for example, to maintain momentum. Those key drivers are the foundation of a nuanced set of high/low scenarios that enable you to adapt and pivot to stay on course.
Everything we have discussed so far in this series comes together in developing multiple scenarios. Simplicity, tested assumptions, clear processes, and an understanding that a forecast is a navigation manual, not a lifebelt, are all critical.
What happens when reality diverges?
The world around us has a nasty habit of throwing curve balls. For every carefully considered future outcome, there are many more that could arise. The global economic and socio-political landscape is too complex to predict with accuracy. Sanctions, war, pandemics, supply chain disruption, and the fracture of trading blocks were not in anyone’s forecasts just a few years ago.
Who knows what the next decade holds? There are many things that we cannot see until we know what they are. Dallenbach’s 1951 psychology experiment demonstrates this (no spoilers - check it out here). The picture makes no sense on the first examination - but once you know what it is, you cannot unsee it. As soon as the image resolves itself, we know whether we have that scenario in the bag, or if we need a new plan.
Fortunately, the ten commandments of planning and forecasting have prepared us for this moment. We’re ready to re-cast the figures, test new assumptions, plot our new course towards the horizon, and take full advantage of opportunities that we cannot yet imagine.
What is your tried and trusted method of producing multiple forecast scenarios? How are they best communicated to stakeholders? Let us know in the comments.
This was the tenth article in my new series about the Ten Commandments of planning and forecasting. You can read the previous articles below.
While you await future articles why not read my previous series "Charting the course for a successful career in FP&A"? You can find all the articles below.
领英推荐
You can read a lot more articles about FP&A, Business Partnering, and Finance Transformation below. It all start's with “Introducing The Finance Transformation Nine Box”?where you set the ambition for your transformation. You should join the?Finance Business Partner Forum,?which is part of the Business Partnering Institute's online community.
Can we trust the machine for financial planning and analysis??(the last article in my series "Planning (as we know it) is dead".
The secret sauce of FP&A transformation?(the last article in the series "FP&A Transformation Talks")
How Finance should use its seat at the table?(the last article in the series "The Unfair Advantage of Finance")
The ultimate guide to decision-making for finance professionals?(the last article in a series about the decision-making process and how Finance should impact it).
The Mindset Change Checklist For Finance Professionals?(the last article in a series about the mindset change that finance and accounting professionals should make to become business partners)
It's Time To Decide If You Want To Be A Business Partner?(the last article in a series about the personality traits of business partners)
All Successful Business Partners Are "Leaders"?(the last article in the series about our new capability model)
Should We Keep Talking About Business Partnering??(part of a 17-article series where we deep-dive into the WHY, WHAT, and HOW of business partnering by putting it on a formula)
Everyone Can Adopt A Business Partnering Mindset?(part of a six-article series about FP&A Business Partnering)
From Business Partner To Working Within The Business?(part of an article series where I interview finance professionals about their careers in FP&A and Business Partnering)
Is Your Product Optimized For Value Creation??(part of a toolbox series where we look at what tools FP&A professionals should leverage to drive value creation)
How Business Partners Turn Analysis To Insight?(part of a case study series where I interview business partners about how they drive value creation using real cases)
Anders Liu-Lindberg?is the co-founder and a partner at?Business Partnering Institute?and the owner of the largest?group dedicated to Finance Business Partnering?on LinkedIn with more than 10,000 members. I have ten years of experience as a business partner at the global transport and logistics company?Maersk. I am the co-author of the book “Create Value as a Finance Business Partner” and a?long-time Finance Blogger?on LinkedIn with 110,000+ followers and 190,000+ subscribers to my blog. I am also an advisory board member at?Born Capital?where I help identify and grow the next big thing in?#CFOTech.?Finally, I'm a member of the board of directors at?PACE - Profitability Analytics Center of Excellence?where I support the development of new analytics frameworks that can improve profitability in companies around the world.
Senior Manager at Bayat Rayan
2 年?? ??
Director of Financial Planning & Analysis at United Road Services
2 年Very inciteful Anders. I like the summary regarding worst and best cases with the best scenario's impact on resources (I think people and CASH) P.S. Took me quite a bit of time to see Dallenbach's cow; uh oh! ??
Fractional CFO for fast-growing companies | 400k+ Followers | Founder & CEO of Mighty Digits
2 年Scenario planning is an incredibly powerful tool when planning for the future, as it keeps everyone aligned with the potential different outcomes that can ensue...allowing the team to plan for each outcome. The future is out of our hands, but the more we can prepare for it, the better we can manage whatever is thrown at us!
Executive Leadership | Turnaround Strategist | Transformation enabler | Corporate Finance | FP&A | Process Optimisation | Risk & Compliance | ESG | Pharma & FMCG | Retail| Ex-Citi| Ex- Nomura| Ex-Flemingo | Ex- Aspen
2 年Excel is very important in business in everyday life. It makes work much easier and faster.
I teach Storytelling to Finance Teams | Course Facilitator | Keynote Speaker
2 年The most difficult in scenario planning is to make sure to foresee the mechanisms of dependencies if you move one driver on the other parts, and follow up on these. Most difficult but also the best way to develop your understanding of the company you work for