What is Scenario Planning? Templates and Examples

Here are three scenario analysis examples that show how you can think through and model different situations in your planning cycles. The study of so-called X, Y (Millennials) and Z generations is a mandatory part of any scenario analysis in strategic management and risk identification. The name PESTEL is derived from the initials of the letters of different types of scenarios that strategic planning demands be analyzed. With NetSuite, you go live in a predictable timeframe — smart, stepped implementations begin with sales and span the entire customer lifecycle, so there’s continuity from sales to services to support. Next, you need to identify the key variables and metrics involved. Remember to keep track of which key variables you will modify for each scenario, such as the cost of raw materials, and which ones you control, like the price per unit.

  • Once you have calculated and evaluated the different scenarios, you can start making decisions.
  • One of Excel’s biggest strengths is that it offers users a blank canvas.
  • Scenario analysis is the process of estimating the expected value of a portfolio after manipulating a number of key variables.
  • Initially, a base case scenario is prepared that uses current, commonly accepted assumptions about the future.
  • This example demonstrates how to perform a What-If analysis on a data import batch that has been processed and completed with the status Preimport Completed.
  • Performing scenario analyses properly (and efficiently) gives companies the ability to understand how internal and external changes will impact them in the short and long term.

In a worst-case scenario, it’s assumed that every variable changes negatively, and in the best-case scenario, the potential benefit of variables moving in a positive direction. Managers advocating organizational investment are naturally optimistic regarding the outcomes of their proposals. The problem is that research shows most don’t thoroughly evaluate all potential outcomes and, consequently, many decisions don’t achieve the benefits initially predicted. Alternatively, finance managers and analysts use scenario analysis to estimate the expected portfolio value, assuming changes in the interest rates or downturns in the economy. This exercise produces an outlook of future proceeds for each company in your portfolio. As with the Quick and Dirty approach, firms will generate perspectives across a variety of cases (upside, downside, baseline, etc).

Provide break-even analysis:

You don’t need a crystal ball to understand why scenario analysis is one practice great venture capital firms never neglect. Additionally, next generation scenario analysis tools perform the heavy lifting capability to calculate the overall impact of various scenarios. Although most organizations have excellent business management software from vendors such as SAP, Oracle and others, these are primarily focused on managing the business on a day-to-day basis.

  • Although most organizations have excellent business management software from vendors such as SAP, Oracle and others, these are primarily focused on managing the business on a day-to-day basis.
  • Flexible scenario planning starts with clean, organized financial data and dynamic modeling and planning tools.
  • These include hard-coded software solutions as well as others that have simple drag-and-drop modeling capabilities.

Understanding every outcome gives you the power to avoid bad investments and risky decisions so you can achieve the most optimal outcomes. By considering different outcomes, companies can understand the impact and feasibility of decisions that range from hiring new employees to investing in new equipment. While you’re investing in engineering headcount to build out product features, how much should you spend on ads and other marketing initiatives to drive revenue growth? There are two sides to consider in this scenario analysis example — developing your product and promoting it. Planning starts with having deep conversations with engineering about the headcount they’ll need to hit product release goals and with marketing about their plans to generate demand.

Both sensitivity and scenario analysis are popular types of what-if analysis. While scenario analysis evaluates the effects of changing multiple variables in your model, sensitivity analysis focuses on one key variable at a time to see how the model responds. Consequently, most businesses resort to performing their scenario analysis in Excel. By identifying potential threats, organizations can change the scope of their decisions to minimize the impact of potential threats. For example, it helped Shell anticipate the 1973 energy crisis and the oil collapse in 1986, as well as take pre-emptive action to mitigate their impacts.

Scenario Analysis in Personal Finance

Scenario analysis reduces the risk of underinvestment and sets you up to capture best the returns from follow-on. Scenario analysis is quite similar to simulation analysis but less complex because most often it considers only the two extreme and one base case scenarios. However, you should focus less on choosing an approach to scenario planning and more time thinking about your process for mapping out scenarios that are financially sound and that make sense to the business.

Understanding Variables and Assumptions

But you also have to account for a scenario where you boost customer acquisition and experience high churn because you hadn’t yet reached product-market fit. So, your original sales capacity model might encompass the base case where all 12 of those reps, when fully ramped, pull in $480,000 in revenue. Let’s say that you currently have two account executives with sales goals of $600,000 each. You decide to ask, “What if we were to hire 10 more account executives with the same sales goals? ” Your best-case scenario is that everyone hits 100% of quota and you boost revenue to $7.2 million.

What Are the Advantages of Scenario Analysis?

While a branch’s revenue history doesn’t change, its prices and expenses could. Let’s say there’s a regional bank chain that’s been steadily growing over the past 15 years. While the bank has had success since its previous last new branch opened, the owner, John, understands that success isn’t guaranteed. That said, office space and expansion are still important considerations. You would need to determine the costs of new personnel (such as office managers), new equipment costs for expanded headcount, and the square footage cost to accommodate headcount plans. Dropbox serves as a vital scenario analysis example for the future of work.

While it’s a great tool for investors and managers to utilize, scenario analysis is only as good as the assumptions and inputs made by the user. On the other hand, sensitivity analysis assesses the impact of changing just one variable at a time. Scenario analysis looks at a wide range of possible outcomes, but it analyzes the effect of manipulating all variables at the same time. The result is typically a base-case scenario, a best-case scenario, and a worst-case scenario.

John anticipates that it will be one more year before selecting the location of his new branch. Having a tool that can create new scenarios in little time will be vital to adapting to whatever lies ahead. Given what we know about our regional bank, it https://accounting-services.net/scenario-analysis-explained/ makes sense for the owner to invest in a tool like Synario. The company is growing, meaning that detailed scenario analyses will likely become a regular practice. Variables are defined as any factor that can change the outcome of a particular result.

Three months later, news breaks that the empty lot across the street from Location B will be the site of a large commercial bank’s newest local branch. Mr. Smith explains that this is due to the branch’s downtown location, where rent is higher, and he’s hired extra staff to keep up with demand during peak hours. Of course, some scenarios will likely be more relevant than others. In our example, most of the bank’s locations have annual fixed expenses of around $205,000.

Scenario analysis is most commonly used in finance to estimate the expected value of an investment in a number of situations (such as best case scenario, base case scenario and worst case scenario). Being able to think through different scenarios and then bring the financial analysis to life in a model quickly is key. And while that’s not easy, the best finance teams can get a good feeling for where the business is headed with agile, flexible planning. But building out models that accurately capture best, worst, and base-case scenarios is a complex and time-consuming process.


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