The Ultimate FAQ for Business Scenario Planning
Posted on 12th October 2017 in Cash Flow
Written by Freya Hughes
Here you’ll find the answers to all of your scenario planning queries. If we’ve missed anything, send us a message and we’ll add to this list!
Starting, and running, a business is exciting. You need to put some measures in place to protect your investment – you’ve put a lot of time, money and energy into your business, so make it the best it can be. One such protective measure is to set up scenarios, which will show you the possible outcomes of a myriad of things that’ll inevitably come your way.
What is scenario planning?
Essentially, scenario planning is a means of evaluating the results of different outcomes. You’re estimating the value of a proposed business decision, be it an investment or more of a general decision. Investopedia define scenario planning:
“By creating various scenarios that may occur and combining them with the probability that they will occur, an analyst can better determine the value of an investment or business venture, and the probability that the expected value calculated will actually occur.”
So in a real-life example, you might want to invest in a new piece of equipment for your business. We spoke to Michael Tyrell of Beautiful Print a while back, who needed to do exactly that.
He knew that if he did buy his new machinery, he would probably make more revenue overall but he also needed to know how long his investment would take to see a return. You can read the full case study here. He told us how he managed investment and made a good return:
“We broke [the potential investment] down in the end into three scenarios. We were able to drill right down and look at the profits it was creating over our 5-year plan, and the effect it would have on the bank balance as well. It’s very clever and the Dashboard made it so easy to understand – the impact each scenario would have on my business was so clear.”
From this, you can see that scenarios are to be used when you’re just not quite sure what the outcome of something will be. Not only internal use, scenarios can also be applied for more general things too. If you live in a hotter country than the rainy UK, extreme weather can be a seasonal worry. If you were to wonder ‘what if’ with this type of variable, you could plan for different outcomes. The idea is to get you thinking outside the box for whatever might come your way so you can always have a plan B, C or even D!
Why should I be scenario planning?
It’ll make your business stronger, so is thoroughly recommended. It can give you options in your decision making, which allows you to dodge any calamities coming your way.
A good example of this came in the very early days of the concept. As Harvard Business Review wrote, at the turn of the 1970s, Shell developed scenario planning to protect the business in case of disaster. They listened to planner analysis of the global business environment, meaning that in 1973 when there was an oil crisis, the company was ready to cope. Fast-forward a decade to 1981 and they were again prepared to deal with an industry slump; other oil companies had stockpiled their reserves after the Iran-Iraq war broke out, while Shell had the foresight to sell their excess before prices dropped.
As you can see, using this proactive method is like a shield for your business against things you simply can’t control. Had Shell followed suit in 1981, a lot of millennials might not even know who the company were. While that may have been a win for the planet, it would have been a huge loss for those in charge.
How can I use scenario planning in my business?
Use this function to visualise how you’re going to achieve your goals. While you may think your business is too small to need such things, in reality startups become SMEs, and then can grow even further. Therefore, monitoring your progress from day one will get you into good habits from day one of operating. Later down the line it becomes harder to keep tabs on every aspect of your business, so using reliable software that will help you stick with it is important.
To use an example, let’s say you were thinking of crowdfunding to get a bit of a cash injection. You’re not going to know exactly how much cash will come in from that, even if you can make an educated guess. Planning for three to five different amounts will allow you to make a decision confidently whether or not you need to amp up your marketing, evolve your product or services, or look for additional investment.
How do I set up scenarios?
Within FUTRLI’s scenario builder you can view, create and edit forecasts that have been created for your organisation.
When creating your scenarios, you can use previous months’ data to create an accurate forecast. There is no need to create a formula to calculate this, it can be done using a monthly growth rate method in the Scenario’s Forecast Methods. We have handy help documents available to help you get your head around this whole concept, which you can see here.
The simplified version, however, is to input your predicted fixed costs (do some research to make sure your figures stack up) and make that your base scenario. From this, create another scenario and link it to your base assumptions. Do this for your best, worst and middle of the road expectations. Ensure you’re using at least three different outcomes for each scenario – it gives you options to consider and it’s going to put you in good stead moving forward.
What is a ‘what if’ scenario?
Your business has many paths it could go down and you need to choose which one to action. What if scenarios allow you to work out which future is the best for you. Creating one base scenario with your certain outgoings (rent, rates, bills, etc) and then create further scenarios on top of this to see your best/worse cases, or what it looks like with this many staff vs this many, etc.
What if scenarios give you the perfect tool to see how any changes will impact the overall picture by linking further scenarios that you create, to your base one. Whenever you edit your base scenario, changes will flow through to the scenarios that are linked to it.
Now you have a what if scenario set up, you can produce forecasts to indicate what would happen in the best case situation. For example, you may predict a new service will attract five new clients per month. On the other hand, you can create a what if scenario based on the worst case scenario, with only one new client every other month.
What is the maximum length of a Scenario in FUTRLI?
The maximum length of a scenario in FUTRLI is ten years. If you want to edit your start and end dates, or the length of your scenarios, then head to ‘Advanced Copy’ and it’s a simple process.
Why can I not see the Scenario Section?
Because the Scenario section of FUTRLI is only displayed for Admins and Owners of accounts. User accounts don’t have access to the Scenario section, so if you need it ask the account Owner to grant you access.
Should I include all of my potential leads in my base forecast?
You could do, but it’s better if you only include your financial data like your costs and revenue. Linking these through different scenarios means you’ll have best, worst and middle cases for how many leads convert into sales. Following the worst case in this instance would make a better result a nice surprise, but of course aim high!
Can I use scenario planning to make quick spending decisions?
You can indeed. By linking your current forecast through to a what if scenario, simply layer on the additional cost and you will then be able to compare key metrics. These might include your bank account or profit, which will help you to make decisions with confidence.
In a particular scenario not all costs are relevant. Can they be excluded?
In short, yes. You can show or hide the costs that are relevant for you, as scenarios are designed to be flexible.