In this series of blogs, I’m focusing on particular issues regarding the management of performance. In the last blog I looked at improving the accuracy of forecasts. In this blog I’m looking at Scenario Planning.
It is evident that we live in unprecedented times as far as the speed and complexity of business is concerned. Speed in that it doesn’t take long for new fashions and competitors to spring up and take away what we consider to be ‘our share of business’. Complex in that as well as dealing with customer and supplier relationships, we also have to deal with the impact of social media and what that does to our business. Both speed and complexity lead to the reduction of the planning horizon – i.e. how far we can see into the future, meaning that organisations have to be continually ready for the unexpected.
Being ready for the unexpected requires organisations to model a range of ‘What if?’ scenarios. For example, what if sales are down 15% or more on what was planned? What happens if energy prices or green taxes were to increase suddenly? To allow this, the organisation must first build a model of how the business operates. This means looking at the relationships between the resources consumed, the amount of work those resources support, and the anticipated outcomes that would be generated. For example, sales revenue is the product of marketing, lead generation, sales calls, customer references and signing contracts. Similarly, production costs are the result of buying raw materials, fabricating them into products, packing and shipping them to customers.
Driver-based planning example that links profit with activitiesThese links can be modelled so that entering information such as workload or resources to be spent, are then used to generate the anticipated outcomes. This is known as ‘driver-based’ planning. Once this model has been built, it can be used to try out a range of scenarios, such as decreasing sales by 5% while increasing transport costs. The results from this scenario can then be captured and compared with other scenarios. The point of doing this is to highlight any exposure the organisation has and to then develop contingency plans that will offset their impact, should those conditions occur.
Scenario planning is best done using a specialised planning systems such as Financial Driver. This application allows the organisation to be modelled, from which scenarios can be easily set up and run. To support this, Financial Driver allows an unlimited number of versions. These are typically used to hold actual, budget and forecast versions of any data, but they can also be used to hold different scenarios. For example, senior management may want to better understand the impact of a rise in energy prices. To do this they create a new scenario – say ‘Higher Energy Price’ and using Financial Driver’s Data management capability they can copy the data from actual (or budget, forecast or a combination of all three) into the new version. If energy price was set up as a global variable, it can now be changed in the ‘Higher Energy Price’ version, which will then be used to re-evaluate all the data in that version but at the new energy rate. This exercise can now be repeated but with another new version called ‘Lower Energy Price’, only this time using a lower energy cost. The two versions can now be compared ‘side-by-side’ in a report. Financial Driver is perfect for organisations wanting to carry out scenario analyses, which can be done simply and quickly but without invalidating the integrity of actual results
By continually evaluating different business scenarios, management can be better prepared for an uncertain future. This allows alternative courses of action to be evaluated that can be quickly put in place when and as they are required. If you’re interested in seeing how Financial Driver can help your organisation, request our free solutions booklet by following this link.