Reforecasting and Scenario Planning During Times of Change

No business likes uncertainty. Businesses operate best through planning and preparation for the future.

But nothing in the future is guaranteed, even during normal times. As the saying goes, the best-laid plans often go awry.

It’s important for businesses to consider what they should do if any number of events affect them.

In general, all businesses should have dynamic planning processes that can anticipate and adapt to external and internal changes.

Reforecasting Expectations

Those processes should include ongoing reforecasting. This means changing expectations as the year progresses, based on what has actually happened and what can reasonably be anticipated.

If your business hasn’t already revisited its budget to allow it to accommodate changing conditions and adapt, it’s imperative that it be done. It’s time to reforecast future events that may affect the company and plan for different scenarios.

With the onset of the COVID-19 pandemic and seemingly unpredictable business restrictions amid stay-at-home orders, previously reasonable, solid predictions no longer make sense.

Consider these questions to get you started:

  • How will your business be affected by the pandemic moving forward?
  • What if there’s a second wave?
  • Will the government provide sufficient aid?
  • What changes in the law will affect business operations? Examples here could be changes in tax laws or requirements of financial assistance.
  • What’s going to happen with the economy?
  • How might this affect your supply chain and your employees?
  • What happens if an effective vaccine means restrictions are no longer warranted?

The Future is Unknown

As these questions illustrate, now in 2020, more than any other time in recent history, certainty is fiction. Pragmatism is crucial, as is the ability to conceive of smart responses to possible future events.

The only thing that can be counted on in these times is that nothing can be counted on.

After all, few could have predicted a year ago that so much of the economy would be shut down. No one could have forecast that more than 100,000 Americans would be killed by a raging pandemic that would also paralyze parts of the worldwide economy.

Forecasting and reforecasting are especially important during this time with many unknowns. Continuing to reforecast enables companies and managers to respond to events and answer important questions about what to expect and how to adapt.

Major Companies Use Scenario Planning

Scenario planning uses data-based assessments of a company’s options considering different possible factors.

The approach has benefitted major corporations.

Shell Oil became known as a pioneer in the strategy when it navigated the oil crisis in the 1970s by having a scenario plan prepared. The company was able to survive because it was ready to respond.

Another major company that made effective use of scenario planning is Rolls Royce. The company was facing difficulties on several fronts in 2015 when several executives attended a conference and learned about scenario planning.

The executives persuaded Rolls Royce to develop an extensive process for scenario planning. And the following year, scenario planning formed the basis for the company’s strategic planning.

How to Approach Scenario Planning

The way to approach scenario planning is by assessing current conditions and looking at forecasts for the future. Incorporate factors that may influence events to envision plausible developments.

Be able to see your outlook, change variables, and see how they affect your scenario planning.

Keeping your evolving forecasts in mind, create a series of projects, policies, and initiatives that make sense for your company, given the different scenarios. Make sure to consider the potential of various scenarios playing out at once.

Scenario planning can be the responsibility of a management team or a team of younger employees who brainstorm different scenarios. Expert facilitators could be brought in to help with this task.

These steps should be incorporated into your scenario planning:

  • Make a list of factors that could drive change.
  • Note how those factors could affect your company.
  • Identify indicators that something is likely to occur.
  • Analyze factors that are more likely to develop and those that are important to your business.
  • Identify uncertainties that could be critical to your business.

It’s helpful here to know the Pareto Principle, named after the Italian economist Vilfredo Pareto, also called the 80/20 rule.

In this application, the rule would suggest that 20% of factors create 80% of results in business, according to FP&A Trends. Those 20% are referred to as key drivers. Identifying those drivers is an important part of planning, forecasting, and generating scenarios.

Scenario planning can involve different approaches. Some may consider the probability of future events, while others may account for whether future events are plausible. This plausibility approach is known as Oxford scenario planning.

Applying Scenario Plans to Circumstances

Scenarios don’t necessarily have to line up specifically with events that occur to be useful. For instance, a plan to respond to a natural disaster, such as a hurricane, could help a company react to some of the components of COVID-19 and civil unrest.

This works because different scenarios would envision, for example, losing a portion of revenue or the business being temporarily shuttered.

A business that was ready to transition its workforce to telecommuting would have been well-positioned for the pandemic, even if the plan was designed with a natural disaster in mind.

It’s also important to plan for a sudden, increased demand for business output, as well as disruptions in how you get your products and services to customers.

Scenario planning should be carried out for all levels of your company and should be done on an ongoing basis, so your organization is able to respond quickly.

Now It’s Even More Important to Reforecast

According to the American Planning Association, scenario planning allows professionals to “respond dynamically to an unknown future. It assists them with thinking, in advance, about the many ways the future may unfold and how they can be responsive, resilient, and effective, as the future becomes reality.”

Fixed expectations, in other words, are replaced by possibilities.

As crucial as this planning was before, it’s even more important in the second half of the year.

Meeting Your Company’s Specific Needs

One reason it’s important for your company to create its own scenario plan is each company is different. Events affect different companies differently.

For example, supermarkets were affected one way by COVID-19, while restaurants saw an entirely different effect.

Scenario planning is useful for big and small businesses, as well as non-profits, schools, and houses of worship.

Small- and medium-sized businesses may find it beneficial to outsource some of their accounting and planning services to a firm that has more experience anticipating and reforecasting for different scenarios.