Scenario Planning 101: The 10-Minute Intro for Entrepreneurs

In short:

• As you look out over the vast possibilities of 2021, consider using the practice of scenario planning to plot your response to various potential events.
• The first of three easy steps entails looking backward, at drivers of your business’s prior success.
• Next, you’ll build potential future scenarios, assess the impact of various possible responses, and create a framework for quicker, smarter decision-making throughout the year.

No one can predict the future with precision. How long will my ecommerce site’s current surge last — or will it continue? How will consumer spending fare in 2021? What will happen if one of my suppliers halts operations? What type of financial relief can my business expect from the government?

Enter scenario planning. This practice allows you, the decision maker, to identify ranges of potential outcomes and estimated impacts, evaluate responses, and manage for both positive and negative possibilities. And being prepared for events that may come will put you in a position to make educated decisions faster when surprises inevitably arise.

Getting started with scenario planning can be easy. A few necessary steps when planning for the duration of 2021 and beyond:

1. Identify driving forces.

Establish a timeframe, and pull historical data accordingly to evaluate variable factors. For example, if you’re planning for the next three years, then pull the previous three years’ financials, sales and customer churn data for reference. Work to understand what was going on at the business’s healthiest point and the competitive advantage you had during that time.

2. Brainstorm future scenarios, and templatize your plan.

As you build your scenarios, external factors — potential changes to the economic and geopolitical landscapes, as well as consumer behavior — need to be included in your assumptions. This is where finance teams can feel overwhelmed; there’s no way to plan for so many possibilities properly. So, keep it as basic as possible by focusing on two to three significant uncertainties and building multiple scenarios from there.

3. Understand your planned response inside and out.

Each scenario needs to contain enough detail to assess the likelihood of various potential responses’ success or failure for the business. Once finance leaders feel comfortable and agree with these responses, you can create a framework that helps the executive team make educated decisions. Then, the results of any decisions made need to be monitored in real-time so the team can nimbly adjust its ongoing response to a given event.