If you’d like your business to be able to cope with whatever the future holds for it, then it’s a good idea to plan for a range of contingencies. This applies especially to the financial side of the business, where it might be difficult to react to events in an informed, sober-minded way. If you’ve already done some financial scenario planning, then you might already have considered the factors you end up faced with. 

Effective financial scenario planning involves having a strong grasp of the technical concepts you’ll be dealing with. But it also requires a little bit of creativity and imagination. After all, you’re going to be trying to envision scenarios that haven’t yet come to pass, and might not actually do so. 

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What is financial scenario planning?

In practice, financial scenario planning works a little bit like collaborative screenwriting. You’ll try to imagine what might happen in a given situation, and try to extrapolate how events might unfold, and what the ultimate impact on your business might be.

You can then begin to devise a series of action plans, which can be put into action when the situation in question actually does arise. Of course, there might be significant variance between what you thought might happen and what actually does happen – so a good plan will be adaptable.

How does it help?

Anticipating different scenarios will allow you to react more quickly to unfolding events. You won’t be spending as much time thinking through the problem while under pressure. You’ll have already invested that time and thought in advance. 

Imagine that one of your important clients announces that they can’t pay their outstanding debts. If you’ve failed to anticipate this, you might immediately begin to alter your strategy, perhaps making moves that, in the long term, are going to be sub-optimal. 

It might be that you can take immediate, proactive steps to avert disaster. Investing in quality HR software might allow you to avoid the risks associated with a traditional payroll system.

How to actually financial scenario plan

In practice, your financial scenario planning will mean coming up with three potential outcomes for a given scenario. These will be the best-case scenario, the worst-case scenario, and the base-case scenario. 

You’ll want to judge the overall likelihood of all of these. To many, the idea of planning for the worst might make intuitive sense – but if the worst-case scenario is actually extremely unlikely, then it can be counterproductive to focus too much attention on a would-be doomsday that never arrives. So, while planning for a rainy day makes sense, it shouldn’t come at the expense of planning for more probably, though potentially less damaging, risks.