Financial Management

13Scenario Analysis, Planning, and Management

“It's tough to make predictions, especially about the future.”

“The future ain't what it used to be.”

— Yogi Berra

Most plans and financial projections are based on a single course or scenario. Single-point projections and scenarios have a number of shortcomings. First, they ignore the presence of uncertainty: The future will be different than we anticipate. Second, they contain dozens of assumptions, many of which are critical and buried in the depths of our projection models. In times of uncertainty, scenario analysis and planning are critical tools. Scenario planning can be applied to all types of financial projections. Whether you are projecting financial earnings, estimating cash flow and liquidity, or evaluating product development or capital investment decisions, scenario analysis provides important context and encourages an awareness of uncertainty. It is not simply a financial planning tool; it can be an integrated approach that can assist enterprise-wide efforts in preparing for an uncertain future (Scenario Management).

SCENARIO ANALYSIS: DEFINITION, BENEFITS, AND APPLICATIONS

What Is Scenario Analysis and Planning?

Scenario analysis and planning are tools to assist in making decisions under uncertainty. In general, most operational plans and financial projections are based on a single course or scenario. This single scenario is based on many significant assumptions about the future that often are not explicitly ...