Scenario-Based Business Planning: What It Is and How to Use It

As a business owner, it's important to prepare for as many possible roadblocks as you can before you encounter them. By anticipating changes or challenges in your business's environment, you will help set yourself up for success.

This preparation can be achieved through scenario-based planning — in other words, thinking through different potential obstacles and creating actionable strategies to handle them.

What is scenario-based business planning?

Scenario-based business planning involves imagining scenarios about your business's future and anticipating any potential realities or challenges.

Jinny Uppal, a board advisor and consultant for startups and small businesses, noted that this isn't an exercise to forecast what will happen — instead, it helps business owners prepare for a broader set of possibilities.

"It's not a tool to predict the future, but a methodology to plan a set of controllable actions for an unpredictable future," said Uppal, who is on the leadership team of the Harvard Business School Club of New York's Recover and Rebuild Initiative, which provides pro bono consulting and coaching to small businesses. "During fast-changing, uncertain times like now, scenario-based planning can help a small business move from a 'reactionary' to more of a 'proactive' mode of operating."

[Read: How to Write a Business Plan During a Pandemic]

Scenario-based business planning begins with identifying external factors that could significantly affect your business, said Uppal. For instance, in the current pandemic, these factors may include virus case volume, vaccine availability, lockdowns, fiscal stimulus support and trade and economic policy considerations. From there, you can map out possible "scenarios" or outcomes that could stem from each factor.

"By thinking through multiple possible outcomes and a high-level action plan for each, your business can build a far more robust and consolidated plan compared to one that is either too pessimistic or too optimistic based on one set of assumptions," Uppal told CO—.

Uppal noted that this process is straightforward enough to be done "on the back of a napkin" and is applicable to any business, regardless of size or sector. Your scenario assumptions can be translated into profit and loss and cashflow projections that can be built in simple Excel spreadsheets.

"It is important to build in timelines for the scenarios since that will impact the cashflow," she added. "One idea is to build scenarios for 6-, 12- and 18-month timelines with assumptions on revenue and any outflows due to new investments being made during that time period."

[Read: How to Start a Business Without a Lot of Money]

Tips for scenario planning

Brainstorm potential obstacles with your team

Talk to every member of your team at different levels and ask to brainstorm scenarios that could affect your business. Think about the lifecycle of your products, how politics affects your industry, outside analyses of your industry and whether technological advancement could improve or make obsolete your services.

Instead of trying to plan for every potential scenario, Uppal recommends keeping it simple and evaluating no more than three scenarios during this exercise.

Identify driving factors and uncertainties for each scenario

Once you've decided on the three scenarios to plan for, focus on three to four specific factors or trends that might impact each one, said Uppal. Think about not only how your individual business is affected, but what forces affect suppliers, customers, competitors, your employees, shareholders and the government.

"Include factors that seem distant now but may impact you in the future," Uppal advised. "For example, will a continued deterioration in U.S.-China relations disrupt your supply chain?"

Develop plausible scenarios

With your team and the proper data, discuss and play out these scenarios. Think about when and why they could occur and what you can do to minimize the risk if the issue does come up.

If you're not sure what's truly plausible and realistic versus what's in your imagination, Uppal advised turning to trusted colleagues for their insights before taking information reported by self-proclaimed "experts."

"Ask a trusted partner or mentor to help you develop a fact-based matrix of possible outcomes," she said. "I highly recommend not taking advice from so-called forecasters or experts. That may lead to excessively optimistic or pessimistic scenarios."

Reevaluate and update your strategies accordingly

Scenario-based business planning should be a continual, ongoing process. Evaluate your assumptions regularly update them according to changes in the market, new technology and the growth and development of your business.

"[This] is not a one-and-done activity," said Uppal. "Revisit the scenarios and plans every month [or] every quarter. Adjust plans if significant new information becomes available."
[Read: 4 Smart Ways to Pivot Your Business Model Now]

CO— aims to bring you inspiration from leading respected experts. However, before making any business decision, you should consult a professional who can advise you based on your individual situation.

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