Read on and learn how scenario planning can benefit your small business.
By choosing the right scenario planning software for your small business, you can create contingency plans for the worst while being prepared to capitalize on the best. Your small business can thrive while others are caught unprepared.
Using Profit Frog’s tools will help you make decisions that maximize profitability and avoid decisions that would tank your profits.
What are Scenarios?
A scenario is a what-if question based on a specific set of variables and assumptions:
- What if I hire a human resources manager?
- What if I raise prices 16%?
- What if average temperatures continue to rise from climate change?
- What if I invest in inventory management software?
- What if the United Kingdom’s manufacturing costs increase by 50%?
- What if a serious supply chain disruption occurs?
- What if my sales pipeline shrinks?
- What if I reduce employee pay?
- What if I fire my HR professional?
- What if I adopted a more aggressive recruitment strategy for talent acquisition?
- What if I start using a customer relationship management (CRM) software?
The power of scenarios is that they allow you to create models that help you envision the potential impacts on your small business of each hypothetical situation.
What are Scenario Plans?
While you may have limited control over numerous external factors affecting your business, you don’t need to feel helpless.
Scenario planning involves asking the following two questions.
- What could potentially occur? This is the scenario itself.
- What would be the impact on my business if it did occur? This often involves looking at “most likely,” “best case,” and “worst case” outcomes.
There are four approaches to scenario planning:
- Exploratory scenarios
- Target-seeking scenarios
- Policy-screening scenarios
- Retrospective policy evaluations
These approaches are typically used in larger enterprises and serve different functions in the budget planning process, with retrospective evaluations being particularly useful in determining the driving forces of the sales cycle across a specific time frame.
Smaller businesses don’t need the complexity of these different approaches, which is why Profit Frog simplifies the scenario planning process to make it understandable and actionable for average business owners.
With the right tools, you can create business plans around scenarios to guide your small business toward the “best case” outcome of each scenario and away from “worst case” potential outcomes.
Benefits of Scenario Planning
Scenario planning helps small business owners navigate to the most profitable outcomes possible. There are numerous benefits of scenario planning:
- Helps business owners understand the effects of each decision
- Helps teams (finance, operations, etc.) prepare initial responses to potential situations that could arise
- Shows proactive risks business owners can take that have small downside and big upside
- Helps small businesses avoid common pitfalls
Scenario planning allows you to model all sorts of profitability drivers within your business, and how they might respond to external events or trends. Armed with these insights, your financial management and business decisions will be much better.
- Cost of goods sold
- Labor costs
- Supply chain issues
- Sales cycles
- Pricing increases
- Human capital issues
Profit Frog’s scenario planning software lets you model a wide range of possible outcomes and impacts. Then you can navigate your business toward best-case scenarios while still preparing for worst-case ones.
What Are Three Potential Outcomes of Scenario Planning?
By building scenarios, you can be prepared for 3 levels of potential outcomes for any variable you choose to model:
- The best-case outcome
- The most likely outcome
- The worst-case outcome
You can increase the likelihood of the best-case outcome, and capitalize on it more fully if it does occur.
You can use the most likely outcome to maximum effect by making choices that increase profitability and decrease liability.
You can decrease the likelihood of the worst-case outcome occurring, and mitigate its devastation if it does occur by being ready in advance.
Why Do Small Businesses Need Scenario Planning?
The need for developing scenarios has never been greater than it is today. Just look at the current reality of the world we live in:
- Global pandemic (COVID-19)
- Global conflicts
- Health crisis (monkeypox)
- Energy crisis
- Record inflation
- Supply chain issues
- Climate change
The only disadvantage of scenario planning is that it takes time and effort. Until Profit Frog arrived on the scene, that is. Profit Frog makes scenario planning easy for small business owners. Profit Frog users can conduct powerful planning exercises that set them up for preparedness and success.
Scenario Planning Types
Traditionally, there are four main types of scenario planning. For the average small business owner, understanding, and mastering all four is not necessary. Profit Frog blends the most useful aspects of each scenario planning type to allow average small business owners to easily and decisively navigate uncertainty.
Normative Scenarios
Normative scenarios describe an achievable, most preferred end state. This type of planning is geared towards goals on how the company would like to operate long-term. Normative scenarios are usually combined with other types of scenario planning, as they focus on what the end goal is rather than how to achieve it.
Quantitative Scenarios
Quantitative scenarios look at scenario planning through the lens of financial modeling. These scenarios examine the financial implications of different scenarios.
Operational Scenarios
Operational scenarios are the most common form of scenario planning. They focus on the immediate impact of a specific event and provide short-term strategies. Operational scenarios look at all likely outcomes of a certain decision and how they can influence the business.
Strategic Management Scenarios
Strategic management scenarios examine your company’s environment. They look at the broad picture, including the economy in your area, and how your customers are likely to think and behave.
With Profit Frog, you don’t need to have knowledge of the scenario planning process to get the benefits. Simply follow the prompts in our software and model different scenarios for your company.
Scenario Planning vs Strategic Planning
Strategic planning and scenario planning are both great business solutions and have a lot in common, but they differ in the following respects:
- Strategic planning assumes a known future scenario and strategizes how to get there.
- Scenario planning assumes a dynamic, chaotic future and helps you plot a course to maximum profitability through unknowns.
- A strategic plan is a more static process and is disrupted by variability, whereas scenario planning is designed to navigate variability.
Profit Frog’s scenario analysis is designed to be dynamically updated as conditions change. This sort of dynamic planning is much more effective and actionable than many static planning models.
Frequently Asked Questions about Scenario Planning
What are the disadvantages of scenario planning?
The biggest disadvantage of scenario planning has traditionally been the time and resources it consumes. Before scenario planning tools were used on a regular basis, modeling different hypotheticals took a tremendous amount of time.
Modeling scenarios in Microsoft Excel, for example—even with a good scenario planning template—is a daunting process for all but the most proficient Excel users.
These days, a wealth of scenario-planning software tools have made the process more achievable for regular folks.
Profit Frog’s scenario planning software is targeted to small businesses. We take away the unnecessary complexity that some of our competitors include—many of them focus on serving funded startups with complicated CAP tables and shareholders—and give Main Street businesses exactly the features they need…and none that they don’t.
What is scenario modeling?
Scenario modeling is the same as scenario planning. It involves forecasting how different drivers will impact your business according to specific hypothetical changes. Scenario modeling is a dynamic way to plan for your business and navigate uncertainty through exploring multiple scenarios and being prepared for many eventualities. Profit Frog helps you do this easily and with no scenario modeling experience.
What are the four approaches in scenario planning?
The four main approaches to planning various scenarios are:
- Exploratory scenarios
- Target-seeking scenarios
- Policy-screening scenarios
- Retrospective policy evaluations
These approaches are typically used in larger enterprises and serve different functions in the budget planning process, with retrospective evaluations being particularly useful in determining the driving forces of the sales cycle.
Smaller businesses don’t need the complexity of these different approaches, which is why Profit Frog simplifies the scenario planning process to make it understandable and actionable for average business owners.
What is the history behind scenario planning?
Scenario planning got its start in the military, which used it to imagine different “war games” and their outcomes. In the aftermath of WWII, scenario planning began to infiltrate the civilian and corporate world. Today, it is an established practice that companies use to navigate uncertainty and variability.
Herman Kahn and the Hudson Institute
Herman Kahn was a systems theorist and pioneer of scenario analysis who popularized the term “scenario” in the 1960s. Kahn founded a scenario-based think tank, the Hudson Institute, in 1961. Hudson initially prioritized defense-related scenario planning and its theories of nuclear deterrence and escalation were influential within the Kennedy administration. Hudson then began to focus on scenario planning in economics; Kahn successfully predicted Japan’s economic rise.
Royal Dutch Shell and Scenario Planning
Shell has been using scenario planning since the 1970s. The company’s scenario team has been able to successfully model global trends and plan against them.
Shell’s set of scenarios have helped the company anticipate and adapt global business operations to the oil shocks of the 1970s, the collapse of European communism, the Great Recession of 2008, and other volatility. Here are a few Shell scenarios:
- The Sky scenario: imagining meeting the climate goals of the 2015 Paris Agreement and the changes that would need to occur to mitigate climate change
- Rethinking the 2020s: 3 scenarios that explore the long-term ramifications of the COVID-19 pandemic
- Digitalization: exploring how digital technologies might continue to change the world as we know it
Shell’s executive leadership has benefited tremendously from their investment into scenario planning. With a strategic foresight gained from knowing their strategic options and the key factors driving them, Shell has been able to develop contingency plans for an uncertain future. This has helped them with investor relations, and cost management—not to mention positioning the company to capitalize on global business trends rather than getting sideswiped by them.
Today, scenario planning is one of the major driving forces behind enterprise FP&A. Management consultants, business guides, and top executives use it to guide their innovation strategy, technology planning, and other decision-making.
In 2022, Profit Frog emerged to make scenario planning available and accessible to the average Main Street business owner. Our tool is intuitive, easy to navigate, and does not require an MBA or degree in economics—which is why it’s amazing for small business owners.
Our solution provided everyday entrepreneurs with critical decision-making intelligence to navigate an uncertain world and optimize profitability. More and more small business owners are acknowledging the importance of scenario planning to steer their businesses.
What is a Gantt chart?
The Gantt chart is a work chart that helps teams plan and work around deadlines. Many project management software solutions use some version of the Gantt chart. In business, this chart is mainly used by project managers and heads of departments.
What are the top 3 scenario modeling tools?
Here are 3 tools that business leaders use to construct best-case and worst-case scenarios. Armed with this info, they can mitigate potential risk and set themselves up for success.
- Microsoft Excel
If you know how to use Microsoft Excel, you can use spreadsheets to create scenario planning templates and model scenarios.
If you’re not proficient in Excel, you’ll probably find yourself frustrated, spinning your wheels, and eventually giving up.
Advantages of Excel for scenario planning
- Free, with a Microsoft Office subscription
- Construct unlimited scenarios on any device that has Excel
Disadvantages of using Excel
- Complicated for those with limited Excel skills
- Models are static rather than dynamic
- Time-consuming
- Prophix
Prophix is a scenario analysis software that integrates with Microsoft Office. It allows you to model multiple scenarios and generate forecasts for visibility into factors such as the following:
- Cashflow
- Profit and loss (P&L)
- COGS vs operating expenses
- Gross margin
- Operating margin
Prophix is targeted to larger enterprises and can be unmanageable or overkill for small businesses.
- Profit Frog
Profit Frog is the only scenario planning solution specifically targeted to small businesses. We know that you don’t have time to master Excel—or software platforms that are nearly as complex as Excel—so we’ve stripped our tool down to the essentials.
- Modeling and optimizing profitability: profit is the lifeblood of your company, and all of our forecasts are based on modeling profit under different scenarios.
- Controlling expenses: we help you get a handle on your expenses so you can see which ones have the biggest impact on your profitability.
- Unlimited scenario planning exercises and models to guide your business strategy.
If you are looking for easy-to-understand scenario modeling tools that allow you to dynamically plan for the future, you want Profit Frog. We have everything you need for modeling your small business, and nothing you don’t.
What is operations planning?
Operations planning is the process of turning a strategic plan into a map that outlines actions of your team that are needed on a weekly, or daily basis to achieve the desired goals. This process comes after a successful scenario mapping process and is only successful if your scenarios are rooted in data.
What are the differences between scenario planning and continuity planning?
Business continuity planning is a part of corporate strategy and is often conflated with scenario planning. However, while scenario planning aims to envision scenarios that may occur, continuity planning focuses on whether the business is prepared for a disaster (an earthquake, fire, or flood, for example).
Scenario planning and scenario development should become important components of business continuity planning.
What is a scenario planning template?
A scenario planning template is a framework or model that facilitates the process of scenario planning. Such a template could be as simple as a matrix drawn on a piece of paper with X and Y axes. Or it could be purely conceptual. Or it could be specific to a given piece of software, such as Microsoft Excel.
Profit Frog offers a scenario planning framework that is easy to use for the average small business owner.
How do you create a scenario planning project?
Here’s the most efficient way for small businesses to create one or more scenario plans:
- Identify scenarios you want to model
- Input actuals (data about your business) into Profit Frog
- Adjust variables (costs, pricing, or other drivers of profit) dynamically to see how they influence your scenarios
- Create business plans and update them dynamically as conditions are changing
What is financial planning?
Financial planning is a complete evaluation of future financial states by using your business’s current variables to predict asset values, withdrawal plans as well as predict future income.
