Good scenario planning software allows you to create contingency plans for the worst while being prepared to capitalize on best-case outcomes. You can thrive while other businesses are caught unprepared in times of crisis. You’ll be able to confidently make decisions in any business environment and take your company’s profitability into your own hands.
Profit Frog is the leading FP&A software specifically designed for small businesses. Our 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.
What is business scenario planning?
Business 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 “best case,” “most likely,” and “worst case” outcomes.
With the right tools, you’ll create business plans around plausible scenarios to guide your business toward the “best case” outcome of each scenario and away from “worst case” potential outcomes.
While you may have limited control over many external factors affecting your business, you don’t need to be helpless.
Scenario planning practical examples
Here are some examples of scenario planning in use:
Subscription service scenario modeling example
Say you are asked to build a scenario model for the launch of a new video game subscription product. Based on your research, you can get an idea of how many customers will sign up by using available data: video game market size, subscribers to similar services, number of video games you will feature on the platform, etc.
You can then adjust the data to develop a range of estimates for new subscribers under different variables. For example, your modeling could predict a range of 1 to 3 million new customers per month over the first six months of launch, given a specific conversion rate, then a different metric for new subscribers given a different conversion rate.
Or you could model subscribership under other variables such as:
- Organic traffic ramp-up
- Effectiveness of influencer campaigns
- Word-of-mouth
- Percentage penetration of specific target demographics or subcultures
- Etc
You will be able to model profitability metrics under each scenario, and arrive at a clearer picture about the likelihood of your product’s success. This may result in you deciding not to launch it, tweaking it somewhat, or going full steam ahead. In any case, you’ll be much further ahead—and will potentially save yourself millions of dollars and lots of time and stress.
Royal Dutch Shell example
Shell has been using continuous scenario planning since the 1970s. The company’s scenario and finance teams have 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. Shell has used scenario modeling as a driving force to help them adopt contingency plans for an uncertain future. This has positioned the company to capitalize on global business trends rather than getting sideswiped by them.
Cold-pressed juicery example
Let’s say you sell cold-pressed juices and other wellness products through various ecommerce channels. You are deciding the next step for your business, and you want to model three different scenarios before deciding how to proceed. The scenarios are:
- Expanding from ecommerce to selling in retail stores such as Walmart, Kroger, Whole Foods, Costco, Aldis, and Trader Joe’s
- Adding a new product line of nutritional juices to be sold within existing ecommerce channels
- Opening your own retail store to sell your current products
A good scenario planning tool (hint: Profit Frog) will allow you to model all three of these decisions. You’ll be able to create budgets and forecasts for a variety of potential scenarios—and have insight into whether your current strategies are leading you in the right direction or whether you should modify them.
- Which has the better outcome if labor costs increase significantly? Or if there is a labor shortage?
- Which has the better outcome if prices of raw materials increase significantly?
- Which has the better outcome if commercial real estate prices drop?
Bakery scenario planning case study
Josh has been growing his bakery shop steadily for the past year and has plateaued in his local market. He models three scenarios in Profit Frog to come up with a new business plan for his bakery. He considers making one or more of the following three changes, and models each with Profit Frog.
- Switching coffee suppliers. Josh finds a new coffee bean supplier offering volume pricing that is 30% cheaper than what he has been paying.
- Increasing prices on specialty drinks. Josh knows he could charge more for specialty drinks based on his local research, so he increases prices to match the market.
- Advertising. Josh isn’t doing any advertising, and contemplates retaining a Google Ads firm to drive local business to his bakery.
Modeling his bakery’s profits under each scenario, Josh realizes that all three are profitable moves, and that implementing all of them should increase profitability by 50%. He creates a business plan to make the three changes, and updates it dynamically in Profit Frog as conditions change.
Landscaping scenario planning case study
Kenton Landscaping has been growing steadily for the past year and has plateaued in their small city. They want to expand and are considering these three options:
- Commute to other cities and offer services there
- Sign a lease in a new city for a permanent base there
- Focus on more high-margin services
Using Profit Frog, Kenton builds a scenario planning project for the three variables:
Commuting
Commuting will increase gross revenues by 20% while increasing gas expenditures by $8,000 per month and payroll expenses by $5,000. Net profits decline even though revenues increase. Commuting is out.
New building lease
Leasing a building in a new city will also increase revenues by 20%. Payroll will increase by $5,000—again, the same number as for the commuting scenario. Lease and utilities for the new building will cost $4,500. Profit margins increase from 6.5% to 8% and net profit increases by nearly $3,000. This option looks good.
High-margin services
Profit Frog shows Kenton scenario team that their highest-margin service is cleanups in the spring and fall. The team decides to invest in getting more cleanup work as a percentage of total revenue.
New building and cleanups
Profit Frog’s steps of scenario planning clearly reveal that the best course for Kenton Landscaping is to lease the building in the new city while investing $1,000 per month in marketing cleanups. Total profits go up by more than $6,000 per month and profit margins increase from 6.5% to 10%.
Scenario planning FAQ
How do you create a scenario plan?
Here’s the fastest, 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 scenarios
- Create a business plan and update drivers of future as conditions change
What is a scenario planning tool?
Scenario planning tools are software programs—either spreadsheets such as Excel, or online applications—that allow one to model hypothetical scenarios and forecast best-case and worst-case outcomes.
Here are some of the best scenario planning tools on the market:
- Microsoft Excel
- Synario
- Profit Frog
- Onplan
- BSC Designer
If you are interested in learning more about scenario planning tools, take a look at our detailed guide to scenario planning tools.
What are the 5 steps of the scenario planning process?
Traditionally, the 5 steps of the scenario planning process looked like the following (Profit Frog simplifies these):
- Identify trends or decisions needing to be made
- Come up with a future scenario involving those trends or decisions
- Develop a scenario planning template
- Create one or more scenarios
- Evaluate your scenarios
With Profit Frog, the process is simpler:
- 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 scenarios
- Create a business plan and update it dynamically as conditions change
What are the most common types of scenario planning?
Traditionally, there are four types of scenario planning. For the average small business, an understanding and mastery of all four is unnecessary when moving towards bigger goals.
Profit Frog blends the most valuable aspects of each scenario planning type to allow business owners to easily and decisively navigate uncertainty with trust and security by their side.
- Normative scenarios
- Operational scenarios
- Strategic management scenarios
- Quantitative scenarios
What is the difference between scenario planning vs strategic planning?
Scenario planning and strategic planning share a lot in common, but differ in the following respects:
- Strategic planning processes assume known future outcomes and strategize how to get there
- Scenario planning assumes a dynamic, chaotic future and helps you plot the course to maximum profitability through all the unknowns
In other words, strategic planning is a more static process and is disrupted by variability, where scenario based planning is designed to navigate variability.
What is a scenario planning template?
A scenario planning template is a form that allows you to input your assumptions, run your calculations, and generate a model. There are many different approaches to creating scenario templates.
With an abundance of scenario planning template options available online, many business owners try to conduct scenario planning on their own with Excel. They then get discouraged by the complexity.
Scenario planning software brings the power of scenario planning within reach of the average business owner. You don’t need a degree in finance or wizard-level Excel proficiency.
Profit Frog, for example, is built for owners of small businesses. Our software is designed to let you model different scenarios, easily and intuitively. You don’t even need a template; just plug in the numbers for your business and the software does the rest.
For a more in-depth look into scenario planning, you can read our step-by-step guide to scenario process.
What is the importance of scenario planning?
Scenario planning is a way to model future outcomes and plan accordingly. It allows you to see how different variables would affect your business.
For example, you could model the impact to your profitability if you raise prices by 10%, or if your COGS increases by 30%. You could model the impact on your business of an economic downturn, a pandemic, or rising interest rates.
The following two questions are associated with scenario planning:
- 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 all possible positive and negative scenarios.
Based on the forecasts of modeling multiple scenarios, you can create a plan to navigate them.
What are the 4 major components of financial modeling?
These are the four major components of financial modeling:
- Balance sheet
- Income statement
- Cash flow statement
- Debt schedule
What are the most common types of strategic planning?
Strategic planning has many different types, from informal to formal. Let’s take a look at the 8 most common types:
- SWOT Analysis
- OKRs (Objectives and Key Results)
- PEST Model
- Porter’s Five Forces
- VRIO Framework
- Gap Analysis
- Balanced Scorecard (BSC)
- Blue Ocean Strategy
If you are a small business owner, you don’t need to worry about any of these. You want Profit Frog. We have everything you need for your small business, and nothing you don’t.
Get started with your free trial of Profit Frog today!
What is business continuity planning?
Business continuity planning (BCP) focuses on preventing and recovering from major disruptions such as the death (or unexpected departure) of a key executive, a terrorist attack, or some other dramatic event. BCP ensures that the company can resume normal functionality in a reasonable time frame when facing a disastrous scenario. It is, in essence, a set of actions planned in response to specific threats to the company’s existence and functionality.
What is pestel analysis?
Pestel analysis studies external factors that influence businesses. It is used to model scenarios that will help your businesses avoid critical uncertainty and identify the focal issue.
What are the five business forecasting methods?
- Delphi Method
- Market Survey
- Executive Opinion
- Sales Force Composite
- Time Series Models
With Profit Frog, you don’t need extensive knowledge on the different forecasting methods to get the benefits. Simply follow the prompts in our software and maximize your company’s long-term profitability.
What is headcount planning?
Headcount planning involves the creation of upskilling and reskilling plans to decrease employee turnover, align your team, meet hiring targets, and analyze business-specific objectives and strategies.
What is the most popular accounting program?
Here is a list of the most popular accounting programs in the US:
- Quickbooks
- GnuCash
- Traverse
What are the objectives of workforce planning?
- Ensure that your business has the right talent
- Ensure the workforce is strong enough to overcome challenges
- Ensure the workforce has opportunities
- Keep good employees hired
