Scenario planning: How forecasting works in everyday business

Running a business is always characterized by uncertainty. Things often develop differently than originally planned. Both internal and external factors, which are often unpredictable, can force companies to rethink or even fundamentally change their strategy. Responding flexibly to favorable events is just as important as managing unexpected challenges. That is why it is important for entrepreneurs to play through various scenarios and prepare potential strategies.

We explain what scenario planning is all about, why it is important for cash flow management and how software can support you in this process.

What is a scenario?

In the context of corporate planning and strategy, a scenario is a detailed and structured description of a possible future situation based on specific assumptions. It serves to anticipate various developments and be prepared for them. Scenarios are used to identify risks and opportunities and to develop strategies for action.

What is scenario planning?

Scenario planning is a strategic tool that makes it possible to simulate different future scenarios and develop appropriate measures. This approach serves not only as a decision-making aid for strategic alternatives but also supports the development of concrete strategies for dealing with unforeseen internal and external events.

Scenario planning plays a central role, particularly in financial and liquidity planning, in order to better estimate changes in cash flow and avoid liquidity bottlenecks. Creating forecasts also helps to promote collaboration with stakeholders and across different business units.

Scenario planning vs. forecasting – the differences

In addition to scenario planning, forecasting is another essential tool for corporate planning and management.

Forecasts usually focus on a planning horizon within the current year and, thanks to their lower level of detail, can be quickly adapted to new framework conditions. The regular forecast generally represents the normal case for business development.

Scenarios, on the other hand, are forecasts or projections created by taking possible realities into account. Creating a forecast is essential for developing scenarios, as they are built upon these projections. Through scenario planning, companies can play through various possible futures based on unknown risks and uncertainties.

The planning horizons for scenarios and forecasts can vary significantly. Whether a short-term or long-term planning horizon should be chosen depends on the specific question at hand.

Creating scenarios: normal, best, and worst-case scenarios

The fundamental scenarios that take the entire development of the company into account include:

• Normal-case scenario
• Best-case scenario
• Worst-case scenario

These scenarios contain assumptions about the future state of the company as well as potential developments in the industry and the economy as a whole. They take into account factors such as product prices, operating costs, interest rates, and inflation, which can influence the company. Depending on the industry and business model, these scenarios can vary.

Normal-case scenario

This scenario takes into account the average development of the previously defined assumptions and is the most realistic of the three. It is based on experience and historical data and depicts a development that is not influenced by any significant positive or negative events.

Example: In a media agency, it is assumed that most clients pay on time, projects stay within budget, rent and wage costs rise moderately, and sales activities proceed satisfactorily. The effects would be stable revenue, controlled expenses, projects running on schedule, and a moderate improvement in market position.

Best-case scenario

Here, the ideal scenario is defined as the sum of positive influencing factors. This scenario is more optimistic but less likely than the normal-case scenario.

Example: In the media agency, the best case would mean that all clients always pay their invoices on time, all projects are delivered according to plan, rent, budget, and wage costs are low, and sales activities run optimally.

Worst-case scenario

Worst-case scenarios take into account the sum of negative influencing factors, representing the most severe negative manifestation of the defined assumptions. These scenarios are more pessimistic but also less likely than the normal-case scenario.

Example: In the media agency, the worst case would be that client payments are only received after multiple reminders, projects are not fully billable, rent and wage costs rise, and sales efforts yield no results.

Scenario planning: 3 examples of cash flow scenarios

In addition to general company scenarios, it is very useful to test individual decisions and forecast their impact on cash flow. Scenario planning and cash flow management are closely linked. Through scenario planning, companies can create a forecast and play through various possible future scenarios, such as a worst-case or best-case scenario. These scenarios help in understanding the potential impact on cash flow.

Depending on the company and business model, there are different cash flow scenarios. Below, we show three examples of cash flow scenarios that apply to many companies and look at potential impacts and strategies.

1. Dealing with late payments

The timing of incoming payments is a key factor in liquidity management. In efficient liquidity planning, every incoming payment is assigned an expected date. If this date is not met, the liquidity calculation is no longer accurate. In the worst case, all expected payments arrive late. This can happen particularly in invoice-based project businesses with payment terms, as is often the case with construction companies.

To assess this scenario, it is important to know how much money the company has available in its account and which outgoing payments must be made.

Possible impacts can include:

• Liquidity bottlenecks
• Invoices and running costs may not be able to be paid on time
• Financial uncertainty increases

The following strategies can help as a solution when considering this scenario:

• Create buffer accounts to bridge short-term bottlenecks
• Introduce early reminders and strict payment terms
• Keep loans or credit lines available as a reserve

Considering this scenario helps in assessing the risk of the company running out of money.

2. Planning team growth

The right team is one of the most important factors in a company's success. However, even with rising revenue, you shouldn't underestimate the cost factor of new personnel, as this is one of the most expensive items for any business.

Potential impacts can include:

• Higher personnel costs impact cash flow
• Delays in new hires that slow down growth
• Timely hiring enables better order processing and customer satisfaction

This leads to the following strategies to play it safe with your cash flow:

• Define revenue-related milestones that must be reached before hiring
• Carefully plan and monitor the budget for personnel costs
• Use part-time or temporary staff as a flexible solution

3. Making major investments

Large purchases, such as new industrial machinery or laptops for the entire team, cost a lot of money. Sometimes it is worth asking whether these purchases are truly necessary. The timing of purchases should be chosen wisely: to define the ideal time for investments, potential cash flow scenarios should be considered.

Potential impacts are:

• Large one-off expenses strain cash flow
• Modern equipment can increase efficiency and productivity
• Long-term cost savings and revenue growth are possible

These strategies can help weigh the risks of the scenario:

• Carefully plan and prioritize investments
• Check financing options such as leasing or installment payments
• Calculate the return on investment (ROI) and ensure that investments are profitable in the long term.

4 steps of scenario planning with Tidely

Scenario planning is an important approach for effective cash flow management. Tidely helps you set up important, company-specific scenarios and supports you in all four steps of scenario planning:

1. Situation analysis: Identifying key factors

At the beginning, you must identify the decisive factors that influence the business. Our budgeting software provides you with a comprehensive overview of all financial data. The dashboard displays account balances, income, expenses, and future payments. This allows the most important financial drivers to be quickly identified and evaluated, which is essential for planning and creating realistic budgets.

2. Projections: Estimating developments

After identifying the relevant factors, the next step is to estimate potential developments. Tidely creates forecasts based on historical transactions and planned payments. These projections help you visualize different future scenarios, estimate their financial impact, and make decisions accordingly. This allows you to precisely control the speed and direction of your company's development.

3. Creating scenarios: Calculating combinations

To develop scenarios, you compare different influencing factors and calculate their potential combinations. With Tidely, you can compare multiple scenarios. For example, you can combine technological developments and regulatory changes and analyze the resulting financial scenarios directly in the dashboard.

4. Impacts: Planning goals and strategies

In the final step, the most plausible scenarios are used to identify opportunities and develop strategies. You can find detailed financial reports on Tidely. The software supports your decision-making and helps you plan new strategies. This ensures that your budgets and plans remain optimally adjusted, even under changing conditions.

Ready to take your scenario planning to the next level? Book a demo now!

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