Published on Tuesday, January 11, 2022
There are no two businesses that have progressed in the exact same manner. For instance, Amazon grew by expanding their product offerings beyond their original model, whereas Apple grew by honing their original products to make them best in class. One thing both companies have in common, however, is using multi-scenario analysis in revenue planning to predict their next move.
Multi-scenario analysis can help organizations plan for the bad, the good and all the unexpected in between. With the ability to visualize both potential opportunities and risks, businesses become better equipped to respond proactively and preventively, rather than delayed and defensively. Learn more about the role a multi-scenario analysis plays in business revenue planning.
What is a Multi-Scenario Analysis?
Multi-scenario analysis is the process of assessing the potential future scenarios a business could encounter and quantifying the outcomes that could be expected from each. By becoming better aware of both positive and negative events that could impact an organization, and their outcomes, it’s easier to estimate fluctuations in company value that influence revenue planning.
At its core, multi-scenario analysis isn’t just a revenue planning resource — it’s a way to help organizations navigate uncertainty. Multi-scenario planning enables quick, efficient leadership approaches to sudden circumstances to considerably cut back on response time and costs. Multi-scenario analysis is also helpful during large business decisions to help executives better anticipate potential profit gains or losses.
What Are the Forecast Scenarios to Assess?
In order to construct a valuable analysis that can be used for strong revenue planning, business managers can’t define just one potential scenario and expect the final outcome to be perfectly aligned. Rather, it’s important to put the “multi” in multi-scenario analysis and prompt the most accurate revenue planning efforts.
Using various presumptions including customer data, operational costs, product pricing, and market strength, multi-scenario analysis must be broken down into three scenarios at minimum to cover all potential outcomes:
- Base case scenario — Viewed as the average or most anticipated outcome, a base case scenario is the expected outcome if a business stays on its current growth and revenue trajectory with minimally expected changes.
- Best case scenario — Viewed as the most flavorful outcome, a best case scenario is anticipated when a business exceeds its current growth and revenue trajectory with minimal changes to the base scenario.
- Worst case scenario — Viewed as the least favorable outcome, a worst case scenario is defined by the worst possible outcomes or issues the business may face if growth or revenue underperform or become negatively impacted by internal and external factors.
Although these three scenarios offer companies a wide array of potential outcomes, there is no limit to the number of scenarios businesses can construct. From volatile market conditions to supply chain uncertainty, a company may need to develop multiple scenarios for each case to gain the best outlook for accurate revenue planning.
How Far Out Should You Forecast?
Though forecasting efforts typically occur on an annual basis every 12 to 18 months, how far out an organization forecasts relies on various contributing factors of their business. These factors can include competitor expectations, product life cycle, and current market and supply chain health. When deciding on a timeframe to construct a multi-scenario analysis for your business, consider the major contributing factors that will define your potential outcomes.
For example, many e-commerce brands base major corporate decisions on the outcome of peak holiday shopping months that occur in the fourth quarter (Q4) of the business year. With the previous year’s holiday performance data as a basis, an e-commerce owner may opt to construct a multi-scenario analysis from Q4 of one year to the next, or next Q4 to Q4 of 2025.
What Major Internal and External Factors Are Likely to Impact Scenarios?
Numerous internal and external key factors must be assessed to create the most efficient scenarios possible. Internal factors include but are not limited to staff and production capabilities, current cash flow and ongoing funding efforts. External factors include but are not limited to industry and money market data, competitor products and changing customer behavior.
Before investigating external factors, it’s wise for business operators to identify key internal factors first. Learning what’s happening inside of the business can add more context to outside phenomena. For instance, if a company is encountering obstacles with funding while the market holds high uncertainty, managers should consider these factors when constructing a multi-scenario analysis.
What Are the Risks to the Scenarios?
Even with incredibly in-depth multi-scenario analysis efforts, any organization is guaranteed to still face some sort of risk or uncertainty when revenue planning. For one, the development of a multi-scenario analysis requires time-consuming and skilled efforts that include diving deep into financial and customer data. If such data is inaccessible or accidentally overlooked, a multi-scenario analysis may have flaws that can result in missed opportunities and overlooked risks.
As we learned from the COVID-19 pandemic, businesses also face unforeseen outcomes that can be far beyond any professional presumption. The inability to accurately determine what will happen in the future is a contributing factor as to why a multi-scenario analysis will always possess risks. Without the power to 100% envision all possible scenarios, it’s important that the assessment of all internal and external factors is as detailed as possible for the most accurate revenue planning.
How Does Multi-Scenario Building Help in Future Business Planning?
While multi-scenario analysis helps business operators better prepare and understand uncertainty overall, the ability to leverage scenario building for revenue planning is powerful. When a company conducts revenue planning, they’re forecasting how much future profit they expect to bring in and determining how to allocate this revenue back into investments or company costs.
Multi-scenario analysis and revenue planning work hand-in-hand to benefit each other. By breaking down the base, best, and worst-case scenarios, business managers can leverage data to conduct revenue planning at each of these levels. Likewise, by understanding where revenue currently stands and how it’s expected to increase or decrease, this data can be used when deciphering financial data for multi-scenario analysis purposes.
Advanced Revenue Planning Software for Enhanced Scenario Building
Business operators have a chance to prepare for the unexpected with multi-scenario analysis. However, a multi-scenario analysis and subsequent revenue planning are only as accurate as the data used in the process. With revVana’s revenue planning and forecasting capabilities, gathering necessary data for analysis purposes has never been easier or more accurate. To learn how we can enhance the multi-scenario analysis and revenue planning for your business, contact revVana today to schedule a demo.
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