What’s the scenario? Financial planning in uncertain times
Many of you are attempting to anticipate the length or depth of the financial impacts of the pandemic. This will be difficult to predict, which makes financial planning challenging. One important tool available to help you in these circumstances is scenario planning.
Scenario planning is the purposeful act of preparing forecasts based on different underlying assumptions. It might include a worst case, a best case, and maybe two more possibilities in between.
Why you should use scenario planning
It allows you to start early and make plans while considering the uncertainty. That way, once reality becomes clearer, you have solutions ready to go and can act quickly. Most importantly, you have a tool you can use to start conversations now with leadership. This is important because it allows you to vet important decisions and get everyone on board, before it is time to act on them.
Best practices when using scenario planning
A number of resources can help you learn more, and we've referenced some of them below, but here is a quick overview:
- Name your scenarios: Use a common language when talking about the scenarios. You want to make them easy to remember so everyone can follow the discussion.
- Be clear on your assumptions: Document your assumptions and make sure they are obvious and transparent. The assumptions are very important because they drive all the resulting numbers. The ability to easily change the assumptions and discuss the results in real time can be helpful when meeting with leadership.
- Build in triggers: Have triggers or indicators that help you recognize when a certain scenario is playing out. For example, what indicator might tell you we are in a short term recovery scenario versus something longer term? If you have this identified, and you monitor for it, then you know it's time to potentially take different action.
- Step back and review: Make sure information and results look reasonable. It's easy to make mistakes in spreadsheets when working with lots of numbers and formulas.
- Involve leadership: Include the government's leadership when building your scenarios. Ultimately, leadership will have to make some hard decisions, so it's important to involve them early so they have time to process the information and start discussing options.
- Keep it up to date: Continually update your model so it is relevant and reflective of changes in your environment.
- Plan for solutions: Have your playbook of solutions ready to go so it's available when you need it. Each scenario might require different solutions and actions.
Want to learn more on this topic? Here are some resources
- Financial scenario planning: visualizing and planning for uncertain times. This free webinar from Government Finance Officers Association (GFOA) specifically focuses on this topic: www.gfoa.org/financial-scenario-planning-visualizing-and-planning-uncertain-times
- How your agency can survive and recover fiscally from the COVID-19 outbreak. This free webinar from Municipal Research Service Center (MRSC) discusses scenario development in very easy to understand terms. The discussion of scenario development starts at 57:38: https://www.youtube.com/watch?v=nHIiZuah4BM&feature=youtu.be
- Budgeting during a crisis. This free webinar from the International City Manager's Association also discusses scenario planning, among other budget and financial issues: local-gov-life.simplecast.com/episodes/local-gov-life-scv19-episode-08-budgeting-during-a-crisis
GFOA Fiscal First Aid Resource Center
Do you need further assistance?
Remember, we are here to help. At the Center for Government Innovation, we have financial management specialists available to help you talk through technical projects. For assistance, reach out to the Center@sao.wa.gov. You can also reach out to us with specific questions through our helpdesk service.