Australian accountants are increasingly turning to scenario planning in budgets to help clients navigate rising costs, supply chain bottlenecks and uncertainty over inflation and interest rates.

The technique involves creating assumptions around future business conditions based on variables specific to a business, such as extended seasonality, price increases for certain customers and modelling different growth rates.

Although the concept has been around for many years, it’s surging in popularity due to advances in budgeting and forecasting software and data analytics. Accountants can create scenarios based on full sets of data using both financial and non-financial information.

“In these unstable economic times, it’s great that scenario planning has become an essential part of budgeting for accountants because the technology has simplified the once complex process,” says Phocas Software executive board director Phil Dodds. “Accountants can create more accurate budgets and prepare clients for a number of possible outcomes.”

Outdated manual processes

Until now, running several scenarios meant entire finance teams sourcing data from multiple silos, verifying it was up to date and then manually feeding it into spreadsheets for analysis.

Two-thirds of respondents in one recent poll conducted by FP&A Trends complained that the process was ‘too time-consuming’ while a third said they didn’t have the capacity to run them at all.

Another reason scenario planning was not done often was the ‘set and forget’ approach to annual budgeting, which precluded making subsequent amendments based on new data. For Dodds, this static approach to budgeting is fraught with dangers.

“When finance teams regularly review budget and forecast data, they quickly identify early warning signs of challenges and see where new opportunities lie,” he says. “Once they’ve done that, they can offer advice based on reliable data.”

Scenario planning in action

Business software such as Phocas’s cloud-based Budgeting and Forecasting tool incorporates sales and operational data, allowing scenario planning across the business. The Lookup tool enables the different variables to be loaded and updated automatically.

“If, for example, a company’s budget assumes customer spend growth of 8%, that can be automatically set as the default across all customers,” explains Dodds. “If some differ from this, then you can manually change it to 10% for some and -5% for others, and all the budget formulas update automatically.”

Assumptions can be built and tested in a quarter of the time and multiple scenarios run quickly and easily as the software has access to up-to-date data. As a result, organisations become more agile and have contingency plans ready for challenging market conditions.

Planning flexibility

“Customers can manage scenario planning to suit their needs,” he says. “Many let finance govern the strategy, but encourage other departments to provide input into the types of scenarios. Others prefer to build budgets and carry out scenario planning for each division.”

Such models provide flexibility while still revealing best-case scenarios to help people see the impact of drivers such as pricing.

“Business is fraught with uncertainties, so planning tools that simplify risk management and aid strategic thinking go a long way towards ensuring future viability,” says Dodds.

“Business is fraught with uncertainties so planning tools that can simplify risk management and aid strategic thinking go a long way towards ensuring future viability.”

Find out more

To learn how Phocas’ business planning and analytics solution can transform your business, visit www.phocassoftware.com/ca