You’ve probably been hearing a lot about scenario planning these days as a valuable tool in times of uncertainty. Maybe you’ve had a funder ask if you’re doing it, or your board has suggested it. Or maybe you think it sounds like a good idea but you’re not sure exactly what it is or where to start. The idea of scenario planning can be intimidating: it can feel like being asked to chart a path forward through a sea of unknowns (and who has time for that?!). This blog will help you decide if scenario planning is the right solution for your question and if it is, guide you through how to do it.
What is Scenario Planning?
Scenario planning is, very simply, planning for multiple possible futures. There are many variations of scenario planning (e.g., scenario positioning, stress-testing, what-if planning); while the details may differ, these are all describing ways to plan for various possibilities. In this blog, we focus on financial scenario planning: laying out the financial implications of the funding, programmatic, or operational scenarios that are most likely to occur for a nonprofit. We recommend you take what works for you, adapt it to your situation, and leave what doesn’t fit. We offer this guide for those looking for a place to start. And, just as importantly, a place to stop!
When should I do it?
Scenario planning is not a one-size-fits-all tool and it is not always the right tool for your situation. Don’t do it just because everyone else is doing it, or because a funder asked if you had. Like any type of planning, scenario planning requires time and energy, so you want to make sure it’s the right tool before you start. Here are some examples for when scenario planning can be helpful and necessary:
- If you have to make a decision between multiple discrete, concrete options, scenario planning can help you weigh the outcomes of each option
- You lost a contract and have to decide whether/how/what to cut.
- You got an unexpected grant and must decide how to use it.
- If you are potentially facing discrete, definable possible futures, scenario planning can help you prepare for whatever might happen.
- Your funding next year is even more uncertain than usual, and you need to have a plan for the best and the worst case.
- You might or might not get that massive grant you applied for, and you need to have a plan for both possibilities.
Whichever moment you’re in, scenario planning doesn’t have to be a huge, arduous, financially detailed endeavor. It can be as simple as a series of clear conversations. And yes, it can also involve complex financial modeling. You can get a lot of value out of every level of scenario planning, as we’ll show below.
We offer these steps to help you start the process, determine the level of detail you need, and match the time and energy you put in with what you need to get out of it.
Scenario Planning Process
We break scenario planning into four simple steps. Simple does not necessarily mean easy, but each step builds on the previous ones to help you gain value every step of the way.
Here’s a quick-start guide through the steps (and the off-ramps!).
Step 1: Define
This first step is crucial, because if you can’t clearly articulate discrete possibilities, then scenario planning is not the right tool for this moment of uncertainty for you. When the variables are too many and the decision points aren’t clear, general budgeting might be more appropriate.
The main question to consider for this step is: what type of scenario are you facing?
- Go/no-go: only two possibilities
- Example: Close the program or keep the program open?
- A or B or C: only a small handful of discrete possibilities (2-4 is a good amount, more than 4 can get unwieldy)
- Example: Keep the program as-is, cut the program in half, or close the program entirely?
- Example: Grant allows for one new hire, should that be an assistant, a part-time teacher, or contractor?
- Spectrum (best case/worse case, more/less, etc.)
- Example: What will we do if we have higher or lower program attendance?
- Example: What will we do if we have small funding cuts versus large funding cuts?
Scenarios can also be a combination of types, if you have multiple key variables at play. For example, you might be facing a range of funding cuts and a go/no-go decision, and you want to see how those variables play out in combination. In this case, you’re looking at a two-by-two grid that gives you four distinct scenarios:
Step 2: Describe
Before you start doing any analysis, describe your scenarios: broadly, what is the situation going to look like for your organization in each of the discrete scenarios?
Some questions to consider:
- What might be high-level financial and programmatic outcomes?
- What happens to programs, staff, and people served? Community impact?
- What are your non-negotiables across all scenarios? Are there values/activities/ programs/priorities that you will keep “no matter what”?
- Are there non-negotiables within each scenario? Different things you will prioritize?
Example:
ABC nonprofit knows it will lose a major contract in June. They are applying for replacement grants but know there is a good chance they won’t get any. They need to plan for two scenarios:
Scenario 1: Prioritize the staff. In this scenario, their non-negotiable is taking care of staff working on this program, so in March they would let staff know the funding will run out by June and give staff time to find new jobs. This means preparing to wind down the program, and the plan focuses on that.
Scenario 2: Prioritize the program’s continuity. In this scenario, their non-negotiable is the program – they want to stay open for as long as possible. So, they would reduce staff now and plan to move to a bare minimum program model while continuing to apply for grants.
We generally recommend staying high-level with these early conversations. Sometimes describing scenarios can be enough to give you sufficient clarity on the path forward. But if it’s not enough, move on to Step 3.
Step 3: Analyze the finances
You may not need to analyze every scenario. But if your scenarios are more complex, more impactful, equally likely, or require more advance preparation, it can be helpful to dig deeper into the details of how your decisions and possible outcomes might interact with your finances.
Some questions to consider:
- Revenue
- How will this scenario impact each revenue stream, directly or indirectly?
- Do you have relationships with funders that could adjust amounts or timelines?
- Expenses
- What expenses would be impacted? Compared to your most recent budget, what might be increased, changed, or cut? What stays the same?
- Are there decisions to be made regarding staffing, supplies, etc.?
- Given changes in expenses, are there other follow-on changes in revenue? For example, if you cut staff, will that result in lost revenue? Just as in budgeting, when analyzing the financial implications of your scenarios there is often a back-and-forth that happens between revenue and expenses.
- Balance sheet
- Cash cushion – how much cash do you have to navigate these scenarios?
- Safety net – how large/strong are your unrestricted and available net assets? How much of a deficit could you weather?
- Risk tolerance
- Considering all the above (revenue reliability, expense risks, cash cushion), how quickly and confidently could you manage any potential risks in this scenario?
- What is your board’s risk tolerance, and how are they able to support you?
- How much of a financial risk is your organization willing and/or able to take, and what does that indicate about potential actions within each scenario?
Example:
ABC Nonprofit is considering whether to close their program or not. They map out what revenue might look like for the rest of the year, along a best case / worst case spectrum. Then they map out implications for expenses. They based their planning on their budget, adjusting each high-level line item from the budget for each scenario.
If you’d like an example of this, NFF has a scenario planning model that could be helpful. You can use this or your own budget. This is all internal planning, so don’t worry about making it look pretty. It’s more important that you explain your thinking and any underlying assumptions about why things will change. Even simple financial models can be helpful; don’t let perfect be the enemy of good. “Good enough” can be a powerful mantra at this stage, depending on what your goal is.
Step 4: Create an Action Plan
Some scenario planning won’t end in different potential action plans; for example, if the purpose of the scenario planning was to make a decision, the descriptions and analysis you completed in earlier steps may be sufficient for choosing between your options, and you can simply implement the chosen option as the path forward.
But for those scenarios where deeper preparation feels helpful, it can be worth the time to make action plans.
Some questions to consider:
- Are there any decision points or triggers when you will need to pick a scenario? For example:
- We have to make a call either way by this date
- If X% of revenue doesn’t arrive by Y date, then we’re in Scenario B and need to cut Z% of expenses.
- If we hear back from our program officer that we can repurpose our grant, then Option A is best
- Who will be in the conversation to give input on the decision, and who will have decision rights?
- What are your communication plans for the board, staff, and external stakeholders (if relevant)?
- Who will do what, and when?
- Is there anything else you can – or need to – prepare in advance for any given scenario?
Example:
An organization is facing government funding cuts that would significantly impact one program. Leadership (which includes the ED, development VP, program director, and board chair) must decide whether to seek other funding to keep the program, or to refocus on other programs should the government funding not be renewed. They model these two scenarios and identify that the decision point is six months prior to when the current government contract will end. They also determine actions that may be taken now to inform that decision point – for example, the board chair will introduce the development VP to two other potential funders for the program.
Summing up
No process is perfect. And no tool will fit every need. But finding the tool that works best for your organization and its specific circumstances means finding the tool you’ll actually use. We’ve laid out some suggestions here for one method of clarifying, prioritizing, and making decisions. Use what works and leave what doesn’t (and check out the scenario planning tool we referenced in step 3 if you want to do more detailed financial modeling of your scenarios).
Even though this blog presents scenario planning in “simple” steps, we know that the world you’re navigating isn’t so tidy. Some choices can be made over long stretches of time, and some choices demand to be made in an instant. As a leader, you will likely find yourself facing both types. Building the muscles of thinking things through in advance, knowing the data at your disposal and where to find it, and remembering you aren’t alone – these are the best tools to keep on hand.
Interested in learning more? Here’s a webinar about strategic budgeting and scenario planning with a companion workbook.
And if you would like deeper support, click here to learn more NFF’s consulting services.
