What is the purpose of scenario planning in budgeting and forecasting?

• A. To eliminate uncertainty by fixing assumptions.
• B. To set fixed targets for all possible futures.
• C. To assess how changes in assumptions affect outcomes and to prepare for uncertainty.
• D. To optimize a single best-case scenario.

Answer: (C)

Scenario planning in budgeting and forecasting is about exploring how outcomes change when the key assumptions shift. It looks at different plausible futures and tests how sensitive the results are to changes in drivers such as demand, prices, costs, exchange rates, and interest rates. By building multiple scenarios (for example base, optimistic, and pessimistic) management can see where forecasted results could diverge, identify which variables are most impactful, and develop contingency plans or trigger actions. This approach prepares the organization to respond to uncertainty rather than trying to eliminate it. It is not about fixing assumptions, setting one fixed future, or chasing a single best-case outcome.