A financial model with one scenario is a guess. A model with three scenarios is a strategy tool. Here’s why scenario analysis separates sophisticated operators from wishful thinkers.
The Three Scenarios You Need
Base case: Your actual operating plan. The numbers you’re committing to your board. Should be achievable with execution discipline — not requiring miracles.
Upside case: What happens if things go better than planned. A key deal closes early, a new channel outperforms, or retention exceeds expectations. This scenario helps you plan for success: if we beat plan, where do we invest the upside?
Downside case: What happens if key assumptions don’t hold. Revenue comes in 20-30% below plan. A major customer churns. A critical hire doesn’t work out. This is the scenario that matters most — it tells you how much runway you have and what levers to pull.
How to Build Good Scenarios
Don’t just adjust revenue by +/- 20% and call it scenario analysis. Each scenario should tell a coherent story: what specific conditions lead to this outcome? What operational choices would you make in this scenario? Change the inputs (conversion rates, deal sizes, churn rates), not just the outputs.
What to Do with the Results
Identify your tripwires: specific metrics that, if crossed, trigger a shift from base case to downside response plan. If monthly bookings drop below X for two consecutive months, trigger the downside playbook. This removes emotion from crisis response — the plan was already made when heads were cool.
Do This Monday
- Open your financial model. Add a downside scenario if you don’t have one. Cut revenue 25% and see what happens to cash.
- Identify the 3 assumptions your model is most sensitive to. Build scenarios around those assumptions specifically.
- Define 2-3 tripwires that would trigger a shift to your downside plan. Write them down and share with your leadership team.
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