best and worst case scenario business plan

Scenario Planning: Strategy, Steps and Practical Examples

• Scenario planning helps decision-makers identify ranges of potential outcomes and impacts, evaluate responses and manage for both positive and negative possibilities
• By visualizing potential risks and opportunities, businesses can become proactive versus simply reacting to events
• There are a number of templates and formalized frameworks for scenario planning, as we'll discuss. What's important is choosing a method that works for your team
• We'll look at two fictional firms, a software company and a wholesale distributor, to illustrate the planning process

If anything magnifies the value of scenario planning, it's a pandemic — even if most companies didn't have “economy grinds to a halt” in their modeling. In the context of a business, scenario planning is a way to assert control over an uncertain world by identifying assumptions about the future and determining how your organization will respond.

By building organizational awareness of what could happen, leaders may spot warning signs of brewing challenges and respond accordingly. When a worst-case event arises, scenario planning documents add tremendous value by playing out multiple outcomes and listing immediate steps to contain damage. Plans are also valuable for best-case scenarios — say a product goes viral and demand spikes 300% overnight? What if an acquisition opportunity lands unexpectedly? Are you prepared?

Scenario plans, ultimately, tell a story with many possible endings. Crafting the narrative requires a clear set of assumptions about potential business realities and ensuing outcomes.

What Is Scenario Planning?

For businesses, scenario planning enables decision-makers to identify ranges of potential outcomes and estimated impacts, evaluate responses and manage for both positive and negative possibilities. From projecting financial earnings and estimating cash flow to developing mitigating actions, scenario planning is more than just a financial planning tool — it's an integrated approach to dealing with uncertainty.

But it's more than just a way to recognize and mitigate risk or plan for growth situations. Scenario planning is also about visualizing different representations of an organization's future, based on assumptions about the forces driving the market — some good, some bad.

Scenario planning is a process pioneered by the U.S. military , which today runs exercises looking up to 20 years out to guide R&D efforts.

Why Is Scenario Planning Important?

Scenario planning can provide a competitive advantage by enabling leaders to react quickly and decisively — because a situation has been thought through and actions documented, no one has to scramble when in the midst of a crisis.

Scenario planning also gives executives and boards of directors a framework to make nonemergency decisions more effectively by providing insight into plans, budgets and forecasts and painting a clearer picture of key drivers for business growth and the potential impact of future events.

Scenario Planning Advantages and Disadvantages

A comprehensive scenario planning exercise takes time, effort and money. Should you commit?

Advantages:

• Scenario planning will help executives understand the effects of various plausible events.
• Finance, operations and other teams can prepare initial responses.
• There's an element of knowledge management; by having key personnel take part, the company captures their insights and recommendations.
• If these stakeholders are unavailable during an actual extreme event, the company has documentation to fall back on.

Disadvantages:

• Scenario planning is a potentially enormous undertaking. It can be a lengthy process to collect data and driving factors; for large enterprises, plans can take months to create.
• Factors that impact plans can change quickly. That means scenario planning must be a living process, with constant updates as conditions and assumptions evolve.

We recommend that all companies perform at least rudimentary scenario planning, even if it's in the context of a business continuity exercise. The process itself has real value.

Once you've decided to get started, you need to settle on a format.

Types of Scenario Planning

Quantitative scenarios.

Financial models that allow for the presentation of best- and worst-case versions of the model outputs. These models can be quickly changed by altering a limited number of variables/factors. Quantitative scenarios are also used to develop annual business forecasts . These models assume key variables are known and that relationships among them are fixed.

Operational scenarios

One of the most common types of scenario planning an organization will undertake internally. Operational scenarios specifically explore the immediate impact of an event. The scenario then provides short-term strategic implications.

Normative scenarios

These describe a preferred or achievable end state. These scenarios are less objective planning and more geared toward statements of goals. These goals are not necessarily about an organizational vision, but more about how the company would like to operate in the future. Normative scenarios are often combined with other types of scenario planning as they provide a summation of changes and a targeted list of activities.

Strategic management scenarios

Essentially stories that say little about the company or industry, but more about the environment in which products and services are consumed. These are often the most challenging scenarios for company leaders to put together because they require a broad industry, economic and world view. On the plus side, they give planners freedom to brainstorm decisions and a broad storytelling mandate. In some cases, companies bring in analysts or even so-called futurists .

How to Use Scenario Planning

Typically, macroeconomic expectations are used in conjunction with scenario planning to help the CFO frame near-term expectations for the company and to level-set expectations in departments.

The fundamentals of scenario planning are the same, even if the particulars across industries and within businesses vary. To illustrate this, consider how two fictional companies, a software provider and a wholesale distributor, would approach scenario planning during the COVID-19 pandemic.

Company 1: Gimbloo Software is a young business software company that had been experiencing steady growth until the pandemic. The leadership team hadn't undertaken any scenario planning, but its CFO had lived through both the dot-com bubble and the Great Recession and was ready to act quickly to protect Gimbloo's runway.

Company 2: Before the pandemic, the CFO at established wholesale distributor Tar Heel Direct had prepared three scenarios based on order volume: green, yellow and red. Each scenario encompassed a new set of mitigating actions, using order volume as a metric to trigger when it was time to enact each action sequence. However, the retail freefall meant that Tar Heel Direct found itself operating in the worst-case scenario — red — within a matter of weeks.

Questions both companies considered:

• What is the issue that we are trying to assess?
• How far out are we trying to predict?
• What are the major external factors likely to impact on our scenarios?
• What are the key internal drivers that we need to address?
• What are the risks to the scenario?
• Do we have the right data, technology, bandwidth and skills to develop and maintain scenario plans?

Tar Heel Direct's scenarios are based on order volume and ability to fulfill orders efficiently. Because the negative effects of the pandemic were so sudden, the company decided to set milestones for every 30 days in anticipation of delayed accounts receivable as well as reduced ability of retailers to accept products.

It quickly lost orders from most customers with physical retail locations — infection rates and lockdown orders have a direct impact on sales. Internally, Tar Heel Direct has taken safety precautions for its workers. Social distancing and increased sanitization measures mean that warehouse teams are operating at about 60% capacity. Suppliers and customers are in roughly the same boat, with suppliers being affected too — though not as dramatically as retail outlets. Some incoming product shipments will be delayed, or suppliers may be able to provide only fractions of their normal output.

Tar Heel's leaders are in close communication with suppliers and customers, and the firm monitors government data and industry reports to try to stay ahead of trends; however, the future of retail is uncertain, and it may need to explore new sources of revenue.

Scenario Planning vs. Business Continuity Planning

Scenario planning is often conflated with business continuity planning. While both are structured processes for helping a company navigate the future, scenario planning plays a longer game that considers revenue over time. Business continuity planning is about how your business will react to a disaster, such as a warehouse fire or earthquake.

In both processes, the journey may be as valuable as the final work product. By bringing leaders together to think through what could affect your business, you may head off potential risk.

Meanwhile, Gimbloo's challenges are less dependent on outside stakeholders. Its management and private equity partners met early in the crisis to establish a plan. They came to an agreement that new business and additional sources of funding aren't likely in the next few months, so the key focus is extending runway by cutting discretionary costs and being prepared to adjust headcount. The company's PE partners aren't likely to sit by and watch Gimbloo run out of money, but before providing additional funds, they will want to see that the company has cut wherever possible.

Leadership made the assumptions that recurring revenue would stay largely the same and new deals would surge when the economy reopens. If both hold true, they'd begin scaling back the cost-saving measures. They also added a cushion for churn, down-sells and, in the event of an extreme and protracted downturn, some mid-contract cancellations.

Any significant changes in metrics would trigger another scenario with further cuts.

Scenario Planning Work Approach

Actions to take.

• Secure commitments from senior management, select team members and organize scenarios around key issues to be addressed and evaluated.
• Define assumptions clearly, establish relationships between drivers and limit the number of scenarios created.
• Make sure each scenario presents a logical view of the future.
• Focus on material differences between scenarios.
• Indicate KPIs, and refresh scenarios and update assumptions on a regular basis.

Actions to avoid

• Avoid developing scenarios without defining the issues first.
• Don't develop too many scenarios – three is a good starting point. Beginning with your best guess at how business will go, add one scenario for things going better and another for things going worse. A good starting point is 50% for best guess, then 25% for things going better and 25% for things going worse.
• Do not attempt to develop the perfect scenario – more detail does not mean more accuracy.
• Avoid becoming fixated on any one scenario.
• Don't hold on to a scenario after it has ceased to be relevant.

3 Steps to Better Scenario Planning

1. identify critical triggers even in the midst of uncertainty:.

When faced with a crisis, finance leaders quickly establish guidelines for how the organization should respond by developing multiple scenarios. These scenarios are built on a set of assumptions around events that affect the survival of the organization and should trigger a series of actions.

In times of crisis, companies need to combine historical data with plausible outcomes to determine ramifications for each part of the organization. Scenario plans can give leaders breathing room to slow down and assess economic, political and environmental factors. These prioritized factors are a critical part of crisis scenarios.

2. Develop multiple scenarios, but keep it simple:

When building multiple scenarios, it's easy for finance teams to feel overwhelmed by the range of potential outcomes. How can anyone properly plan for so many possibilities? Simply put, you can't. That's why it's best to keep it simple. Focus on two to three major uncertainties and build scenarios from there. Finance leaders need to prioritize and develop perspectives about each of the scenarios to help the company navigate.

3. Build a nimble response strategy:

Each scenario should contain enough detail to assess the likelihood of the success or failure of different strategic options. Once this is all in place, finance leaders can create a framework that helps the executive team make decisions. Any decisions made need to be monitored in real-time so the team can be nimble in its ongoing response.

Scenario Planning Matrix

Strategies to manage scenario planning projects.

As has probably become clear, the scope of scenario planning is limited only by leaders' time and imaginations. There must be guardrails on the project to keep the time investment in line with expectations. Here are some key issues in managing scenario planning scope creep:

• Recognize the importance of the team's time.
• Spend more time on creation and analysis of problems/questions, less on “what if” tangents.
• Define important outcomes.
• Decide how you will put your scenarios to use; that will inform scope.
• How will you assess success?
• Recognize an evolving context and narrative.

Tar Heel Direct's models were based on assumptions that didn't work during the pandemic, but the mitigating actions planned in its original scenarios still applied, even with different conditions.

For example, pre-pandemic scenarios used fuel costs as a trigger, anticipating higher prices in a crisis. After spending a few weeks assessing key metrics for the business, the company realized that because diesel fuel is cheap, it can be more competitive on rates and pay truckers better than Amazon — the opposite of what it expected in its original scenario planning. Fuel is so inexpensive, in fact, that sending out partly filled trucks is a more reasonable proposition than it was just a few months ago. Because the company had already planned mitigating steps for scenarios that relied on high fuel costs as a trigger, it was able to work them backwards without additional planning.

Operating at 60% of regular revenue, management assessed what its existing customers needed and got the sales team working on acquiring new customers by thinking out-of-the-box. Tar Heel Direct's next move is to identify small and niche businesses that are operating at reduced capacity and have the sales team contact those that may be having trouble moving partial loads. The projection is that taking these steps will bring revenues up to 80%, which would move the company into a better scenario.

Download Our Scenario Planning Template

This scenario worksheet is designed to be used as a guide through the planning project and should help teams avoid common problems.

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For Gimbloo's part, leaders began running weekly cash forecast scenarios using a variety of inputs, focusing first on collections and hoping for a week-to-week decline in delinquent payments. Next, they examined new bookings, customer churn and customers reducing licenses. The company's forecasts are based on recurring revenue, and factors that affect MRR will trigger new actions.

The company decided to focus on its core value: the service it offers. Leaders decided to take on fewer new customers before making cuts to customer service, cloud services or customer success. It eliminated discretionary expenses, paused hiring and cancelled future marketing events to make up the difference.

If things go poorly and Gimbloo sees a spike of non-renewals and cancellations, leaders plan to seek additional capital from current investors and cut employee costs, such as by furloughs and reducing discretionary bonuses, versus delaying product launches. If it wins new business, the company will begin hiring again and expand its digital marketing footprint.

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Scenario Planning and Modeling: Best Practices

1. assemble the right team:.

In large companies, financial planning and analysis groups should be included. But while finance professionals can certainly lead the scenario planning process, they won't be successful alone. This effort needs to connect leaders from across the organization, including business units and HR.

2. Get the right data:

For finance teams to execute with confidence, they need the right data, going well beyond the general ledger. To create better, more accurate models, finance needs historical and comparative sales data, headcount and expected growth, and of course actuals from the general ledger. They'll also need to understand the costs of producing products and services, which products are foundational and which are additive.

3. Model with basic scenarios:

Finance teams should consider developing basic low, medium and high models. A low scenario is where costs and revenues are challenging. The goal here will be finding cost savings while still delivering quality products in a timely manner. A medium scenario assumes that sales will continue to grow based on last period actuals. This scenario will show how the last period's sales figures compare with forecasts, and what adjustments you need to make on headcount and other departmental spending to maintain trajectory. The high scenario is usually based on demand increasing and sales accelerating due to big changes in the market. The goal is to ramp up capacity without incurring costs that eat into margins.

4. Provide break-even analysis:

This analysis will support, with data, decision-making regarding your cash-flow break-even level. It looks at the minimum sales volume your company needs to keep operating normally and sales compensation plans to see if you need to adjust commissions or bonuses.

Rami Ali is a senior product marketing manager at Oracle NetSuite. Rami has over 10 years of experience in the software industry. Areas of specialized expertise include GTM strategy, product launch, market analysis, competitive analysis, sales enablement, demand generation, content development, project management, digital marketing, responsive web development, SaaS and PaaS. Rami holds a BS in Business Administration and Marketing from Grand View University. He is currently pursuing his MBA.

David Luther is a senior content writer at Oracle NetSuite, covering the latest trends in SaaS, finance and ecommerce. His research and writing have appeared in Forbes, Business Insider, MSN Money, Yahoo Finance and MarketWatch.

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Reorganizing for Survival: Building Scenarios

In the “new normal,” how should business leaders ensure that their business is well-equipped to survive and then thrive? Scenario analysis is a handy tool: How are scenarios built and translated into financial projections?

By Natasha Ketabchi

Natasha transitioned to venture capital after a career in banking built in prestigious firms such as JPMorgan and ESM.

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The COVID-19 pandemic brought a lot of changes and chaos for everyone, with stay-at-home orders and enforced social distancing. Now that it is obvious we will live in a “new normal” for the foreseeable future, how should business leaders ensure that their business is well-equipped to survive and then thrive in the future? Scenario planning and analysis is a handy tool in these circumstances.

We provide some insights on effective scenario analysis for decision-making, on how to build and implement scenarios, and finally, on the current macroeconomic, epidemiological, and social assumptions that managers can use to build them.

Planning for Recovery

What Is Scenario Planning?

Shell pioneered scenario planning in 1965. The head of economics and planning developed a methodology that the company still uses effectively to this day. The “Futures” program, as it was called, was born from the intuition that understanding the future better could help the company in setting and executing more effective strategies.

According to the Corporate Finance Institute , “Scenario analysis is a process of examining and evaluating possible events that could take place in the future by considering various feasible results or outcomes. In financial modeling , this process is typically used to estimate changes in the value of a business or cash flow, especially when there are potentially favorable and unfavorable events that could impact the company.”

Being able to better prepare for periods of high uncertainty, mainly when that uncertainty is around adverse outcomes, can make the difference in the performance of a company. Companies excel through a better ability to anticipate change and improved ability to learn and respond to it, which is crucial at times of high uncertainty and considerable risk, such as the current pandemic. Previously, the most significant increase in the use of these techniques was immediately after 9/11 .

There will typically be three scenarios, although more can be necessary for more complex organizations:

• A base-case scenario describes the expected outcome and is the basis of management’s objectives.
• A worst-case scenario considers what the most severe outcome could be.
• A best-case scenario is the ideal outcome.

What Is the Value of Scenarios and How Are They Used?

Companies can then use the scenarios to create financial projections, which can go out for several years.

Once the financial projections have been calculated, they will form the basis for strategic planning, which will include a differentiated approach for each of the outcomes. The company will then be able to respond better to change, but it additionally has several other positive implications:

• Superior treasury and cash flow management, as management can better anticipate cash needs even when demand outstrips expectation.
• Improved inventory management: reacting quickly to changes.
• Enhanced relations with stakeholders, as management can better explain performance and prepare them for the range of possible outcomes.

The Scenario Building Process Is Complex but Useful

Business analysts start constructing scenarios by first identifying qualitative inputs and then transforming them into qualitative outputs.

The Scenario Building Process

First: Discover Your Variables

The first step is to identify the risks and factors that affect your business. For example, for a restaurant in a pandemic, the variables may include (1) the economic backdrop (e.g., GDP estimates), (2) the epidemiological scenario (as these will have implications for the ability of customers to frequent the restaurant), (3) regulations regarding interactions with the public (will patrons be allowed to consume in, or will the service be take-out only?), and (4) projected consumer spending and sentiment.

For a private equity firm, these assumptions will cover their firm and the portfolio companies. For instance, stay-at-home orders and travel restrictions affect how many of the staff will need to work remotely and how consultants and contractors can be employed in a new, distributed workforce. This list needs to be exhaustive but not exceedingly—going into excessive detail only adds complexity without adding information. At this stage, the purpose of the exercise is to identify what can impact the business and to rank each identified variable by importance.

Second: Understand What Could Go Wrong (or Well)

Second, the potential risks for each of the variables should be estimated. Management needs to dig into each variable, agree on expectations for each, and identify what could present a positive or negative surprise. For example, in the UK, Prime Minister Boris Johnson has announced that he plans to bring the country to as close to normality as possible by the end of July 2020. This “full reopening” could either be anticipated or delayed further, each having a great impact on business strategy. For our hospitality example, this would entail potentially having clients in the busy summer season or not. For PE, this could mean abandoning traditional in-person meetings.

Third: Build Your Scenarios

Third, management should then build the required number of scenarios. Starting from the baseline, what is the worst case? What is the best case? What is the time horizon? This step is the first quantitative part of the process, albeit still with external variables. We are not yet looking at the direct impact on the business, but merely trying to quantify the magnitude of the most important external factors to our operations. A good starting point is the macroeconomic projections by the relevant bodies. In the next section, we briefly discuss the IMF Global Economic Outlook for 2020, which covers global GDP forecasts and the risks associated with the pandemic and other factors globally and by country.

Fourth: Understand How Each Variable Impacts Your Business

The fourth step is the one that will then translate into the actual forecasts and company-specific impact numbers. At this point, management should involve the relevant internal stakeholders to quantify the impact of each variable in each scenario would be on the business.

It is important to understand that while the assumptions can be applied to many consumer businesses, the importance of each will not be the same, as it will directly relate to impact. Using the previous example of the hospitality industry, a prolonged stay-at-home order could be positive for a delivery-only service and negative for a sit-down restaurant. The objective of this step is to identify how each variable impacts each key financial performance indicator.

Fifth: Financials, Financials, Financials

The fifth and final step is to visualize the impact of each scenario on the business in its entirety, which will usually be done in a financial model. The best practice is to list the scenarios in an individual tab that is then linked to the projections page. A toggle button would then show the effects of each scenario in the main financial page. The inputs for linking to the result will come from step 4.

For instance, the baseline scenario assumes that consumer spending for the second half of 2020 will follow the economic consensus and that after reducing by more than half in the first half of the year, it would recover to 96% of the value of the year prior. Then, if the assumption is that the share of spending to restaurants remains constant (ignoring other restaurant and location-specific variables), revenues for December 2020 should be 96% of what they were at the beginning of the year. In a hypothetical worst-case scenario, both consumer spending and the share spent in restaurants could be lower, meaning that revenues would be 70% of what they were the previous year.

A Simple Model Can Help Visualize How Assumptions Impact Financials

We provide here a very simple financial model that can be used for strategic scenario planning. At the top, we list the variables and show how each one of them behaves in each scenario. The base scenario is one of nearly flat growth over an extended period of time, which could be consistent with a stagnating economy.

The worst-case scenario is one in which the business is affected by adverse macroeconomic conditions and suffers a decline in sales. Finally, the best-case scenario shows an economic rebound. For simplicity, we have kept figures constant over time.

Base-case Scenario

Worst-case Scenario

Best-case Scenario

Through looking at the three outcomes, it becomes clear how much each assumption can affect net income. Considering future business scenarios can help managers understand and anticipate changes in performance and their drivers.

What Do the World’s Best Economists Think the Main Scenarios Are?

The IMF has called the COVID-19 crisis “The Great Lockdown: Worst Economic Downturn Since the Great Depression.” They have built their scenarios, but being economists, they have calculated the risks only to the downside, based on their estimate that this is where the majority of the risks lie. Their baseline scenario assumes that the pandemic will fade in the second half of 2020 and that shutdown measures will reflect this. They then built three alternative scenarios based on the duration of the pandemic: 50% longer but mostly over in 2020, a second milder outbreak in 2021, and a combination of the two. Additionally, “All three scenarios contain four common elements: the direct impact of measures to contain the spread of the virus; tightening in financial conditions; discretionary policy measures to support incomes and ease financial conditions; and scarring resulting from the economic dislocation that policy measures are unable to fully offset.”

Latest World Economic Outlook Growth Projections

A Word of Caution to Conclude

Scenario planning and building is a useful tool for management, as it helps organizations navigate complex and unexpected situations. It can help any organization to reorganize itself in a time of crisis or be best prepared to benefit from an unexpectedly rosy turn of events. Asking the right questions and understanding where the risks lie will ensure preparation, but involving stakeholders and understanding each scenario’s quantitative repercussions accurately will be the true differentiators for success. In these circumstances, this will often ensure survival.

The Dos and Don’ts of Scenario Planning

Understanding the basics

What is scenario planning in business.

Scenario planning is a corporate process that starts with listing possible future events and evaluating their probability and the impact of the associated outcomes. These can then be used to build financial models that can be used to estimate the impact on the business of positive or negative events in the future.

How do you use scenario planning?

Companies will typically build three scenarios: 1) Base-case: describes the expected outcome; 2) Worst-case: considers what the most severe outcome could be; 3) Best-case: the ideal outcome. The scenarios to create financial projections and inform strategic decisions.

Why is scenario planning important?

Being able to better prepare for periods of high uncertainty can make the difference in a company’s performance. Companies excel through an improved ability to anticipate change and also to learn and respond to it, which is crucial at times of high uncertainty and considerable risk.

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Natasha Ketabchi

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Anticipating Change: A Practical Guide to Scenario Planning

Scenario planning is an important tool for making decisions in uncertain situations. It helps businesses anticipate various outcomes, evaluate responses, and prepare for both positive and negative possibilities. In this blog post, we’ll explore why scenario planning is valuable, look at its different types, and share practical tips on using it effectively.

What Is Scenario Planning?

Scenario planning is a strategic method used in decision-making when facing uncertainty. Decision-makers use this approach to anticipate a range of potential outcomes, both positive and negative, and prepare for them. Essentially, it’s a way of foreseeing different possibilities and making informed choices.

By visualizing potential risks and opportunities, individuals and organizations can take proactive measures, rather than merely reacting to unexpected events, to navigate through uncertain circumstances.

Scenario planning originated in the U.S. military as a way to make better strategic decisions. The military started using it by envisioning different future situations up to 20 years ahead. This helped them plan and prepare for various possibilities. Eventually, businesses adopted this approach, finding it useful in dealing with uncertainties. Today, scenario planning is widely used across different industries as a key part of making strategic decisions.

Why is Scenario Planning Important?

From anticipating potential outcomes to evaluating responses, scenario planning provides an integrated approach to dealing with uncertainty. Here’s why scenario planning, a proactive strategy to improve decision-making by reducing reliance on reactive measures, is an important tool for organizations:

Anticipation of outcomes : Scenario planning helps decision-makers foresee potential results.

Response evaluation : It enables the evaluation of responses for both positive and negative scenarios.

Integrated approach : Beyond financial planning, it offers a comprehensive strategy for addressing uncertainty.

Visualizing futures : Businesses can visualize diverse representations of their future based on market assumptions.

Proactive decision-making : It facilitates proactive decision-making, reducing reliance on reactive responses to unforeseen events.

Types of Scenario Planning

There are several types of scenario planning that provide decision-makers with versatile tools to anticipate, strategize, and adapt to various future possibilities.

1. Exploratory scenarios

• Focuses on a wide range of potential future situations.
• Explores different possibilities without specific predictions.
• Helps in identifying unexpected challenges and opportunities.

2. Normative scenarios

• Involves creating scenarios based on preferred future outcomes.
• Guides decision-makers in working towards specific goals or objectives.
• Aims to shape a desired future rather than merely preparing for it.

3. Timeframe-based scenarios

• Considers scenarios within specific timeframes (short, medium, long term).
• Enables organizations to tailor strategies to address immediate and future challenges.

4. Best and worst-case scenarios

• Examines extreme outcomes, both positive and negative.
• Prepares organizations for the most favorable and challenging circumstances.
• Increases resilience by developing strategies for various extremes.

5. Quantitative scenarios

• Involves numerical data and modeling for scenario development.
• Utilizes statistical methods to assess probabilities and potential impacts.
• Particularly useful for financial planning and risk assessment.

6. Qualitative scenarios

• Focuses on narrative descriptions and qualitative factors.
• Emphasizes understanding the context and nuances of potential future situations.
• Well-suited for industries where human behavior and qualitative factors play a significant role.

How to Use Scenario Planning

The scenario planning process provides a structured approach to anticipate various potential outcomes and strategically plan for them. Here are the steps of the scenario planning process.

Step 1: Define the purpose and scope

Clearly articulate the objective of the scenario planning process and the specific decision or area it will address.

Step 2: Identify key factors

Determine the key variables and factors that significantly impact the situation or decision at hand.

Here you can use mind maps or fishbone diagrams to visually represent the interconnected key factors.

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Step 3: Gather information

Collect relevant data and insights related to the identified key factors. Use internal and external sources to ensure a comprehensive understanding.

Here you can use flowcharts or data flow diagrams to map the sources, flow, and interactions of information, creating a visual guide for gathering relevant data.

Step 4. Brainstorm scenarios

Engage a diverse group of stakeholders in generating a range of possible scenarios. Encourage creativity and exploration of both optimistic and pessimistic outcomes.

Use mind maps or a brainstorming board to capture and organize ideas generated during brainstorming sessions, fostering creativity and categorization.

Step 5: Define scenarios

Develop detailed narratives for each scenario, outlining the sequence of events and their potential impacts. Make sure each scenario is internally consistent and logically plausible.

Step 6: Assess likelihood and impact

Evaluate the likelihood of each scenario occurring and assess its potential impact on the organization. Consider a quantitative or qualitative approach, depending on the nature of the scenarios.

Use a probability-impact scenario planning matrix that can help visualize the likelihood and impact of different scenarios.

Step 7: Prioritize scenarios

Rank the scenarios based on their relevance, likelihood, and potential impact. Focus on a manageable number of scenarios to facilitate strategic planning. Here you can use a prioritization grid to systematically evaluate and rank scenarios based on predefined criteria.

Step 8: Develop strategies

Create strategies and action plans for each prioritized scenario. Tailor responses to leverage opportunities and address challenges presented by each scenario and determine the resources, timelines, and responsibilities required to implement the identified strategies. Create an action plan to outline specific actions, resources, and timelines for each prioritized scenario.

Step 9: Monitoring and review

Continuously monitor external and internal factors that may affect the scenarios. Regularly review and update the scenarios and strategies as new information becomes available.

Step 10: Communication and collaboration

Communicate the scenarios and corresponding strategies effectively throughout the organization. Encourage collaboration and input from relevant stakeholders.

After implementation, analyze the outcomes and learn from the scenario planning process. Use insights gained to refine future scenario planning efforts and improve organizational resilience.

Essential Questions to Ask for Effective Scenario Planning

The following questions are designed to spark thoughtful discussions and help organizations explore a range of possibilities, ensuring a comprehensive and strategic approach to scenario planning.

Scenario Planning Best Practices

Follow these best practices to maximize the effectiveness of scenario planning and modeling, leading to more informed decision-making in the face of uncertainty.

• Involve key stakeholders : Engage a diverse group of key stakeholders, including representatives from different departments and external perspectives. This diversity ensures a holistic exploration of scenarios.
• Identify key drivers and uncertainties : Systematically identify the key drivers and uncertainties that could affect the organization. Focus on factors both within and outside the organization’s control.
• Develop plausible scenarios : Create possible scenarios that cover a wide range of possibilities. Include both optimistic and pessimistic scenarios to explore potential opportunities and risks.
• Use multiple models : Use a variety of modeling techniques, including quantitative and qualitative approaches. Combine financial models, trend analysis, and other relevant methodologies to capture different aspects of the scenarios.
• Ensure data quality : Check and make sure the quality of data used in the modeling process. Accurate and reliable data is crucial for generating meaningful insights.
• Integrate historical data : Incorporate historical data into your models to provide context and help validate assumptions. Analyzing past trends can improve the accuracy of future projections.
• Iterative approach : Adopt an iterative approach to scenario planning and modeling. Regularly revisit and update scenarios based on new information, changing conditions, or organizational learning.

When to Use Scenario Planning

Scenario planning is a versatile tool that can be applied whenever there is a need to proactively explore and prepare for different future possibilities in a structured and strategic manner. Here are some situations where using scenario planning is particularly beneficial;

Strategic planning

Scenario planning helps anticipate and prepare for a range of possible futures during strategic planning. It improves the strategic decision-making process by considering different external and internal factors.

Market entry or expansion

Scenario planning helps assess the potential challenges and opportunities in different market scenarios, for example, before entering new markets or expanding existing operations, especially in unfamiliar or volatile environments.

Long-term planning

For long-term planning, especially when the business environment is characterized by significant uncertainties. It allows organizations to explore alternative futures and build strategies that are adaptable over time.

Innovation and research

When developing new products or services, engaging in research and development, or exploring innovative initiatives. Scenario planning can highlight potential disruptions and guide innovation efforts.

Major policy changes

When anticipating or responding to major policy changes, regulatory shifts, or geopolitical events that could affect the industry or the organization. Scenario planning helps with understanding the implications of such changes.

Technological disruptions

In the face of rapid technological advancements or disruptive innovations within the industry. Scenario planning helps organizations prepare for the consequences of emerging technologies on their operations and market dynamics.

Exploring business model changes

Before implementing significant changes to the business model. Scenario planning helps assess the viability of different business model alternatives and their implications.

How to Use Creately to Streamline Scenario Planning

A visual collaboration tool like Creately can improve the effectiveness of your scenario planning projects by providing a digital platform to collaborate, brainstorm, and visualize complex information.

Virtual scenario boards & real-time collaboration

Create workspaces dedicated to scenario planning. Share them with stakeholders to collaboratively work on scenarios, eliminating geographical constraints and facilitating real-time updates.

Conduct collaborative workshops or brainstorming directly on the platform, integrating Creately’s plugin for Microsoft Teams.

Leverage commenting for ongoing communication. Team members can provide feedback, ask questions, and engage in discussions related to specific elements on the visual collaboration platform easily with contextual comments.

Assign tasks directly on the platform and track their progress. Make sure that responsibilities related to scenario planning, such as data collection or strategy development, are clearly defined and monitored.

Easily export and share the scenario planning board with stakeholders. This could be in the form of presentations, PDFs, or other formats, improving communication and dissemination of scenario insights.

Simple visual tools

Creately’s drag-and-drop functionality makes it easy to move, rearrange, and organize elements on the canvas. This makes it simple to modify scenarios, reorganize key factors, or adjust visual elements.

You can also use virtual sticky notes, mind maps, flowcharts, etc. to visually identify and organize key drivers and uncertainties and categorize and prioritize the factors that will shape the scenarios. And get a headstart with 1000s of templates related to scenario planning.

Use prioritization grids, emojis or dot voting to facilitate prioritization. Team members can vote on specific scenarios or elements, helping to identify the most critical aspects that require further analysis or attention.

Import and embed external content

• Import and embed external content such as market reports, graphs, or images directly onto the canvas. Use integrated notes and data fields for shapes to store additional details pertaining to them. This ensures that the scenario planning board is a comprehensive repository of relevant information.

In conclusion, scenario planning is a helpful tool for organizations to handle uncertainty and make smart decisions. By thinking about different possible futures, considering different factors, and creating flexible strategies, scenario planning helps organizations be ready for change. It’s not just for crises; it’s a way to plan for the long term, manage risks, and make smart decisions. Using scenario planning encourages a forward-thinking mindset, helping businesses prepare for challenges and take advantage of opportunities in a constantly changing world.

Join over thousands of organizations that use Creately to brainstorm, plan, analyze, and execute their projects successfully.

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Amanda Athuraliya is the communication specialist/content writer at Creately, online diagramming and collaboration tool. She is an avid reader, a budding writer and a passionate researcher who loves to write about all kinds of topics.

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Scenario planning: Strategies for moving beyond the basics

Jim Bullis has over 13 years of experience implementing CPM/EPM tools and other finance software, as well as consulting and supporting a wide range of clients from Fortune 500 organizations, to privately held corporations generating over $100M in revenue, to public sector entities.

No one can know the future, thats why scenario planning is extremely important for your business.

Planning for a variety of possible outcomes can make sure you are ready for anything and prepared to adjust on the fly.

It can be a challenge to even know what future scenarios to plan for so we're offering  best practices and tips to make the process easier.

Head of Pre-Sales & Solutions, Cube Software

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What is scenario planning?

Scenario planning is a method of forecasting and analysis that takes a variety of assumptions to drive different outcomes in the future.

This planning method can be traced back to the days of the Cold War when analysts used existing information to predict how nuclear war could play out to manage uncertainties better.

Though nuclear war could be considered an extreme scenario, a global pandemic has done just that, reminding finance and business leaders of the importance of planning for the unknown.

Types of scenario planning

FP&A professionals use multiple types of strategy planning to analyze and prepare for a wide range of potential future scenarios.

Let's take a look at four common types of scenario planning, each designed for a specific purpose and providing essential tools for informed decision-making in a rapidly changing environment.

Quantitative Scenarios : These scenarios are based on financial models, presenting both the best and worst possible outcomes. They allow for quick adjustments by changing key variables and are commonly used for annual business forecasts.

Operational Scenarios : Operational scenarios focus on the immediate impact of an event, helping organizations explore short-term strategic implications and responses to specific situations.

Normative Scenarios : Normative scenarios describe a preferred or achievable end state, emphasizing goals and how the company envisions operating in the future.

Strategic Management Scenarios : These scenarios consider the broader external environment in which products and services are consumed, providing a platform for brainstorming decisions and narratives based on industry, economic, and world views.

Best practices in scenario planning & analysis

Scenario planning projects are most commonly used to run various outcomes in a single budget or plan, which we will cover today.

The most common example is drawing various outcomes from an annual operating budget to improve business decisions around resource allocation and adjustment.

After hundreds of budget cycles, we’ve developed a best practice around multiple scenario development in annual planning .

1. Start with the major goals

These are typically the targets that the business would like to achieve, often set by the CEO and the board (for example: grow x% this year while maintaining the same operating expenses).

The goal plan is also referred to as “top-down” and can be used to back into the major line items of a plan, such as revenue, gross margins, operating expenses, and cash.

It is critically important to assess whether these goals are achievable by building a bottoms-up plan that matches the key drivers and metrics in the goal plan.

Finance leaders should do this assessment, and any dissonance in achievability should be called out to management by citing KPIs from other companies in the industry.

See Rule of 40 and SaaS for a discussion on balancing growth and profit.

2. Follow up with the base plan

While the Goal plan details what the business hopes and expects to achieve, a best practice is to build a robust “bottoms up” plan called the Base Plan or Base Case.

The “Base Case” should be the most realistic version of the plan that still gets the business closest to its most important goals, typically revenue and/or profitability.

This is the time to cross-check the plan with KPIs. It’s also an opportunity to evaluate that the plan has achievable goals that are neither easy to hit nor efficient.

Make sure to assess the need to build in commonly missed assumptions such as employee turnover.

3. Build a best and/or worst-case scenario

Building this plan as a “realistically worst-case” scenario is vital when considering the worst-case scenario.

A company might wonder, “ What if we miss revenue by 15%”? What is the one metric the business hopes to optimize if this happens? Is it cash flow? Profitability?

For example, if the company misses revenue but wishes to achieve profitability over increased cash, it will drive different decisions around building the plan.

To increase profitability, they may focus on cutting costs. However, if cash is the goal , the business may be drawing down on a line of credit.

A “best case” scenario might mean that the business has exceeded its goal and can invest in more areas of the business that support this growth.

For high-growth companies, strategic planning out a “best case” can support the business with scaling challenges that arise when the business grows too quickly but doesn’t have the right resources to support the growth.

It’s a highly underutilized practice that can mean the difference between success and failure.

Industry-specific scenario planning examples

These practical cases offer insights into how businesses in different sectors effectively employ scenario planning to navigate uncertainty and make informed decisions.

Manufacturing : Manufacturing companies use scenario planning to prepare for supply chain disruptions caused by various factors, including natural disasters, geopolitical tensions, or supplier issues. By identifying potential vulnerabilities and developing contingency plans, manufacturers ensure resilience in their operations and minimize disruptions' impact.

Real Estate : In real estate, scenario planning revolves around evaluating property value fluctuations during economic downturns. By analyzing different economic scenarios and their effects on the property market, real estate professionals can make informed decisions about investments, risk management, and portfolio diversification.

Healthcare : In healthcare and biotech, scenario planning addresses potential challenges in drug development, such as clinical trial setbacks, safety concerns, or regulatory delays. By considering different scenarios and their implications, organizations can strategize effectively, allocate resources wisely, and navigate the complex landscape of pharmaceutical innovation.

Business Services : For businesses offering professional services, scenario planning plays a crucial role in market entry and expansion strategies. It involves assessing regulatory changes, competitive landscapes, and potential risks in new markets. By anticipating scenarios and adapting their approaches, businesses can successfully enter, grow, and thrive in diverse markets.

Financial Services : In the financial services sector, scenario planning focuses on evaluating investment strategies and risk exposure during market crashes or financial crises. This proactive approach helps financial institutions safeguard assets, adjust portfolios, and maintain stability when faced with challenging market conditions.

Using the scenario plans to optimize performance

Once the major plan versions have been developed, it’s time to put them to work.

Communicating the right plan to the business is often more art than science, but we’ve had good results by using the plans in various ways:

1. Plan to have enough cash to support the worst-case scenario.

Cash is the lifeblood of the business, so it’s worth taking extra precautions around cash flow management .

That may mean looking for additional debt or equity before it’s needed when it’s easier to access.

2. Use the base plan as the operating plan for the business.

Using the Goldilocks method, ensure that the base plan is neither “too hot” nor “too cold.”

Keep in mind that the Budget and the Forecast could vary over time as the business evolves

3. Communicate a revenue range to stakeholders and investors.

Aim for the range to hedge from 10-15% below plan through the base plan.

For example, revenue could be $20-22M for the quarter and the operating expenses and cash plans are tied to the base case.

Why scenario planning is important: Advantages and disadvantages

While a scenario planning project may seem like a golden ticket to success for every organization, it's not a simple process to stand up. It's worth analyzing whether the benefits outweigh the costs before building a scenario planning process from the ground up. 

Advantages of scenario planning

Risk Mitigation: Because scenario planning is essential the practice of creating back up plans, identifying and avoiding risk becomes a natural part of your organization's financial planning.  

Improved Decision-Making: With multiple options laid out for business leaders, scenario planning enables more informed strategic decision-making. 

Flexibility and Adaptability: With multiple plans in place it's easier for organizations to pivot and make changes when needed without having to draw up a Plan B from scratch.  

Strategic Alignment: By closely monitoring the cause and effect of alternative strategic management scenarios, business leaders can determine which plan aligns more closely with business strategy. 

Contingency Planning: With a clear understanding of potential risk across plans, organizations can more easily develop contingency plans from potential disruptions or unforeseen circumstances. 

Communication and Collaboration: Scenario planning requires input and insights into key drivers across the business. This organically creates an environment of collaboration and a holistic approach to financial planning. 

Improved Forecasting Accuracy: With a varied range of potential outcomes and scenarios incorporated into strategic thinking, finance leaders can forecast more accurately. 

Disadvantages of scenario planning

Complexity and Resource Intensity: Naturally, scenario planning requires more resources because it involves developing multiple plans instead of assuming Plan A will always work. Some organizations have scenario teams dedicated to mapping out different possible outcomes and the effect on the business's future. 

Overemphasis on External Factors:  It's easy to focus on potential external disruption without focusing on internal business drivers that can either lead to business success or challenges. 

Assumption Sensitivity: Some business leaders shy away from scenario analysis because it's hypothetical by nature and relies on assumptions that may not accurately reflect reality. 

Overlooking Unforeseen Scenarios: Scenario planning is not a fail safe. Even the best planners can be left flailing from completely unpredictable scenarios (like Covid-19 for example). 

Decision Paralysis: With multiple possible outcomes and strategies developed through scenario planning, in some cases it may seem like it's difficult to chart the best course for the business and business leaders can suffer from decision paralysis.

Continuous Monitoring Challenges: Scenario planning is a living, breathing project that requires consistent maintenance and adjustment. This focus can be difficult for some finance teams and get in the way of productivity. 

The best practices: implemented

As the company approaches its next scenario planning session (or its first-ever!), consider these strategies.

Utilize the industry KPIs to set realistic primary goals before crafting the perfect Base Plan.

From there, it’s easy to build out best and worst-case scenarios to understand how the business plan should be sculpted for the coming periods. In some cases, finance teams can develop a scenario planning templatemul to make future iterations easier. 

These scenarios, combined with the organization's goals and careful scenario analysis, can be used to develop a strategic plan for future events.

Scenario planning models

In the realm of scenario planning, having the right models and tools at your disposal can make a world of difference.

These frameworks and instruments are the backbone of effective scenario planning, helping organizations navigate uncertainty and develop strategic responses.

Matrix-Based Scenario Planning : This model involves creating a matrix with multiple variables, each representing a different aspect of the future. By combining various scenarios within the matrix, organizations can visualize the potential outcomes and their corresponding impacts.

Driver Analysis : Driver analysis focuses on identifying the key drivers or forces that shape the future of your industry or market. By thoroughly understanding these drivers, organizations can develop scenarios that revolve around their potential variations.

Cross-Impact Analysis : Cross-impact analysis takes scenario planning a step further by examining the relationships and interactions between different variables. It helps uncover unexpected consequences and dependencies, providing a more holistic view of the scenarios.

Quantitative Modeling : For organizations seeking a more quantitative approach to scenario planning, mathematical models come into play. These models use statistical analysis and mathematical simulations to assess the likelihood and potential outcomes of various scenarios.

Measuring the ROI of scenario planning

Understanding how to quantify the value scenario planning brings to your organization is crucial.

Below are practical methods for measuring the ROI of scenario planning, offering insights into its tangible benefits and its role in bolstering decision-making, risk management, and long-term success.

Financial Metrics : Assess the impact of scenario planning on financial performance, such as revenue growth, cost reduction, and profit margins.

Risk Mitigation : Evaluate the reduction in financial risks and potential losses by comparing scenarios where planning was employed versus where it wasn't.

Resource Allocation : Track the efficiency in resource allocation by comparing scenarios that utilized planning versus those that did not.

Competitive Advantage : Analyze how scenario planning has contributed to gaining a competitive edge in the market.

Operational Efficiency : Evaluate improvements in operational efficiency, including supply chain optimization and workforce management.

Scenario planning serves as a powerful tool for foresight and adaptability, offering valuable insights and strategies to aid organizations in navigating uncertainty, making informed decisions, and charting a path to success.

Ready to take your scenario planning to the next level? Explore the powerful capabilities of Cube and see how it can transform your strategic decision-making.

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Scenario Planning Explained: Definition, Process & Best Practices

Steve Groccia

Head of Customer Operations

There was a time not too long ago when finance teams could get away with simple scenario planning processes.

You could build basic models for base-case, best-case, and worst-case scenarios during strategic planning processes and present a conservative option for executive and board approval. And that was enough.

But times have changed, and with turbulent economic times requiring a shift in corporate strategy, scenario development has become a crucial part of planning for alternative futures.

In the wake of a global pandemic and a market downturn verging on a full-blown recession, detailed scenario planning is suddenly among your top priorities.

Now, maintaining base-case, best-case, and worst-case scenarios is table stakes. True strategic finance functions go a level deeper, running multiple what-if models on the fly and pulling levers in real time to show department heads and executives how new plans could impact runway and growth. This guide will serve as a template to help you understand how to effectively incorporate scenario planning into your strategic options.

Table of Contents

What Is Scenario Planning?

Scenario planning is the process of mapping out how different strategic plans and external forces will impact a business, showing the potential outcomes of those circumstances to improve decision-making.

Traditionally, scenario planning has applied broadly to management and executive roles as leaders try to better plan for the future. But finance teams are best suited to take on scenario planning responsibilities — especially in the midst of critical uncertainties about future market conditions.

In the context of finance, scenario analysis is the process of building out new models to show how strategic decisions will impact financial efficiency and company growth. Those models include tweaks to various financial assumptions and operational drivers to help the business make more data-driven decisions about the company’s future and inform budgets and annual operating plans .

4 Types of Scenario Planning (and Why You Shouldn’t Worry About Them)

Because the term “scenario planning” is so broad, you’ll see many guides talk about different types of scenario planning. These might span use cases from finance to more general business planning, military strategy, and geopolitical risk management.

The four most common types of scenario planning you’ll come across in business settings are:

1. Quantitative Scenario Analysis

This is the classic financial planning use case where you build models for different cases of business and financial performance. If you’ve built multiple scenarios in your annual planning process, you’ve done quantitative scenario analysis.

2. Normative Scenario Analysis

A goal-oriented form of scenario planning most popular in traditional corporate settings where you lay out where you’d like the company to be at the end of the given period. It’s a much more qualitative approach that focuses more on company vision than financials.

3. Operational Scenario Analysis

A more granular form of scenario planning that explains the possible outcomes of individual decisions or events in the short term. This is the kind of analysis you do when you build scenarios alongside individual department leaders.

4. Strategic Management Scenario Analysis

This is the kind of scenario analysis that focuses more on external factors than internal ones. You may involve industry analysts to better understand how the market is receiving your product and how roadmap decisions would impact total addressable market (TAM).

While it’s good to know what each of these types of scenario planning is, worrying about which is the “right” one won’t do you much good.

The reality is that strategic finance teams should be running scenario analyses that look more like a blend of each type (you can use scenario planning software to help with this). You need to understand the company’s numbers inside and out at the macro and micro levels. And you need to master financial storytelling to explain the “why” behind those numbers.

So, don’t worry about choosing which type of scenario planning to use — focus more on having a great process for understanding potential scenarios and their possible future financial and operational outcomes.

Plan for any business scenario. Download our financial planning blueprint.

Why scenario planning is critical for businesses.

Scenario planning elevates finance’s role as a strategic partner to executives and department leaders because it helps the business make more data-driven decisions. When you make scenario planning a continuous initiative, you’re helping the business see around corners and choose the right path to hit its goals — no matter what changes internally or externally.

On a high level, helping leaders see around corners makes it easier for you to maintain optionality as a business. But what does that really mean in practice? There are a few benefits you get from agile scenario planning that will help drive business success.

It Aligns the Business on Its Key Drivers

One of the biggest challenges you face as a finance leader is being able to translate numbers and models into a language the business can understand. Building a perfect financial model won’t do you much good if no one in the business can understand it. And with so many different financial assumptions  and inputs cobbled together to create a holistic view of the business, it’s unlikely anyone but you will understand the spreadsheet.

Scenario planning forces you to identify the key drivers of business performance. Instead of changing every input in the model, you pull a few different levers and see how they impact performance. Making small changes to key drivers will help the business understand the true financial and operational impact of its decisions.

This is important at both the company-wide level and the department level, giving you the tools to communicate effectively about what your stakeholders truly care about.

It Helps Avoid Surprises for Investors

The true value of investor updates and board meetings is the ability to tap into their experience and perspective to solve business problems. But you can’t unlock that value if investors are caught off guard by unexpected numbers every time you connect.

Strong scenario planning practices help avoid surprises for investors by proactively showing the potential outcomes of decisions. Instead of spending the majority of your time talking through what the numbers are, you can focus more on how to work through various scenarios in the months ahead.

It Shows You Different Ways You Can Extend Runway and Better Manage Cash

The ecosystem of VC-backed startups went through a golden era where growth at all costs was the norm. Funding was far too available for it not to be. But as market conditions change, sustainable growth becomes a necessity. And that means finding ways to extend cash runway  and optimize cash flow.

Your CEO needs to stay on top of two things at all times — how much cash is on the balance sheet (and how long it will last), and how to stretch the company’s cash as far as possible. Scenario planning helps you be a strategic partner in that effort. As executives look for areas to conserve cash, scenario planning allows you to show the impact of different decisions and help decide on the best path forward to safeguard the company against future events.

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The 5 Steps of the Scenario Planning Process

You know your business could benefit from more agile scenario planning. And you know that there’s significant value in going beyond simple company-wide scenarios for base case, best case, and worst case. The next step is to build out a scenario planning methodology that works for you, your partners across the business, and the company at large.

Follow this walkthrough to better understand what goes into a best-in-class scenario planning process.

1. Collaborate with Business Leaders on which Levers to Pull

Always start a scenario planning exercise by collaborating with your business partners. You need to work together to figure out what exactly you want to dial up or dial down in the plan.

Technically, you could change any operational variable to come up with a new scenario for the business. But it would be complete chaos if you started toggling any and every lever at your disposal. Instead, focus on a couple of things:

• What can you control? You want to build models based on levers that you actually control. The scenario itself might be out of your control (i.e., what if we hit a market downturn and appetite for new software diminishes?). But things like your hiring plan are always in your control. Create a game plan around the big, controllable levers at your disposal rather than unknowns.
• How do levers match up with proposed scenarios? You can start with the end in mind with scenario planning. If you want to create a case where you miss top-line growth  goals significantly, what are the relevant levers that could make that happen? Maybe conversion rates drop, or you have attrition on the sales team, or there are product delays.

The outcomes of these conversations will help you go back to your model and start analyzing different scenarios.

2. Start with the Baseline Financial Model

The conversations you have with business partners should always be the basis for how you build your model. You want to make sure that your model goes beyond the accounting basics and breaks out the components of the business from an operational perspective.

In reality, this is more like a prerequisite for agile scenario planning than an initial step. If you try to run scenario planning processes with a high-level model that doesn’t include operational components, you’ll likely finish the exercise with simple outputs that don’t necessarily guide strategic thinking.

In that case, you’d have to go back and rebuild your model anyway to satisfy company needs. Instead, blend the financial and operational aspects of the business in one model and create the right foundation for scenario analysis.

For more info about building a flexible operating model for your business, check out this episode of The Role Forward with Jenny Jao , Head of Finance at Sprig.

3. Pull Levers in the Financial Model Based on Business Needs

The goal of your initial conversations with business leaders is to get a deep understanding of what’s important to them. That’s how you create scenario analyses that have strategic impact.

In theory, if you wanted to create a down case, you could go into your model and just cut every assumption by 20%. You’d get the right outcome, but you didn’t account for anything your partners truly care about.

This comes down to recognizing the non-negotiables for your model. For example, how does your business want to handle a down case where you hit $3.5 million ARR instead of $7 million ARR?

• Do you want to keep cash at a certain level given that outcome?
• Are you going to have to double down on retention instead of new customer growth?
• Will you still need to hire certain mission-critical heads despite a new focus on lean growth?

These types of questions will impact how you pull levers to build your scenario plan. Strong scenario planning processes always revolve around what’s important to the business, guiding you on which levers to pull to reach the intended outcomes.

4. Present Multiple Scenarios and Toggle Inputs Live

There are two primary ways you can present your scenarios to the business. The first is in the context of annual planning processes. In these cases, executives may communicate the handful of main scenarios they want you to build out, so you present different models for each set of guidelines.

The other way you can present scenarios is the more agile approach. If you build a flexible operating model, you should be able to sit down with your executive partners and live toggle different levers in a scenario. You might come to the conversation with your three basic scenarios, but you can then show executives what would happen in each scenario if you tweaked the inputs and assumptions.

Headcount scenarios are the classic example. You can build high, base, and low cases for headcount to start the conversation. But headcount is such a massive lever for your business that it wouldn’t make sense not to treat it dynamically. You can toggle inputs in each case to see how changes to strategic plans — regardless of scenario — will impact performance.

Note that one of the hardest parts of scenario planning in spreadsheets is version control. The more scenarios you build out, the harder it is to keep track of what levers you held constant and which ones you changed. Being able to lock a base case model, clone it, and mix and match different model components with a few clicks is one of the biggest benefits of adopting financial planning and analysis software .

5. Continuously Collaborate on Company-Wide and Department-Level Scenarios

Internal and external circumstances change far too quickly and often to assume the scenarios you map out at the beginning of the year will hold strong three, six, or twelve months down the line. A good scenario planning process has to account for the fact that you need to revisit and rethink your analyses continuously throughout the year to adjust tactical courses of action.

You need to revisit scenarios at both the company-wide and the department levels. At the company-wide level, you should at least be revisiting your scenarios on a quarterly basis when it comes time for board meetings. Being able to run a budget variance analysis  between your actuals and each scenario will set the stage for more valuable conversations between you and your investors.

But on the department level, you should treat continuous scenario planning as a way to collaborate more closely with business partners on operational plans.

For example, what’s the trickle-down effect of missing revenue goals on the hiring plan in customer success? The main financial model for the business may just show a reduction in headcount for CS — but does that really make sense? Discuss various scenarios with your CS leader to understand the qualitative impact of various scenarios on their strategic plans and see if there are different levers to pull that make more sense.

The more you understand the dynamics of each department, the more effective your scenario planning processes will be. Going through this process monthly or quarterly will deepen your understanding of the business and elevate your role as a strategic partner.

3 Tips for More Effective Scenario Planning

There’s no one-size-fits-all way to succeed with scenario planning. So much effective scenario planning comes down to understanding the dynamics and needs of your specific business.

But just because every scenario planning process is unique doesn’t mean there aren’t universal elements and similarities. The steps listed above cover the end-to-end process, and these three will help you take a step even further toward best-in-class scenario planning.

Run Multiple Scenarios Even When You Aren’t Asked to Do So

Traditionally, scenario planning has been such a time-consuming process that you’d only go through it if necessary. In many cases, that meant when executives asked for multiple scenarios during the annual planning cycle.

Strategic finance teams take it upon themselves to run alternate scenarios even when the business isn’t specifically asking for them. Be curious about how different levers will impact the business. See what might break the model altogether. This kind of curiosity is what helps you uncover strategic insights that make finance a driving force for business growth.

Prioritize Business Partnering Over Modeling

It doesn’t matter how beautiful or perfect your financial model is if no one in the business actually uses it. That doesn’t mean your partners should be jumping into the model and making changes themselves necessarily. But rather, it means you have to build the model according to the needs of your business partners.

Don’t start scenario planning by diving straight into your models. Always start by having conversations with business partners and gaining a deep understanding of what they need and how their corners of the business operate. That way, when you’re building the model, you’re actually creating an architecture that makes creating new scenarios a seamless process instead of having to rebuild models for every new request.

Automate the Time-Consuming Side of Scenario Planning

The only way you can make scenario planning an agile process is to get out from under the heavily-manual process of data aggregation and cleansing. Because you’re working with so much data, the process of pulling actuals from different source systems, organizing it, and tweaking it across multiple models for possible scenarios becomes more time-consuming than it’s worth. By the time you actually finish building all your models, the data is probably already stale.

Keeping up with the pace of modern businesses requires real-time data. Automate the data aggregation and cleansing side of the job so you can focus more on identifying those big levers that will make a difference in strategic action plans.

How Mosaic Does Scenario Planning

Since the market downturn that hit in mid-2022, our own approach to scenario planning has changed a bit.

Prior to the downturn, when venture capital was freely flowing, we followed a similar scenario planning structure to most startups. You go into a new year with three main scenarios — a worst case, base case, and best case. Those scenarios gave a solid overview (internally and for investors) of what we believed could happen to the business in the next 12 months.

Now, we’re being much more diligent about scenario planning, which has meant:

Generating far more scenarios upfront before narrowing down to the ones we’ll present to investors Reforecasting multiple scenarios more frequently throughout the year Running much more granular scenarios for different aspects of the business, not just the company as a whole

Let’s look at early 2023 as an example. At the time, we were in discussions with investors about raising our Series C and considering how that would impact our business.

Without getting into the model details, here’s a quick outline of the different scenario groupings we ran:

• 2023 Outlook (with fundraise): This was a collection of models that showed a worst case, base case, and best case for our business if we raised our Series C. These models included inputs for how much we would raise and modeled out headcount and GTM spend accordingly.
• 2023 Outlook (with no fundraise): This was a collection of models for a worst case, base case, and best case if the business did not raise additional funds. It included more conservative assumptions for GTM spend and headcount changes. Headcount model scenarios: Because people are the largest levers for spend in a SaaS business, we also ran specific scenarios for our headcount plans. We took our baseline 2023 Outlook model and ran scenarios specifically for low-case and high-case headcount plans to see how departmental hiring would impact the business.
• Department-level scenarios: This was especially important for our GTM functions. We ran scenarios for how changes in our marketing budget would impact the business. Where could we cut budget to reinvest in other areas without missing revenue goals? Where could we double down and have the biggest ROI? Modeling these out separately from the company-wide scenarios made it easier to understand the relationship just between GTM dollars invested and revenue growth.

The most formal part of our scenario planning took place toward the end of 2022 as we planned for 2023. However, we have revisited these scenarios at least quarterly (and often monthly) throughout 2023. Reforecasting at this rate has helped us keep a close eye on how the scenarios are playing out and adjusting to current circumstances (e.g. updating the models after we did raise our Series C).

Scenario Planning and Forecasting with Mosaic

There are two main roadblocks that will prevent you from effective scenario planning — manual data aggregation and inefficient version control in spreadsheets. Mosaic eliminates these challenges by integrating with your most critical source systems and providing a platform to easily duplicate models, tweak assumptions and inputs, and describe scenarios easily.

Traditional scenario planning and modeling could take weeks of work to complete. And even then, you might only come away with a few basic scenarios only to get a list of new requests once you present them. In Mosaic, you can create new scenarios in less than two minutes. Watch how.

Don’t let manual processes and spreadsheet limitations keep you from being the strategic partner your company’s leaders need. Reach out for a personalized demo  to learn more about how Mosaic can transform your scenario planning processes.

Scenario Planning FAQs

What is scenario planning in finance.

In finance, scenario planning is the process of collaborating with business leaders and building out models that show how changes in different variables impact future outcomes for the company. It’s an analysis exercise that finance can use to help the rest of the business understand potential future outcomes of strategic plans.

What are the steps of the scenario planning process?

The scenario planning process may be slightly different depending on the maturity of your company or the specific scenario you’re planning for. Still, there are five high-level steps you should follow:

• Collaborate with business leaders on which levers to pull
• Start with a baseline financial model
• Pull levers in the financial model based on business needs
• Present multiple scenarios and toggle inputs
• Continuously collaborate on company-wide and department-level scenarios

What is the difference between scenario planning and forecasting?

Scenario planning and forecasting are both processes that show future outcomes based on strategic plans and basic assumptions about the business. Whereas forecasting is a broad term for financial planning, scenario planning is a subset of that term, focusing on building multiple models to forecast outcomes under different circumstances.

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What’s the worst thing that could happen to your business? Are you prepared for it?

Small Business Leadership Small Business Design Small Business Operations

4 min read

What do oyster farming, planning and your business have in common?

If you work in the oyster farming business, then one thing is certain: everything can—and will—go wrong in your business. Wind, rain, tidal swells, oil spills and sea sickness to name a few. Rest assured, there will be an obstacle in your way. 

So how do you plan for a business in which everything is a problem and nothing is for certain? Planning is difficult enough for any business. It takes time and intention—and knowing the results you want and how you’re going to get them. How often has a plan fallen by the wayside for unforeseen circumstances and pivoting meant starting over from scratch? If you’re like most business owners, that scenario is probably more true than not. So what can you do to reduce your vulnerabilities? How can you plan for the things you don’t expect?

The answer is a bit of a conundrum: you don’t, and yet, you do.

When I began coaching Drew, his oyster business was, for lack of a better term, a nightmare . Like many first-time business owners, Drew had a great understanding of the technical work of the business, but beyond that, everything was a blank page. In fact, he didn’t even want to own the business initially. He was an employee and found out the owner was going to leave the company. So out of fear of losing his job, Drew bought it. Not only was his business controlled by the environment, language-barriers made communicating with his team an added challenge. Reluctantly, one day I said, “Drew, do you ever think about selling your business?” He responded with, “Adam, that’s the wrong question. What you should be asking me is, how many times a day do I think about selling it?”

It seemed everything was beyond his reach, and the only thing he knew for certain was that everything can and will go wrong.

Step 1: Accept and expect the worst.

For Drew, the “worst” was everything. But for most businesses, the “worst” is often simple. If you run an internet-based business, what happens if there’s a power outage and no WiFi? What about a damaged pipe and a suddenly leaky ceiling? Broken machinery?

Eventually, something will happen in your business that you won’t be able to control or prevent. Don’t let fear keep you from seeing reality. While it’s not pleasant to think about the worst-case, accepting that these things happen allows you to prepare yourself to ride out the storm. With a plan in place, you won’t be left panicking and wondering, “What do we do now?!”

Step 2: List all of your wild cards.

Wild cards are all the factors that will or can affect your business in any way. What does it look like if absolutely everything goes wrong? Without thinking about the solution, think only about the biggest challenges that could prevent you from doing business. Like Drew, you need to consider natural disasters, power outages, computer backup systems, or employees leaving on a whim without notice—just to name a few.

Step 3: List how these wild cards affect the business.

What does it mean when everything goes wrong? Who does it affect? It’s not just you, the business owner, it’s also your investors and your employees. Who do you need to contact if something happens? If Drew was the only one who knew what to do in an emergency situation, what would happen if he wasn’t there to handle the problem?

Instead of leaving your business at the mercy of the domino-effect, create a list of all the people, places and things that would be affected by your worst-case scenarios. You might notice rather quickly that every area of your business is interconnected. By mapping out what could go wrong and who/what it affects, you’ll be able to see the places where you can strengthen or need more support.

Step 4: Create a strategy for minimizing your vulnerability to wild cards.

One of Drew’s vulnerabilities was the language barrier between him and his employees. He knew that to reduce risk, he needed to be able to give directions clearly, so he developed processes with a maximum of five steps that could be explained through illustrations. He and his manager created simple checklists to help navigate through a variety of situations.

When it comes to strategizing for your business, knowing all of the things that could possibly affect you (Steps 1-3) will give you the ability to prepare and plan . Even though the power may not go out, or an earthquake may not happen, you have a plan for how to handle the situation. Think about the ways you can make changes today and what you can do in the long-term . Make the unforeseen visible because you’ll be able to manage it with confidence.

Here’s what you should be thinking about when creating your strategy:

• What do you absolutely need in order to produce the results you want ?
• What can you do in the short-term to minimize your vulnerabilities?
• What about the long-term ?

The strategies that Drew developed gave him an immense amount of freedom. Instead of managing his business from the day-to-day chaos, he was able to let go because his managers understood what to do next. His plans helped him and his team normalize difficult to navigate scenarios—adding more value to his business. Unlike other oyster farmers, Drew was ready to handle a wild card. He learned to limit his vulnerabilities to outside factors by accepting them and working through them.

Drew’s business was, of course, hit with one of those wild cards. An oil spill killed his competitors crops. There was a lot of damage, and news reporters and video cameras were surrounding the area just a few miles away from his farm. When I called, panicking and wondering what we needed to do, Drew simply and calmly said, “Adam, we have a plan for that .”

Written by Adam Traub

Adam Traub is a senior member of the EMyth Coaching Team and an expert in the EMyth Approach. In his nearly 20 years with the company, his experience has included program development, coach training, customer satisfaction and success, and personally coaching hundreds of business owners through the joys and challenges of redesigning their businesses. Adam’s dedication to helping business owners and leaders comes from his own interest in culture and people dynamics, as well as personal experience working through the EMyth Program as a client, where he saw the possibility for all leaders to transform their companies, create a better culture, and achieve their vision.

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These are hypothetical questions that executives should continuously ask, which cover issues such as:

• What should we do if the price of energy skyrockets?
• What if legislation passes regulations that make production more expensive?
• How do we maximize profits in the face of economic uncertainty?

Using a technique known as scenario analysis, organizations can determine the best-case and worst-case scenarios to anticipate unexpected economic, geopolitical and technological challenges and plan accordingly.

Scenario analysis is not new; Shell Oil Company has been doing it since the 1970s. What has changed is the availability of computer simulation software that allows companies to model their environment and evaluate potential outcomes in a fraction of the time needed in manual scenario analyses.

What Is Scenario Analysis?

Scenario analysis is primarily used to evaluate the pros and cons of organizational decisions. Initially, a base case scenario is prepared that uses current, commonly accepted assumptions about the future. Thereafter, two alternative scenarios are prepared, a best-case scenario and a worst-case scenario.

The best-case scenario considers what will happen if everything goes the organization’s way, while the worst-case scenario considers the negative impact of factors that depreciate returns, such as an economic recession, higher interest rates, global disruption and poor sales.

Why Organizations Need Scenario Analysis

Technology has created rapid change in customer demands, demographics and the way businesses operate. The market is competitive and an ever-changing environment.

Scenario analysis allows organizations to evaluate the impact unexpected changes in the business environment will have on investment and other decisions. It helps them test the robustness of future decisions to understand the potential impact of unexpected influences and identify potential opportunities and threats.

The ability to test decisions

Managers advocating organizational investment are naturally optimistic regarding the outcomes of their proposals. The problem is that research shows most don’t thoroughly evaluate all potential outcomes and, consequently, many decisions don’t achieve the benefits initially predicted.

Scenario analysis allows organizations to test these proposals and evaluate how decisions will stand up when things don’t turn out as expected. It evaluates the best and worst possible outcomes, offering a better understanding of how robust decisions will be when implemented.

Understand the potential impact of external influences

By identifying external factors that affect decisions, it’s possible to evaluate how they will affect projected profitability and return. More importantly, by identifying potential changes in the economy and environment, it’s possible to modify the decision to take these influences into account.

Identify potential threats and opportunities

By identifying potential threats, organizations can change the scope of their decisions to minimize the impact of potential threats. For example, it helped Shell anticipate the 1973 energy crisis and the oil collapse in 1986, as well as take pre-emptive action to mitigate their impacts. Scenario analysis also identifies possible business opportunities, allowing companies to capitalize on them.

Scenario Analysis versus Sensitivity Analysis

Scenario analysis and sensitivity analysis share many similarities, but it’s important to appreciate their differences.

In sensitivity analysis, the analyst considers the impact of varying variables, one by one. For example, the analysis may consider the impact of the dollar-pound exchange rate on an investment decision, while all other inputs remain fixed. In this way, it’s possible to isolate the impact of a single variable.

Scenario analysis considers the effects of changing all variables at the same time. In a worst-case scenario, it’s assumed that every variable changes negatively, and in the best-case scenario, the potential benefit of variables moving in a positive direction.

Scenario analysis allows businesses to determine:

• The overall impact of negative and positive changes
• What may happen in a “perfect storm,” such as a major recession
• The viability of major projects

Key Steps for Performing Scenario Analysis

Now that we know more about scenario analysis, let’s look at the steps you need to take to perform a scenario analysis.

Define the problem

First, you need to define the problem you want to tackle, including time frame, scope and decision variables. The scale of the organization’s plans drives the first step and what scenarios they want to run.

For example, a global manufacturer might want to know what the retail industry will be like in five years and determine answers to questions such as:

• How will omni channel purchasing disrupt distribution channels?
• Will manufacturers supply consumers directly or through distributors?
• The impact of additional competition

Create a list of variables

In this next step, the organization needs to create a list of known and unknown variables that could affect their organization. Known variables, such as unit pricing, sales volumes and margins, are collected from historical data sets. Unknown variables would include the impact of trade disputes, higher tariffs, a weaker dollar and possible recessions.

Run a what-if analysis

Having identified as many variables as possible, the organization would then run a what-if scenario analysis to evaluate the worst-case and best-case scenarios and establish their impacts on the business. This is where the difference between scenario analysis and sensitivity analysis becomes apparent because it evaluates the impact of changing all variables at one time, rather than each individually.

Evaluate options and determine probabilities.

Having determined the best- and worst-case scenarios, these are incorporated into the organization’s planning. A further step could be to determine the sensitivity of various inputs to better understand the impact of individual variables on the overall scenario.

Drawbacks of Conventional Scenario Analysis

While there’s no doubting the benefits of a properly developed scenario analysis, there are several drawbacks to the traditional process developed by Shell and as implemented in numerous organizations.

It takes a considerable amount of time and resources to perform a scenario analysis, as the process must include a good cross section of the organization. Invariably, numerous meetings and workshops are required to identify and achieve consensus on variables, evaluate options and develop different scenarios.

Manual scenario analysis processes are costly, a fact that caused Shell to consider shutting down its scenario planning team on several occasions.

It’s difficult to accurately determine the numerical and financial value of variables, even those that are known, especially because, in many instances, variables have fixed and flexible components dependent on time.

These and other constraints led many organizations to adopt various forms of computerized scenario planning solutions.

Scenario Analysis Tools

Although most organizations have excellent business management software from vendors such as SAP, Oracle and others, these are primarily focused on managing the business on a day-to-day basis. While they supply core data required for scenario analysis, none are configured to perform such analysis, even though some may incorporate limited sensitivity analysis tools.

Consequently, most businesses resort to performing their scenario analysis in Excel. While Excel has powerful tools for conducting scenario what-ifs, its ability to analyze scenarios is somewhat limited by factors such as a cumbersome method for adjusting variables along with a limited capacity to handle large numbers of variables.

Consequently, many organizations turned to advanced analytical modeling solutions that offer the ability to handle large data sets while providing greater control over the scenario analysis process.

Taking the Guesswork Out of Scenario Analysis with Modeling Tools

Mathematical business modeling combined with advanced prescriptive analytics allows users to accurately model the effects of various variables on their business. Using built-in what-if capabilities, these tools allow organizations to accurately determine the outcomes of best- and worst-case scenarios. Other advantages usually include the ability to seamlessly access data, calculate real variable costings, evaluate constraints and simulate multiple scenarios .

Although still requiring a significant time commitment to develop and validate business models, leading prescriptive analytical solutions simplify programming by offer intuitive drag-and-drop modeling techniques that do away with the need for hard coding. Additionally, next generation scenario analysis tools perform the heavy lifting capability to calculate the overall impact of various scenarios.

Simplifying Scenario Analysis with Prescriptive Analytics

Running scenario analysis using a prescriptive analytics platform allows organizations to move beyond the limited capabilities of Excel. Benefits of a prescriptive analytics platform include:

• Ability to access organizational data, avoiding the need for manual uploads
• Capability to analyze complex scenarios
• Capacity to handle an almost unlimited number of variables
• Inclusion of constraints and trade-offs

Various prescriptive analytics alternatives exist for creating models and running scenarios. These include hard-coded software solutions as well as others that have simple drag-and-drop modeling capabilities. While hard-coded solutions are powerful, highly qualified data scientist are needed to set up and code solutions, frequently resulting in a black box phenomenon that few people understand. On the other hand, adaptable prescriptive analytics platforms based on drag-and-drop modeling, such as River Logic’s Enterprise Optimizer™ , overcome these limitations and allow executives to directly use scenario analysis to determine opportunities and threats, and to make data-driven decisions to gain a competitive advantage.

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When Scenario Planning Fails

• Kalle Heikkinen,
• William Kerr,
• Mika Malin,
• Panu Routila,
• Eemil Rupponen

Leaders of companies with operations in Russia share how they’ve navigated new and unexpected challenges during the war in Ukraine.

How can organizations perform scenario planning when they are hit by shocks outside of leaders’ field of vision? Interviews with Nordic executives, who experienced both the Covid-19 pandemic and were in close proximity to Russia as the country invaded Ukraine, can provide clues. Instead of abandoning the typical “base case / best case / worst case” planning, they adapted their planning to encompass four main strategies other companies can try: stretching the types of scenarios under consideration, using vulnerabilities as a prism, building strong action guidelines an internal communication, and building crisis management into the organizational structure.

Over the past several decades, leaders have turned to scenario planning to identify future risks to their businesses. By analyzing things like revenues or margins across locations globally, this method allows leadership teams to design flexible long-term plans against a defined set of alternative external events and outcomes. The outputs can often include short-term financial forecasting and business planning in a “base case / best case / worst case” fashion.

• Kalle Heikkinen is Founder and Chairman of Boston iLab LLC and Managing Partner of strategy consulting firm NAG.
• William Kerr is a professor at Harvard Business school and Co-director of Harvard’s Managing the Future of Work project.
• Mika Malin is co-founder and partner of management consulting firm Helsinki Boston Group.
• Panu Routila is Board Professional and Chairman of the Board at Patria and Fortaco. He has a DBA from Aalto and was previously CEO of Konecranes.
• ER Eemil Rupponen is a strategy consultant at NAG.

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MFS Capital Advisors

• Feb 6, 2023

Understanding the Concept of Base Case, Management Case, and Worst Case Scenario in Business

When it comes to running a successful business, it's crucial to have a clear understanding of different scenarios that could arise in the future. Three of the most important concepts in this regard are the base case, management case, and worst-case scenario. In this article, we will dive into the meaning and importance of these concepts, and how they can help you make better decisions for your business.

What is a Base Case?

A base case is a scenario that is considered the most likely to occur in the future. It's the prediction of what will happen if everything goes according to plan. Businesses use the base case to make decisions about investments, expenditures, and other strategic moves. In other words, the base case represents a "best-case scenario" for the company.

What is a Management Case?

The management case, on the other hand, is a scenario that is slightly less optimistic than the base case. It takes into account possible challenges and obstacles that the company may face in the future. This scenario is used by management to plan for potential roadblocks and make adjustments to their strategy accordingly.

What is a Worst-Case Scenario?

As the name suggests, the worst-case scenario is the scenario that represents the worst possible outcome for the company. This scenario takes into account the potential impact of events such as economic downturns, natural disasters, and other external factors that could significantly affect the company's operations. The worst-case scenario helps businesses prepare for the worst and make contingency plans to minimize the impact of potential disasters.

Importance of Understanding Base Case, Management Case, and Worst-Case Scenario

Having a clear understanding of these scenarios is crucial for businesses, as it helps them make informed decisions and plan for the future. By considering all possible outcomes, businesses can make proactive moves to minimize risks and maximize opportunities.

For example, if a company knows that a recession is likely to occur in the near future, they can adjust their strategy and cut back on expenditures to prepare for the worst. On the other hand, if the company's base case predicts a period of sustained growth, they can make investments to take advantage of the opportunity.

In conclusion, the concepts of base case, management case, and worst-case scenario play a crucial role in the success of a business. By considering all possible outcomes and making adjustments to their strategy accordingly, businesses can minimize risks and maximize opportunities.

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How to to Build a Worst-Case Scenario Using a SaaS Financial Model

Baremetrics on December 07, 2023

Table of Contents

More articles.

‍ "Shit is hitting the fan",   isn't a phrase I've heard regularly from customers over the years. But based on the number of requests for worst-case scenarios we've gotten from customers in the past two weeks, there's a non-zero chance you are losing sleep over this if you are a SaaS founder.

As a financial modeling company, we have helped our customers   navigate through tough times in the past . What’s different this time is that we are having these conversations with nearly everyone, and the changes can be very sudden. We want to help, and I believe my experience with other SaaS companies may be useful to you as you plan out your company’s new future. 

This post will guide you through the process of building scenario-based forecasts in a SaaS financial model. We will also show you how you can evaluate your new plan. If you are looking to create multiple scenarios by using Flightpath, follow the   support article instructions here   instead.

Here’s what we cover:

1. Why create scenarios? 2. How to create scenarios 3. Adjust your revenue forecast

• Base-Case scenario
• Worst-Case scenario

Review bank balance before expense adjustments

4. adjust your expense forecast, freeze hiring.

• Cut non-essential expenses

Pay cuts & unpaid time off

5. evaluate your new plan.

• Expense breakdown
• Comparison to 2019

Comparison to 2020 Target

• Quarterly view
• % of Revenue

6. Other things to consider

• Payment terms
• Annual plans

7. Takeaway

Why create scenarios?

Think of scenarios as possible futures for your company. 

Because we can’t know what will happen, we need to build out multiple scenarios to get visibility into what   could   happen. 

At this time, the majority of our customers are focused on conserving cash. As they should be. Having cash in the bank will give you enormous optionality to adjust to changing conditions that may last a long time, while enabling you to move quickly once you have weathered the worst of the storm.  

The ultimate goal of any financial model should be to understand what your cash balance is each month over the next 12-18 months. 

How to Create Scenarios

We are going to build the scenarios on top of my guest post on Baremetrics blog -   The SaaS Financial Model You’ll Actually Use . If you aren’t familiar with the template yet, I suggest you keep the original post open in another tab as a reference, but make a copy of the   completed version of the financial model here . 

We are going to modify the original SaaS model to include your old forecast, and create two new forecast scenarios.

1. Preserve a copy of your old forecast

First, take your original 2020 goal and call it   2020 Target . 

Now forget it. Every company is going to be affected by the COVID-19 pandemic, it’s just a question of how much, so expect that your old target is no longer relevant. However, your 2020 Target is going to be useful to compare against as we start building a more realistic outlook. 

Next, create a new tab, and call it something like this.

It doesn’t need to be this wordy, but the idea is that you can easily identify this is a former scenario, and it’s hard-coded so you don’t accidentally edit it.

Copy your existing Operating Model   values   and   formatting   to the new 2020 Target tab. Don’t just duplicate the tab - make sure to first copy over the values and then the formatting. This avoids duplicating the named ranges in the original Operating Model, which makes it messier to use them in formulas later on.

2. Create Worst-Case scenario Next, we are going to create a carbon copy of your Operating Model - formulas and all - for your Worst-Case scenario. Instead of copying values, copy over formulas and formatting. Repeat for   Hiring Plan , and   Revenue Model   tabs. 

This is going to be a scenario to help you figure out what to do if everything goes wrong. I’ve seen our customers name this scenario as Worst-Case, Fallback or Covid-19 to give you some examples.   The idea here is to build a contingency plan - what will you do if everything goes wrong? 

3. Create Base-Case scenario Lastly, rename your Operating Model to   Operating Model - Base-Case.   I recommend you do the same for the   Revenue Model , and   Hiring Plan   for clarity. This is going to be your operational forecast for the next 12 months, and you’re going to iterate and improve it monthly. 

Adjust Your Revenue Forecast

Start by adjusting your revenue. At times like this your revenue growth may not be under your control, as customers are cutting costs everywhere they can. 

For our Base-Case scenario, I recommend you find out what happens if your recurring revenue stays flat or contracts a little over the next 3-4 months, after which it starts gradually growing again.

With our example company Southeast Inc, we are assuming that we will have trouble attracting new customers, and existing customers will churn at a higher rate. I’ve also brought down the projected expansion revenue. Overall, MRR will shrink 4% over the next few months.

This is what it would look like in a visual format:

Below are the same changes represented in the   Revenue Forecast Model . Note that I’ve hard-coded these changes directly on top of our existing formulas. While you should eventually try to figure out how these changes take place in your marketing funnel / sales pipeline, we need to get the first version out as quickly as possible to understand the magnitude of the problem.

The goal here is not to try to estimate the entire effects of the global pandemic on your business, but what you need to do in order to keep the lights on. Keep in mind that we are adjusting this forecast monthly as new information comes in, which means that at this stage you want to err on the side of caution.

In the Worst-Case scenario, you need to cut much more. Bring out your worst, paranoid fears and include them in your plan. Is it possible your monthly recurring revenue might shrink 20-30% over the next few months? What if the recovery to your current MRR takes a year?

Our example company Southeast Inc sells SaaS to   airports . There’s no way they are going to come out of this without significant negative impact on their business. 

Here’s the   Worst-Case scenario revenue model with a 26% reduction in MRR . Note that the MRR isn’t back to normal even by the end of the year.

As a reminder, you are doing this to get an understanding of the levers at your disposal if everything goes wrong. You need to understand how you will save your business if your worst fears come true.

After these changes, it’s useful to look at your cash forecast. We have brought down your revenue but haven’t made any adjustments to your expenses. 

Looking at your newly forecasted net profit/loss alongside your bank balance will give you an idea of the scale of cuts you need to make in either scenario. The situation isn’t as bad as it looks here, but it’s meant to tell you that  if you continue business as usual, you run out of money in a matter of months.

Expense Forecast

In a normal business environment, your expenses would be gradually growing, something like this:

When a business appears to take a turn for the worse, we need to figure out how to “stop the bleeding.” This means cutting down your expenses enough so your business doesn’t go under. In Base-Case, this doesn’t necessarily mean drastic measures - think of finding ways to postpone your expense growth. In the Worst-Case scenario it is almost certainly going to result in cutting costs in all areas of your business.

This is one of the first things I’ve seen CEOs do during a time of crisis. Payroll is usually your biggest expense and will move the needle the most. A pause is also a fast decision to make, unlike changes to your current team. 

A hiring ban isn’t permanent either. Once you have a new plan in place, you can gradually begin to lift the freeze should your finances allow it. 

In the Base-Case scenario, I paused all hires in the   Hiring Plan   until August 2020, and changed the speed of hiring to be every two months instead of every month.  

Cut non-essential expenses 

First, evaluate expenses by type and bring down any other types of expenses you expect to decrease. Many of your variable expenses are going down anyway (not a lot of people are in need of a flight ticket right now), so all you need to do is to make sure these expense cuts are reflected in your new financial plan. 

You’ll also want to adjust for expenses that will   go up.   For example, your team working from home might need new equipment. 

You will also benefit from evaluating expenses by vendor. I rarely meet companies where the founder or CEO isn’t at least a little bit trigger happy with signing up for new, shiny SaaS tools. Those tools get forgotten, and yet the vendor continues to bill you. If you software spend is, say, $5,000 a month, it’s hard to figure out how much of that is actually needed just by looking at the number alone.

Luckily, there is a better way. Pull up your   Expenses by Vendor Summary   report from QuickBooks, and export the past 12 months of data, separated by month. 

This view enables you to get a better understanding which tools or services are still in use, and what annual renewals are about to hit soon. I usually first look at the total, which lets me see the overall cost of the service over the past 12 months. For example, here I have highlighted how Southeast pays $26,400 a year to Adobe for their Creative Cloud licenses. Given they are already on their way to switching to Figma, this would be the time to cut off a service that’s no longer needed.

I also recommend looking at individual months to identify any annual plans. You can see that Algolia was paid $125,000 in April 2019, which means the renewal is likely hit soon. Given it’s a critical part of Southwest’ application search, this is not an area where they can save. 

If your report in QuickBooks doesn’t look like this, you might not be assigning vendors to your expenses. To apply these for the past transactions, you’d need to “undo” the initial categorization before you can benefit from the rules. 

After making these changes to non-essential expenses, take a look at the cash forecast again. These changes have helped enormously in your Base-Case scenario where the revenue contracts relatively little.

Worst-Case improves as well. Instead of running out of money sometime in June/July, we are looking at a zero bank balance in the September/October time-frame. Since we want you to continue operating your business, you will need to find other ways to cut costs. 

What if cutting everything non-essential is not enough? Given payroll is likely one of your largest expenses, at some point you will have to consider making changes.

We have seen companies where only the leadership team takes a pay cut, but also team-wide cuts have been on the table. I haven’t personally seen unpaid time off offered yet, but I could see it as an option for some employees who want to work reduced hours because of home-schooling or other similar needs. Delaying raises has been commonplace. 

Start by modeling out what would be the impact of implementing pay cuts. This is an iterative process, so you can begin by adding only the cuts you know you can make and see if it’s enough to keep you afloat. If not, you’ll come in and go through a second round of changes.

Now, say that you have modelled in all of the cost-cutting strategies from above, and yet more and more customer cancellations trickle in. Like many startups, you might have been operating with a low bank balance, and you rely on the consistent cash flows coming in from your SaaS.

What are your options?

If you don’t touch your payroll, your risk running the company to the ground. At that point, you can forget about taking care of anyone in your team. From what I’ve learned from our CEOs, there are two schools of thought on how to go about navigating this. 

In the first option, you only lay off the minimum amount of people required for your company to survive, given everything you know about your business right now. If the revenue slump is temporary, this will be the only layoff you need to do, and you minimize the impact on your team. 

The counterpoint to this approach is what if this isn’t enough? What if revenue continues to take a nose-dive, and now you need another round of layoffs? And then another? This will sap your team’s morale as everyone is going to be asking am I going to be next and when are we going under? The "Do it once" school of thought is also the take of David Ulevitch on his write-up about   managing layoffs .

You are the best person to figure out what’s the right approach for your company. Modeling out the financial impact of either option is easy - it’s the decision having to part with some of your team members that is the hard part.

In the Worst-Case scenario, Southeast needs to do a 25% executive pay cut, combined with letting go of nine of their 34 employees. 

After all of these changes, we finally have a plan that has a shot of keeping your business going.

Evaluate Your New Plan

After making all of these changes in your model, evaluate the new plan. It’s not enough that your cash balance forecast appears to steady out over time - what if your assumptions are flat out wrong?

There’s no way to get everything right with the first try, but luckily we have ways to iterate and improve on your plan. Start by looking at your forecasts with a broader view, but from multiple angles. This is an easy way to spot errors compared to your original 2020 plan, and sanity-check your new assumptions. Let’s look at five quick ways of evaluating your new plan.

Expense Breakdown Over Time

First, your Base-Case expenses should look something like the chart below. There’s a clear drop in near-term expenses, after which expenses stay flat for a few months. Finally, as you expect the business to get back on track in mid-to-late summer, the expense forecast should begin to grow as well. 

Same thing here, but for the Worst-Case. Expenses come down significantly, stay flat for a long time, and even when they begin to grow they stay below the current levels for a while. 

Comparison to 2019 Numbers

Second, compare your forecasts by using the   Reports tab . I recommend starting by comparing each of your forecasts to 2019 numbers. This anchors the newly created forecasts to something familiar, and makes it easier to compare them to each other.

As you can see, you’re still expected to grow your revenue by 30% in your Base-Case scenario, whereas Worst-Case is virtually flat despite the hit in your ARR. This view lets you also make your first adjustments. For example, does it seem realistic that in your Worst-Case scenario, your Support, Engineering and Sales & Marketing team costs go down 7-12%, but your General & Admin (G&A)doesn't shrink at all?

Turns out that this   does   make sense, since even though G&A expenses are otherwise going down, Southeast has locked into a new lease starting in April 2020 that offsets the savings elsewhere. Now would be the time to figure out can they back out of that lease.

This is where you truly begin to see the impact of the changes you have made. For Southeast, their EOY projected ARR is 40% lower than predicted, and we are talking about just the Base-Case. This is almost $8M in recurring revenue they   don’t   have available in 2021 to grow their business with. 

Southeast was on track to become profitable in 2020, but in the new plan that's no longer possible.

The Worst-Case paints an even more drastic picture with a 60% decrease in ARR vs the 2020 Target. 

That said, I’d argue that the Worst-Case scenario might be making too deep cuts to expenses. Southeast is still predicted to have $812k in the bank by the end of 2020, after which the balance starts growing. This is more than in the Base-Case, and more than the entire year's Net Loss (which here equals net cash outflow). In other words, the company could stay flat for the entire 2021 and still have money in the bank.

You need to keep in mind this is not an exercise to maximize cost-cutting measures, but it’s about figuring out what are the   minimum   cuts you need to make that gives your company a fighting chance once the crisis blows over. Before we go back and remove a layoff or two, let’s continue our review and see if there are other changes we should make. 

Quarterly View

Next, I’d look at both scenarios through a quarterly lens. It’s easier on the eyes than a monthly forecast, yet it provides more detail than just the annual overview. 

We should go over each line-item on the table below, and ask ourselves: “Do we understand what each change means?” If not, review and adjust.  

For example, we understand that Support costs go down from $231k in Q1 to $200k in Q2 because of layoffs you are forced to make. 

But do we know why the Hosting and Service delivery costs are coming down? Looking at the forecast more closely, we can see hosting is forecasted out as a percentage of your revenue. When your revenue is projected to come down, so will your hosting costs. In reality, the relationship might not be as straightforward. Tying hosting costs to revenue is a good forecasting method for a perpetually growing company, but what if you just purchased a bunch of reserved instances that you can’t quite shut down if there are less customers using it? In other words, your hosting costs might not actually go down even if your usage does (or at least not right away).

If we change the Hosting forecast formula to never go below your lowest monthly hosting cost over the past three months, the quarterly forecast looks like this.

The hosting cost change alone brought down your end-of-year bank balance down from $812k to $705k. That’s about the cost of one employee for Southeast. 

Follow the same logic for all of the other accounts, and do deeper dives as necessary. Keep an eye out for the bank balance, and make sure it doesn't touch zero. Normally, you'd want a buffer of 3-6 months of   expenses   in the bank, but when modeling out your Worst-Case scenario such rules of thumbs will go out the window.

Quarterly View - Percentage of Revenue

Looking at your spending as a percentage of revenues is another useful way to normalize your forecasts and make them more comparable between each other. 

Comparing the two scenarios here lets us quickly see that our Support spending is proportionally similar in both scenarios. After making the adjustment to minimum hosting costs, we can see the hosting costs are actually proportionally   higher   in the Worst-Case scenario. 

Review the rest of the line-items to spot any outliers. For example, is it justified to have 40% of your revenue spent to Sales & Marketing when your revenues are tanking? Or perhaps you have to continue to spend on S&M to be able to attract new customers?

Other Things to Consider

Here are a couple of other considerations that may help you with the tough times.

Many of our larger, profitable customers have utilized loans or lines of credits in the past. They have used these funds to maintain a comfortable cash cushion while investing into sales, marketing, or other areas of the business. 

In the current crisis, taking advantage of a loan is not as straightforward. You will first need to understand what operational changes you should make to continue running a sustainable business. 

That said, a loan can give you enormous option value. What if things seem to be picking up after this summer and you’d want to continue making new hires without dropping too low cash-wise? 

If you can get a loan with reasonable interest, payment terms and not too restrictive covenants (measurements of your ability to pay back the loan),   I recommend you take it . You don’t actually have to   use   the money for anything, but it’s there should you truly need it. Keep in mind that once the economy enters deeper into recession - and perhaps your business looks worse than it is today - a loan may not be in your cards anymore. 

In contrast,   do not get a loan to delay the inevitable . Say you take out a loan to avoid making layoffs, but the business does not pick up in a month or two. Now you have spent a large chunk of the loan, have a low bank balance, large expenses, and a loan payment plus interest to take care of. A huge exception would be loans such as the US Government Paycheck Protection Program (PPP), which is specifically designed to be forgiven if you are able to keep your team onboard. Here’s a great overview of   business relief programs   by the Microconf Team.

The key here is to model out your options. You should obviously try to take advantage of the loan if it’s merely there to help you move faster once the worst is behind us, and avoid it if the loan won't really help anyway. However, most of us operate somewhere in the middle, which makes it so important to get clear visibility into what a loan would do to your business if you were to take one.

I’ve included   a loan tab   in the financial model so you can see yourself what the impact of taking out a loan would be. Principal payments flow through your Balance Sheet and are automatically taken into account in your future bank account balance projection. Similarly, the interest payments flow through your Profit and Loss statement and bring down your Net Income. 

Ask for longer payment terms & collect A/R

This is as standard business operations as it gets. Your vendors might typically offer NET30 payment terms - ask for NET60 or NET90. Try to ensure your own customers are paying on time - you can even offer a couple of % points discount for paying early.

Offer discounts for paying annually

I’ve seen customers do this successfully in the past with discounts being anything between 1-3 months of free service. Keep in mind that offering three months free is in some ways similar to a loan with 25% annual interest, so don’t go crazy with the annual discount. 

Other things to consider

I’m not a tax advisor, so make sure to speak with your accountant if this is applicable to you.  

• Delay Income Tax Payments.   The IRS has granted a 90-day filing and payment extension for many pass-through entities and corporations. If you aren’t in the U.S., ask if your tax authority offers something similar
• Tax Credits.   If it’s your first five years of business and you are building something novel and innovative, R&D tax credits can be a significant chunk of cash you’ll get back from the IRS in the form of a payroll tax credit. 

Conserving cash doesn’t just mean pinching pennies everywhere you can - although you absolutely have to do that too. You’ll need to look into the ways to get more cash in the door, be it in the form of annual prepayments, loans, or negotiating better terms with vendors.

That said, you can’t flip a switch to get your customers to pay annually, and the financing options aren’t always on the table during uncertain times. Therefore you must use a financial model to forecast many possible futures for your company. 

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The Worst Case Scenario: How to Be Ready For Anything & Everything

The worst-case scenario is something we all want to be ready for.

But, it's a mantra few can say with any confidence. We're more optimistic than pessimistic, so bad situations don't get much thought.

But ignoring the worst-case scenario is a mistake. By thinking about it, we can actually reduce our chances of it happening.

In this article, we'll discuss how to think about worst-case scenarios and how to prepare for them. We'll also provide some tips on how to stay calm and positive when things go wrong.

So whether you're facing a natural disaster, a personal crisis, or something else entirely, read on for some helpful advice.

Why you should read this article: ‍

• Learn how to think about worst-case scenarios like a pro.
• Reduce your vulnerability to worst-case scenarios.
• Stay calm and positive when things go wrong.

What you'll learn:

• What is a worst-case scenario?
• How to identify potential worst-case scenarios.
• How to reduce your vulnerability to worst-case scenarios.
• How to stay calm and positive when things go wrong.

The Worst Case Scenario Meaning

A worst-case scenario is a hypothetical situation in which the worst possible outcome occurs. You can use a worst-case scenario to prepare for potential risks and dangers. Thus, helping you avoid them in the future. You can be 'ready for anything'.

Of course, this sounds so easy.

"Don't panic, we were expecting this and we've got a plan."

In life, too many of us don't plan.

We don't make time to speculate about what could go wrong. Instead, we disregard strategic planning believing it to be an exercise for a company. Life would be so much better if we slowed down and thought about a possible worst-case scenario before acting.

To be ready for anything means stepping away from the comfort of intuitive thinking. Our decision-making process should consider bad outcomes, and worry less about the good times.

Planning isn’t Bad

Plans and planning are frequently misunderstood.

The essential instructions Dwight Eisenhower shared in a quote allow me to explain. Eisenhower was a five-star general in the United States Army and the 34th President of the United States. He is perhaps best known for his role as Supreme Commander of the Allied Forces in Europe during World War II.

His experience adds even more weight to his words.

"In preparing for battle I have always found that plans are useless, but planning is indispensable."— Dwight D. Eisenhower

To understand this, it is worth looking at just how critical Eisenhower’s planning was. In the months leading up to to D-Day, Eisenhower oversaw the extensive planning and preparation for the operation. He worked closely with British and American military leaders to coordinate the movements of the forces involved.

There was an urgent need to invade France and begin the fight to defeat the Nazis.

But, at the same time, the allies couldn’t afford to fail. So, planning was essential. One part of this process was to look for the worst case scenarios that could befall the allies. Undoubtedly, a significant risk lay in landing on the beaches.

It was an obvious bottleneck.

The allies expected mines off the coast. The loss of life, let alone the wreckage from damaged craft would risk the success of the invasion. It was obvious calm seas, a low tide and clear skies would reduce this threat. And so, the alignment of a full moon and low tide became a critical success factor for the invasion to go ahead.

Such a window appeared on June 5,6 or 7—subject to favourable weather conditions to appear.

The rest, is, as they say, history.

Planning for the worst case brings clarity to underseen danger.

The planning phase gave Eisenhower a clear understanding of what could prevent an invasion. It might seem obvious, but when there is an urgent need to succeed, it is easy to ignore risk and just proceed.

How to Create Worst Case Scenario Examples

The more established we become, the more we fear risk.

Whether it’s our age or the growth a business creates, the more comfortable we become, the more we shy away from risk. For individuals, this means ignoring the downside in the hope it never creates a problem. For businesses, the opposite is true.

Companies employ risk managers.

They obsess over removing risk so they can limit potential downsides. They build strategic planning teams to create grand plans to help them avoid risk. What evolves is a devotion to planning and plans.

This approach to risk is worthy of attention.

Risk is simply the possibility of something bad happening.

In life and business, something bad happening comes when a threat or vulnerability arises. General Stanley McChrystal takes it a stage further and wraps it all into a risk equation. It looks like this:

Threats x vulnerabilities = risk

In General McChrystal’s conversation with Tim Ferriss , he explains the logic behind the equation.

“So if the threat to me is somebody with a handgun and I am walking down the street, and they want to shoot me, and that handgun would hurt me, I’ve got a pretty high level of risk. If however, I’m in a tank and they have a handgun, then suddenly my vulnerability is much reduced and so is the resulting risk. And if my vulnerability is zero, my risk is zero. So if I can either reduce the threat to zero or the vulnerability to zero, I’ve taken it to zero. Now, very rarely can we do zero in either, but we don’t control the threats much. We do control our vulnerabilities. We control what can hurt us and what we can do about it in the moment. So we started to think about risk, acting with risk is really about reducing your vulnerabilities.”

What we have here is a simple way to create some worst-case scenario examples.

When you begin to think about the potential threats you face, you can then assess your vulnerability to that threat. If we are vulnerable to the threat, then we have a worst-case scenario. If we aren’t vulnerable, then we don’t have a problem.

This is the crux of planning with possible worst-case outcomes in mind.

Eisenhower might have said the threat to the invasion was hitting sea mines. The extent of the vulnerability could be magnified or diminished depending on the visibility (full moon, low tide, clear skies). Take those elements away and the worst case scenario plays out as the landing craft can’t see the mines and hit them.

Eisenhower couldn’t remove the risk, but he could reduce it.

Concluding Thoughts

At the outset, I said I would get you thinking about worst case scenarios like a pro. The scope of this begins with a crucial point. It is all about planning.

When we begin planning, we naturally tend to look for the  We are optimists at heart. Upsides are attractive and rewarding, and show progress to our bosses and piers. Rarely do we pause and think about the worst thing that could go wrong.

To not think about the worst case is an act of foolishness.

Once we begin thinking about the things that could go wrong, it is then time to rationalise our approach. We can’t fall into a doom spiral of total negativity. We need logic to help us be sensible about all the possible doomsday outcomes we might be thinking about.

For me, one great way to do this is to use the risk equation.

Threats and vulnerabilities bring reality to risk. Each leads us to the upsides and downsides of how we can best prepare for the risks life and work throw at us.

It is here the lesson lies.

If you want to think about the worst case scenario like a pro, then the motto you need to carry is this; be prepared.

Being prepared means you have considered the worst thing that can happen. It means your planning was effective. You've opened your mind up to think through the things that can go wrong.

It is here we can finally grasp the point Eisenhower was making when we talk about the worst case scenario.

Decision Growth Made Easy

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How To Prepare Your Business For Worst Case Scenarios

While it’s not pleasant to think about, disaster-readiness is essential to a business’ success. In order to succeed in the long term, a business must handle the bad times, as well as the good. In order to handle any disasters that might befall your business, it’s important to prepare for difficult situations ahead of time. As a business owner, you must sit down with each department within your company, to help them plan for any problems that might arise. Read further to find out more about how you can help your business prepare for the worst.

Have A Disaster Recovery Plan In Place

Planning for worst case scenarios necessitates having a disaster recovery plan in place. As the name implies, a disaster recovery plan lays out the steps that your company will take, should some catastrophic event befall your company. Such events often include, but are not limited to, fires and floods. An effective disaster recovery plan will provide your company with guidelines for document protection, data retrieval, and replacement of damaged items. Having a disaster recovery plan in place ensures that your company will not go under when a disaster occurs.

Make Sure That Your Company Is Adequately Insured

Insurance is another crucial aspect of worst case scenario planning. If something terrible does happen, being properly covered can make the difference between your company recovering and your company closing. This is true for companies large and small. Fires and other disasters can be nearly impossible to recover from without proper insurance. Do some strategic planning and assess your insurance needs before speaking to an insurance agent.

Have A Business Continuity Plan In Place

Similar to a disaster recovery plan, a business continuity plan allows you to put processes in place for a variety of negative scenarios. Business continuity planning involves taking a hard look at threats and risks facing your company.  Unlike disaster recovery plans, which help you with document and data recovery, business continuity plans help you ensure that all functions of your company are able to continue in the face of a disaster. This being the case, business continuity plans account for a wide variety of scenarios, including natural disasters, disease outbreaks, labor strikes, and political upheaval. Having a business continuity plan in place will truly help you prepare for the worst.

Turn To A Business Consultant For Planning Assistance

For any of the above preparations, it’s important to seek the guidance of a CPA or business consultant. These consultants can help your company with disaster recovery planning, business continuity planning, and assessment of insurance needs. When planning for disaster, a business consultant can be one of your greatest resources. This is especially true given the fact that such planning is not simply conducted over the course of a weekend. These plans need to be constantly revisited and revised. A business consultant can help you with high level planning over the long term.

Mark Zuckerberg owns over 1,200 acres of land. Here's a look at his properties across the US, from a Hawaiian doomsday bunker to Lake Tahoe estates.

• Mark Zuckerberg has been quietly snapping up massive chunks of real estate for years.
• The tech billionaire has bought hundreds of acres of Hawaiian land.
• He's also splashed out on large homes in California's Silicon Valley and Lake Tahoe.

Mark Zuckerberg is one of the world's richest people, and his multimillion-dollar real estate portfolio reflects that.

The man responsible for Facebook is worth around an estimated $180 billion, Forbes reported , and part of that fortune includes assets like a sprawling California compound and acres of lush land on a Hawaiian island.

Zuckerberg's real-estate dealings are often shrouded in privacy, including the use of limited-liability companies and addresses linked to the investment management firm Iconiq Capital.

Over the years, he's bought and sold homes all over the country. He's also reportedly built some — a Hawaiian doomsday ranch that has had many scratching their heads, for example.

Zuckerberg's real estate portfolio has an assessed value of around $200 million, according to Business Insider calculations based on property assessments.

However, the assessed value of properties can be lower than reported purchase prices (or current market value), so Zuckerberg's holdings are likely worth significantly more.

Representatives for Zuckerberg didn't immediately respond to BI's request for comment.

Here's what we know about his real estate.

Zuckerberg owns a residential compound in Palo Alto.

It's no surprise that a tech titan has more than one property in Silicon Valley. The Meta CEO owns five homes in the Crescent Park neighborhood of Palo Alto.

He gave viewers a rare peek inside one of them in 2016; the house is even tricked out with a "custom-made artificially intelligent assistant ," according to CNBC . The home is only a 10-minute drive from the Meta HQ in Menlo Park.

He bought the first Crescent Park property in May 2011 for $7 million.

Architectural Digest described it as a "'no frills abode" that chooses function over extravagance. Zuckerberg then spent over $43 million on the four homes surrounding his original residence in Crescent Park, The Wall Street Journal reported .

He sold his San Francisco townhouse in 2022 for a reported $31 million.

The four-bedroom, four-bathroom home is located near San Francisco's Dolores Park. He and his wife, Priscilla Chan, reportedly spent $10 million to purchase the townhouse in 2010.

At the time of the sale in 2022, it was the largest residential real estate deal in the city .

He bought two adjacent estates on the shore of Lake Tahoe around 2019.

Lake Tahoe is a popular vacation destination for wealthy Californians in both summer and winter, and Zuckerberg and his family are no exception.

The tax records of the two properties — known as Carousel Estate and Brushwood Estate — display the same address as tax records of other properties linked to Zuckerberg, according to documents viewed by BI.

Zuckerberg reportedly paid $59 million for both properties.

At 5,322 square feet, the Brushwood Estate features six bedrooms, five baths, and two half baths, according to SF Gate . Inside are high-beamed ceilings and picture windows; outside are lush trees, a private dock, and a hot tub. There's also a 2,293-square-foot guesthouse.

The Meta exec owns over 1,200 acres of land in Hawaii.

It's unclear exactly how many acres of land Zuckerberg currently owns on Kauai , but he began buying up a region of the island back in 2014.

BI tracked down at least 1,200 acres between 17 parcels of land that have the same tax address as other properties mentioned above, but are owned by LLCs including Kahu'aina Holdings LLC and Pila'a International LLC.

The 1,200 acres include about 750 acres he reportedly paid $100 million in 2014 for. That encompasses a more than 350-acre span of land on Pila'a Beach .

His plans for Koolau Ranch seem to be in preparation for the worst case scenario.

Another part of Zuckerberg's Hawaii holdings is the nearly 600 acres of land on Kauai's North Shore that reportedly cost him around $53 million in 2021.

On one of his Hawaiian parcels, Zuckerberg is reportedly building a huge compound that's said to include a 5,000-square-foot underground bunker with an escape hatch. It's been dubbed Koolau Ranch, and Wired reported that buying the land and creating the compound cost the executive an estimated $270 million.

Hillary Hoffower contributed to an earlier version of this story.

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News & Insights

The Best Case Scenarios for the Magnificent 7 Stocks in 2024 

April 01, 2024 — 05:43 pm EDT

Written by Alex Sirois for InvestorPlace  ->

InvestorPlace - Stock Market News, Stock Advice & Trading Tips

It’s no secret that the Magnificent 7 stocks have performed exceptionally well throughout 2023 and into 2024.  In this article we’re going to look at the best case scenarios for those equities. Before getting into those best case scenarios let’s take a look at just how important they’ve become.

In 2023 The Magnificent 7 pulled the S&P 500 up by 24% . One tripled in value, another doubled, and the worst performers grew by nearly 60%. Their collective 106% return was phenomenal. It was so impressive that one head of research dubbed the remaining stocks within the S&P 500 the ‘Meager 493’ noting their relative lack of contribution.  

That strong performance begs a question: just how much higher can the Magnificent 7 rise? No one knows exactly how high but it’s certain that artificial intelligence (AI) will be the defining factor

Magnificent 7 Stocks: Alphabet (GOOG,GOOGL)

Source: IgorGolovniov / Shutterstock.com

Alphabet (NASDAQ: GOOG , NASDAQ: GOOGL ) trudged through 2023 always a step behind the other stocks within the Magnificent 7. Microsoft charged out of the gate with its strong investments in OpenAI and ChatGPT integration into its Bing search tool.

Alphabet seemed to be caught flat footed in that regard. It’s been playing catch up ever since. Alphabet released its chatbot, Bard, which it later renamed Gemini. The service wasn’t particularly well regarded and its Large Language Model (LLM) has been updated twice. That’s a 10,000 foot view of Alphabet’s position today. 

Fundamentally, the company represents a mixed bag. Sales have grown for four straight quarters with revenues increasing by 13% in the most recent quarter. That’s a strong signal to the markets. However, the $65.5 billion in ad revenues during the most recent quarter fell short of Wall Street’s expectations . 

Analysts believe Alphabet can run 20% higher in 2024. In order for that best case scenario to materialize Google will have to improve the perception of its AI prowess.

Apple (AAPL)

Source: sylv1rob1 / Shutterstock.com

Make no mistake about it, Apple’s (NASDAQ: AAPL ) stock is full of potential in 2024. Current estimates suggest that Apple can return 50% this year. Like all other shares discussed here, AI will be fundamental to its success. 

That said, Apple is currently facing more trouble than it has at any point in the recent past. In 2024 the stock has already faced multiple negative revisions that have knocked $25 off its share price since late January. Those negative revisions have resulted in what is known as compression whereby ratios and multiples shrink. As bad as that sounds, there are reasons for bullishness moving forward.

iPhone sales are integral to the success of Apple. Apple will update its operating system to iOS 18 later this year. It is expected to be full of AI updates that could spike demand for the newest iPhone models. Look out for announcements regarding that at the company’s developer conference in June . Announcements there will have the potential to send shares much higher. 

Magnificent 7 Stocks: Amazon (AMZN)

Source: Mike Mareen / Shutterstock.com

Amazon (NASDAQ: AMZN ) stock can move higher in 2024 due to AI. Shares currently trade for $180 and are pegged at a high of $230. In order for share prices to reach that point Amazon’s AI investments will need to show returns.

Amazon just invested an additional $2.75 billion into the AI startup Anthropic . That brings its total investment in the company to $4 billion, its largest investment in another company. Amazon is a minority owner in the upstart. Google also invested $2 billion in Anthropic. In turn, Anthropic will spend $4 billion on Amazon’s Cloud platform over the next 5 years.

Meanwhile, Amazon is also planning to spend $150 billion on data centers in the coming 10 years in order to better capture AI demand. It’s clear that Amazon is keen to maintain its dominant position within the cloud sector. Amazon’s investment in Server Farms is much greater than that of its rivals. That’s a great reason to believe Amazon will continue to thrive in the long run. Overall, 2024 is looking brighter as the company ramps up its AI intentions.

Meta Platforms (META)

Source: rafapress / Shutterstock.com

Meta Platforms (NASDAQ: META ) became a dividend stock in 2024. The early February announcement was a boon to the company, spiking market capitalization by $205 billion . 

The company delivered that news as part of an earnings report that was also very strong. The combination of those two pieces of good news were a blessing and a curse at the same time. The problem is that META shares will have trouble moving higher in the future. Analysts on Wall Street suggest that shares could move above $600 this year. They currently trade for $485.

Meta Platforms is fueled almost entirely by ad revenues. In order for it to move 20% higher the company’s investments in AI will have to filter through and increase ad revenue substantially. Further, in order for ad spend to rise firms will need to be confident of the direction of the economy. My best guess is that the number one factor there is expectations around rate cuts. Signs of earlier cuts will build very well for Meta. 

Magnificent 7 Stocks: Microsoft (MSFT)

Source: The Art of Pics / Shutterstock.com

The best case scenario for Microsoft (NASDAQ: MSFT ) stock in 2024 is that it rises from $420 to $600. In order to do so Microsoft will have to overcome some of its current challenges, especially as they relate to AI prompt outputs.

In recent weeks concerns over the safety of outputs from ChatGPT have emerged. A Microsoft engineer warned that co-pilot creates content that can influence political bias, fuel underage drinking, incite religious attacks, and further conspiracy theories. Microsoft is essentially countering that those so-called malevolent uses were never part of its original intent.

The company recently unveiled tools that are intended to prevent users from tricking AI chatbots into those malevolent uses. 

Otherwise, Microsoft continues to do it very well on a fundamental basis. Its most recent earnings report shows impressive growth overall, at 18%. Microsoft’s cloud revenues are particularly strong, having grown by 24%. Microsoft will have to overcome those safety concerns mentioned above. However, the bigger hurdle will be continuing to prove that enterprises are willing to pay for its AI tools. That will be the primary determinant of Microsoft’s ability to break the $600 threshold in 2024.

Nvidia (NVDA)

Source: Ascannio / Shutterstock.com

Most investors are aware that Nvidia (NASDAQ: NVDA ) is projected to rise as high as $1,400 in 2024. That’s roughly 50% higher than its current $900 share price.

In order for Nvidia to do so it will have to continue to provide stellar results. Revenues grew by 126% in fiscal year 2024. That overall growth is impressive but it’s also the trajectory of growth which is noteworthy. In the first quarter Nvidia reported $7 billion in revenues. By Q4 that had more than tripled to $22 billion. Of that $22 billion, $18.4 billion was attributable to data center revenue . 

The reason to believe that Nvidia will continue to provide stellar results lies in its H200 chips. Initial shipments of those chips are expected in the second quarter. As long as widespread AI adoption continues Nvidia should continue to thrive as well. It has few competitors that have shown any real ability to displace it.

Tesla (TSLA)

Source: sdx15 / Shutterstock.com

Tesla (NASDAQ: TSLA ) is essentially going through a worst case scenario at the moment. The stock remains weak due to softness in the Chinese electric vehicle (EV) market. The company will announce delivery data which will confirm weakness. It’s not likely that Tesla shares will rebound anytime soon. 

Tesla has offered pricing discounts in China to combat weak demand. Meanwhile, it has increased prices on the same vehicles in the United States and Europe. Tesla is again looking to increase margins that fell in 2023. However, analysts believe that those increased prices are not reflective of higher demand in American and European markets. Those analysts therefore believe that those price increases will not help to improve Tesla fundamentally.

U.S. deliveries are expected to increase by 4% in Q1. Deliveries in the U.S. make up roughly 40% of Tesla’s business. Meanwhile, in China, deliveries are expected to decline by 23%. The Chinese market makes up roughly 30% of volume. It’s clear that Tesla’s best case scenario is predicated upon a strengthening Chinese economy. 

On the date of publication, Alex Sirois did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines .

Alex Sirois is a freelance contributor to InvestorPlace whose personal stock investing style is focused on long-term, buy-and-hold, wealth-building stock picks. Having worked in several industries from e-commerce to translation to education and utilizing his MBA from George Washington University, he brings a diverse set of skills through which he filters his writing.

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The post The Best Case Scenarios for the Magnificent 7 Stocks in 2024  appeared first on InvestorPlace .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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