Scenario Planning

name: scenario-planning description: Financial scenario planning — base, upside, downside, stress

When to Activate

• User needs to build financial scenarios for strategic decision-making
• Presenting management or board with a range of financial outcomes
• Evaluating the impact of specific risks or opportunities on the P&L and cash flow
• Building probability-weighted expected outcomes
• Defining management action triggers tied to scenario thresholds

Core Concepts

Scenario Definitions

Base Case (most likely outcome, 50-60% probability):

• Reflects management's best estimate of future performance
• Anchored to current run-rate, pipeline, and known commitments
• Incorporates consensus macro assumptions
• This is typically the rolling forecast or budget case

Upside Case (favorable outcome, 15-25% probability):

• Key opportunities materialize (large deal wins, market tailwinds)
• Revenue growth at the upper end of the reasonable range
• Operating leverage kicks in (margin expansion)
• Does NOT assume everything goes right simultaneously — that is fantasy, not a scenario

Downside Case (adverse but plausible outcome, 15-25% probability):

• Demand softens, customer decisions delay, competitive pressure increases
• Revenue growth slows or declines moderately
• Cost inflation exceeds assumptions
• Represents a "soft landing" — things go wrong but the business adapts

Stress Case (severe but possible outcome, 5-10% probability):

• Recession, key customer loss, regulatory shock, or market disruption
• Revenue declines materially (10-30% depending on industry)
• Tests liquidity and solvency under extreme conditions
• Purpose: ensure the business survives, not that it thrives
• Informs liquidity reserves, covenant headroom, and contingency plans

Key Driver Identification

Scenarios should be built by modifying specific operational drivers, not by applying blanket percentage adjustments to the P&L.

Step 1: Identify the 10-15 drivers that most impact financial outcomes

Revenue Drivers:
- New customer acquisition rate
- Customer retention / churn rate
- Average revenue per customer (ARPU)
- Pricing power / ASP changes
- Market growth rate
- Win rate on pipeline

Cost Drivers:
- Headcount growth / hiring pace
- Wage inflation / merit increases
- Input cost inflation (materials, energy)
- Discretionary spend levels (marketing, T&E, consulting)
- FX rates (for multi-currency businesses)

Step 2: Define driver values for each scenario

Driver                | Base    | Upside  | Downside | Stress
New logos/quarter     | 15      | 20      | 10       | 5
Monthly churn rate    | 1.5%    | 1.0%    | 2.0%     | 3.5%
ARPU                  | $500    | $550    | $475     | $450
Hiring (net adds)     | 25      | 35      | 15       | -10
COGS inflation        | 3%      | 2%      | 5%       | 8%

Step 3: Run each driver set through the financial model to generate scenario P&L, balance sheet, and cash flow.

Probability Weighting

Calculate an expected (probability-weighted) outcome for key metrics:

Expected EBITDA = P(Base) × EBITDA_Base
               + P(Upside) × EBITDA_Upside
               + P(Downside) × EBITDA_Downside
               + P(Stress) × EBITDA_Stress

Example:
= 0.55 × $50M + 0.20 × $65M + 0.20 × $35M + 0.05 × $15M
= $27.5M + $13.0M + $7.0M + $0.75M
= $48.25M

Use probability-weighted outcomes for:

• Valuation (expected cash flows in a DCF)
• Debt capacity assessment (what can we comfortably service?)
• Capital allocation decisions (invest only if NPV positive across weighted scenarios)
• Investor communications (sensitivity ranges around guidance)

Sensitivity Tables

Two-dimensional tables isolating the impact of two key drivers:

=== EBITDA SENSITIVITY: Revenue Growth × Gross Margin ===

EBITDA ($M)      | GM = 58% | GM = 60% | GM = 62% | GM = 64%
Rev Growth = 0%  |   $__    |   $__    |   $__    |   $__
Rev Growth = 5%  |   $__    |   $__    |   $__    |   $__
Rev Growth = 10% |   $__    |   $__    |   $__    |   $__
Rev Growth = 15% |   $__    |   $__    |   $__    |   $__

Build sensitivity tables for the most critical driver pairs:

• Revenue growth × gross margin
• Volume × pricing
• Churn rate × new customer acquisition
• FX rate × revenue growth
• Interest rate × leverage level

Scenario Comparison Dashboard

=== SCENARIO COMPARISON ===

Metric              | Stress  | Downside | Base    | Upside
Revenue ($M)        |  ____   |   ____   |  ____   |  ____
Revenue Growth      |  ____%  |   ____%  |  ____%  |  ____%
Gross Margin        |  ____%  |   ____%  |  ____%  |  ____%
EBITDA ($M)         |  ____   |   ____   |  ____   |  ____
EBITDA Margin       |  ____%  |   ____%  |  ____%  |  ____%
Net Income ($M)     |  ____   |   ____   |  ____   |  ____
Free Cash Flow ($M) |  ____   |   ____   |  ____   |  ____
Net Debt / EBITDA   |  ___x   |   ___x   |  ___x   |  ___x
Cash Runway (months)|  ___    |   ___    |  ___    |  ___
Covenant Headroom   |  ____%  |   ____%  |  ____%  |  ____%
Probability         |  5-10%  |  15-25%  |  50-60% |  15-25%

Methodology

Scenario Construction Process

1. Define purpose — what decision does this scenario analysis support?
2. Identify key drivers — 10-15 drivers that explain 80%+ of variance
3. Define scenario narratives — coherent story for each scenario (not random combinations)
4. Set driver values — specific, justified assumptions for each driver in each scenario
5. Run financial model — generate full P&L, balance sheet, and cash flow for each
6. Analyze outputs — compare key metrics across scenarios
7. Probability weight — assign probabilities, calculate expected values
8. Identify action triggers — what metric levels trigger which management actions
9. Build contingency plans — pre-approved actions for downside/stress scenarios
10. Present to management — decision-focused, not analysis-focused

Scenario Narratives

Each scenario needs a coherent narrative — the drivers should tell a consistent story.

Example narratives:

Upside: "Accelerated digital transformation drives demand pull-forward.
Enterprise segment grows 25% as large deals close faster.
Gross margins expand 200bp from favorable mix shift toward high-margin products.
Headcount scales efficiently due to productivity improvements."

Downside: "Economic uncertainty causes enterprise customers to delay purchasing decisions.
SMB churn increases as smaller customers cut discretionary spend.
Wage inflation persists at 5%, compressing margins.
Two planned product launches slip by one quarter."

Stress: "Recession triggers a 20% decline in new business.
Largest customer (8% of revenue) announces vendor consolidation.
Credit markets tighten, refinancing costs increase 200bp.
Workforce reduction of 15% required to preserve cash."

Management Decision Triggers

=== DECISION TRIGGER FRAMEWORK ===

Metric                   | Green          | Yellow         | Red            | Action
Quarterly revenue        | > 95% of plan  | 90-95% of plan | < 90% of plan  | [Hiring pause]
Monthly cash burn        | < $__M         | $__M - $__M    | > $__M         | [Cost reduction]
Net retention rate       | > 110%         | 100-110%       | < 100%         | [CS intervention]
Pipeline coverage ratio  | > 3.0x         | 2.0-3.0x       | < 2.0x         | [Lead gen surge]
Covenant ratio           | > 30% headroom | 15-30% headroom| < 15% headroom | [Lender dialogue]
Cash runway              | > 18 months    | 12-18 months   | < 12 months    | [Fundraise/cut]

Pre-approved contingency actions:

• Yellow zone: management-level response, enhanced monitoring frequency
• Red zone: executive team activation, board notification, specific pre-approved actions

Templates

Scenario Planning Summary

=== SCENARIO PLANNING SUMMARY ===

Company: [Name]
Purpose: [Decision being supported]
Date: [Date]

--- Scenario Definitions ---
Base Case:     [2-sentence narrative]
Upside Case:   [2-sentence narrative]
Downside Case: [2-sentence narrative]
Stress Case:   [2-sentence narrative]

--- Key Driver Assumptions ---
[Driver table as shown above]

--- Financial Outcomes ---
[Scenario comparison dashboard as shown above]

--- Probability-Weighted Expected Outcome ---
Expected Revenue:      $____M
Expected EBITDA:       $____M
Expected Free Cash Flow: $____M

--- Decision Triggers and Contingency Plans ---
[Decision trigger framework as shown above]

--- Recommendation ---
[Specific recommendation based on scenario analysis]
[Actions to take now regardless of scenario]
[Contingency actions to prepare but not yet execute]

Quality Gate

Before finalizing scenario analysis, verify:

• Each scenario has a coherent narrative (drivers tell a consistent story)
• Scenarios span a meaningful range of outcomes (not clustered around base case)
• Driver values are justified with supporting evidence or precedent
• Base case aligns with the current rolling forecast or budget
• Stress case tests liquidity and covenant compliance, not just profitability
• Probabilities assigned to scenarios sum to approximately 100%
• Probability-weighted outcome is calculated for key decision metrics
• Full financial statements are modeled (not just P&L — include cash flow and balance sheet)
• Decision triggers are specific, measurable, and tied to pre-approved actions
• Scenarios are not stale — refresh when material new information emerges
• Management has reviewed and validated scenario assumptions
• Presentation focuses on decisions and actions, not just analysis