Scenario analysis
Scenario analysis is a simple planning method where you build a few realistic versions of the future and compare their impact on revenue, costs, profit and cash flow. It helps you see risks and opportunities before you commit to budgets, prices, hiring or investment.
Quick example
Create a base case with current sales, a downside with lower demand, and an upside with a new contract. Compare cash flow and funding needs across the three cases.
Unlike sensitivity analysis, which changes one input at a time, scenarios combine several assumptions at once. Typical sets include base, downside and upside, but you can tailor them to issues like supplier price rises, customer payment delays, FX moves or new product launches.
What to include in each scenario:
- Sales volumes and prices, including discounts or seasonality.
- Direct costs (materials, stock, shipping) and overheads.
- Staffing levels, wages and subcontractor spend.
- VAT and other tax effects on cash flow and margin.
- Payment terms, expected late payments and credit limits.
- Planned investments, finance costs and loan repayments.
- Stock levels and lead times that affect working capital.
Make scenarios usable
Name each scenario clearly, write down the assumptions, and keep the model simple enough to update as new information arrives.
