3 Scenario Analysis Examples for Strategic Financial Planning
It’s not easy to effectively plan the future of your business. But scenario analysis helps you map out a wide range of potential outcomes to help you make more accurate financial plans. Here are three scenario analysis examples that show how you can think through common planning situations and make more strategic decisions.
Scenario analysis is your finance playground. The sandbox within your financial models where you can look at historical data and forecasts and ask yourself all kinds of “what if?” questions about the business.
For any what-if, the goal is to use different financial assumptions to map out base case, worst case, and best case scenarios. Doing so helps you get a better understanding of your company’s potential growth trajectory. And it gives you a foundation to make decisions based on a deeper understanding of potential impact.
But building out models that accurately capture best, worst, and base-case scenarios is a complex and time-consuming process. You could spend hours or days creating a financial model and building scenarios to analyze just one part of your business—only for the context to change and have to overhaul the entire thing.
Being able to think through different scenarios and then bring the financial analysis to life in a model quickly is key. And while that’s not easy, the best finance teams can get a good feeling for where the business is headed with agile, flexible planning.
Here are three scenario analysis examples that show how you can think through and model different situations in your planning cycles.
Example 1: Sales Headcount Planning
Revenue forecasting is the starting point of all financial planning, which is why sales headcount is one of the most common use cases for scenario analysis.
When creating your sales capacity model, you discover your revenue parameters based on the number of new sales representatives you plan to hire. If you set your assumption for quota attainment based on historical data, you’ll have one scenario set as a base case for revenue growth. But what if your hiring plan falls short? This is where you start to develop scenarios.
Let’s say that you currently have two account executives with sales goals of $600,000 each. Your baseline scenario is a $1.2 million revenue forecast. You decide to ask, “What if we were to hire 10 more account executives with the same sales goals?” Your best-case scenario is that everyone hits 100% of quota and you boost revenue to $7.2 million.
A base case of 80% quota attainment is more likely. So, your original sales capacity model might encompass the base case where all 12 of those reps, when fully ramped, pull in $480,000 in revenue.
But you also have to plan for the worst case, where maybe you lose a couple of reps in onboarding and none of those new reps hit quota when fully ramped. Where would that leave the health of your pipeline and revenue growth? And more importantly—how would your organization’s financials withstand that scenario?
With these findings, you can expand into multiple scenarios with more granular what-if analysis:
- What if we don’t hit our hiring goals on our timeline?
- What if onboarding and ramp speed is slower or faster?
- What if we hired five additional representatives (above the original headcount plan)?
- What if our sales representative ramp rate is 20% longer than expected—and how does that affect overall revenue goals?
No matter how good you are at forecasting, any of these what-if questions could derail your plans. And it’s finance’s job to provide executives and business partners the complete picture of all potential outcomes and future possibilities. When you can quickly update a model to answer these questions, you put yourself in a position to make more informed decisions about when to be aggressive with hiring and when it’s a better time to be more conservative.
Example 2: Product Release Planning
This scenario analysis example is crucial for startups. There’s no early revenue, but you must prove product-market fit. Because you’re not making money as you prove product-market fit, scenario thinking is all about projecting your runway as you plan out product releases and go-to-market motions.
There are two sides to consider in this scenario analysis example—developing your product and promoting it. Planning starts with having deep conversations with engineering about the headcount they’ll need to hit product release goals and with marketing about their plans to generate demand.
The Engineering Side
Let’s say the engineers need more senior colleagues. In your financial model, you create scenarios like, “What if we hire 20 senior engineers at $200,000 each over the next six months?” Depending on your runway and burn calculations, you’ll need to decide whether or not that’s feasible based on your ideal timeline.
If you do go forward with senior engineers, you may have to prove product-market fit and driving more revenue sooner to make up for the heavy investment in headcount. Or, you’ll need to start planning a new funding round to keep pace with the plans.
This pivots into another question: What if you were to use junior engineers or freelancers instead? It’s a lower investment, so you maintain a longer runway without needing to raise more money, which gives you more time to build the product. Whether one approach is better for your business than the other is a conversation you can have with executives and leads on the engineering side.
The Marketing Side
While you’re investing in engineering headcount to build out product features, how much should you spend on ads and other marketing initiatives to drive revenue growth? It’s another great use case for scenario analysis.
What if you were to spend $5 million on ads? Best-case scenario may be that you get in front of all of your Tier 1 accounts, convert them all to leads, and close deals to earn $10 million in revenue.
But you also have to account for a scenario where you boost customer acquisition and experience high churn because you hadn’t yet reached product-market fit.
It’s not easy to strike that balance, but running through scenario analysis exercises on both the engineering and marketing sides will help you understand how all possible outcomes impact your runway. And that includes an extreme scenario where your product release flops and you don’t earn any of your expected revenue—how much runway would you have in that case?
Example 3: Office Space Planning
Office space planning is a classic situation where financial analysts and leaders would conduct scenario analysis. But in the wake of a global pandemic and the shift toward remote work, the thought process has changed. Take Dropbox’s story as an example.
Dropbox signed a 15-year office lease at the Exchange in Mission Bay, San Francisco, in 2017. Then, in March 2020, the COVID-19 pandemic hit. Six months later, in October 2020, Dropbox announced that the company was committing to a virtual first environment.
As part of its commitment to collaboration and allowing employees to work where they felt best, Dropbox would keep its Dropbox Studios (office spaces) in San Francisco, Austin, Seattle, and Dublin. However, Dropbox paid $32 million to get out of its San Francisco lease agreement in December 2021.
Dropbox serves as a vital scenario analysis example for the future of work. While Gensler Research Institute’s found that 52% of employees surveyed prefer a hybrid work environment, a Morning Consult monthly survey noted that, as of December 2021, 55% of survey participants want to return to their office.
That said, office space and expansion are still important considerations. What if you were to open new offices in two different cities? You would need to determine the costs of new personnel (such as office managers), new equipment costs for expanded headcount, and the square footage cost to accommodate headcount plans.
You set the worst-case scenario by asking, “What if no one uses the space?” Which leads to considering what it would cost to break the lease. Your best case, of course, is that people utilize the space, where they would book time to an office space or come in regularly—and you could renegotiate a better lease down the line. And if your team is remote, you need to consider the costs of transportation and accommodations for any in-person collaborations at these new spaces.
Make Scenario Analysis Your Financial Playground
Scenario analysis that keeps up with the pace of high-growth companies relies on your financial model’s flexibility. If you’re bogged down in complex spreadsheets trying to build out intricate formulas to analyze scenarios, the business will have moved on in the decision-making process by the time you can offer any strategic insights. It becomes more like homework and less like a financial playground where you can imagine any scenario you want.
Flexible scenario planning starts with clean, organized financial data and dynamic modeling tools. Mosaic integrates with your more important source systems to create a foundation of data integrity and fuel your models with real-time actuals. Instead of having to gather data from every corner of the business and build out your models with best-case, base-case, and worst-case scenarios, you can focus on pulling levers to understand how different decisions would impact business growth.
There are many scenarios to consider in every corner of your business. The key isn’t to manage all possible scenarios for every single decision you have to make. But rather, it’s to be able to investigate different outcomes more efficiently and answer questions about the business as they come up. The scenario manager capabilities in Mosaic help you do just that.
Request a personalized demo to see how your business can slide toward strategic growth and smoothly grapple the next monkey bar to success.
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