What is scenario planning?

Definition

Scenario planning is the practice of modeling several plausible futures and reading how the numbers hold up in each one. You keep more than one complete picture, not a single heading and not a test of one input at a time.

On the books, it is a planning method, not an account. Actuals still post to the general ledger; the futures live in the planning file.

Each future is a whole set of assumptions. Light, expected, and heavy years sit side by side so you can see the range.

Where it shows up

P&L: Related to several plausible income-and-expense futures.

Balance sheet: Related to several plausible balance-sheet futures.

Cash flow: Related to several plausible cash futures.

See also: Sensitivity Analysis · Forecast · Cash Flow Forecast

When you look at your Income Statement, this work is several versions of revenue and expense, not one locked path. You read them together to see how wide the range is.

The Balance Sheet can have the same set of futures when cash, receivables, and payables are modeled too. Cash runway often sits in that view because cash is what a thin year threatens.

Cash is included when you also project receipts and payments in each future. A light year that still covers operating expenses is a different story from a light year that does not.

Owners usually keep three columns or three tabs. The live books stay the record of what already posted.

How it works

Name two or three plausible futures, such as light, expected, and heavy. Fill each one with a complete set of assumptions, not a single total.

Keep more than one complete picture, such as:

• Light
• Expected
• Heavy

The futures should be believable, not cartoons. A wedding venue that has booked 45 dates already should not use a light case of five.

The work is several whole futures. Moving one input while everything else holds still is a different test, and writing one heading is a different job.

When you change volume, rate, and mix together, you are still inside this method. The point is the set of complete pictures, not which one input you touched.

Nothing posts when you add a third future. The general ledger still records the real event when it happens.

A thin future that burns cash faster shows up in burn rate and cash runway, not as a book entry. That is why the cash view of each future matters.

After the year starts, actuals tell you which future you are closer to. You can drop a future that is no longer plausible and keep the ones that still are.

Example

A wedding venue is looking at next year's event fees. The owner does not pick one booking count and stop.

The light case is 40 weddings at $8,000 each, or $320,000 of fees. The expected case is 50 weddings, or $400,000.

The heavy case is 60 weddings, or $480,000.

Staffing, catering minimums, and deposit timing can change with each count. The three pictures are whole years, not three isolated fee totals.

The books will still post each wedding as it is earned. The 40, 50, and 60 are the range, not a journal entry.

If deposits come in slower in the light case, cash runway shortens even before the Income Statement looks dire. That is why the three futures include cash, not only fees.

The Financial Statement Package will show whichever year actually happens. The three columns stay in the planning file so the owner can see the range in advance.

Common mix-ups

Scenario planning is not the same as a single updated heading. One heading is where you think you are going; this method is several complete futures read together.

Scenario planning is not the same as moving one assumption while everything else holds still. Testing only the ticket price, with volume frozen, is a different test.

Scenario planning is not the same as the locked annual plan. The plan is the path you approved; the futures are the range you checked before, or beside, that approval.

Related terms

• Sensitivity Analysis: Testing how much the outcome changes when one assumption moves.
• Forecast: An updated projection of where the numbers are actually heading.
• Driver-Based Forecasting: Building projections from the underlying volume and rate assumptions.
• Cash Runway: How many months current cash will last at the present burn rate.
• Break-Even Point: The sales level at which total revenue exactly covers total costs.
• Budget: The approved plan of revenue and spending for a coming period.
• Cash Flow Forecast: A forward projection of cash receipts and payments.
• Margin Of Safety: How far sales can fall before the business drops below break-even.