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