Quick Answer
Model three to five scenarios for most planning purposes. The standard set is base case (most likely), upside (optimistic), and downside (pessimistic). Add a stress test for board and investor presentations, and optionally a "budget case" if it differs from your forecast. More than five scenarios creates confusion without adding proportional insight — focus on scenarios that are meaningfully different and would lead to different management decisions.
The purpose of scenario modelling is to prepare for different futures and help leadership make better decisions. The number of scenarios should serve this purpose without creating analysis paralysis.
Base case: Your most likely outcome. Built from realistic assumptions grounded in current data. This is your primary forecast for operational planning.
Upside: What happens if key drivers outperform. Revenue grows faster, churn is lower, deals close sooner. This scenario helps identify capacity constraints and investment opportunities.
Downside: What happens if key drivers underperform. Revenue misses, churn increases, macro conditions worsen. This scenario informs contingency planning and risk management.
Stress test: An extreme negative scenario for risk assessment. "What if revenue drops 40%?" or "What if our largest customer churns?" This tests survival, not performance.
Budget case: If your approved budget differs from your current base forecast, maintain both. The budget is your committed baseline; the forecast is your current expectation.
Strategic option: If you are evaluating a major decision (acquisition, new market, pricing change), model it as a separate scenario against the status quo.
More than five scenarios creates problems: - Stakeholders cannot hold more than 3-5 versions in their heads - Each additional scenario requires maintenance and update effort - The incremental insight from scenario 6 vs scenario 5 is usually minimal - Too many options can delay decisions rather than enable them
Each scenario should be tied to specific trigger points and management actions: - If Q1 bookings are below £X: activate the downside plan (hiring freeze, marketing cut) - If Q1 bookings exceed £Y: activate the upside plan (accelerate hiring, increase marketing)
This converts scenario analysis from an academic exercise into a decision-making tool.
Review and refresh scenarios quarterly. As the year progresses, some scenarios become implausible — retire them. New information may warrant new scenarios. The base case should be updated monthly or quarterly to reflect actual results.
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FAQ
The leadership team and board should see all scenarios. Department heads typically work from the base case for operational planning. Share the downside scenario's implications (e.g., hiring freeze) with relevant managers, but with context to prevent unnecessary alarm.
Different enough to lead to different management decisions. If your upside and base case produce the same actions, they are not different enough. As a rule of thumb, key metrics should vary by at least 15-20% between scenarios.
Focus on the variables identified through sensitivity analysis as having the highest impact. Typically: revenue growth rate, customer churn, sales conversion, key cost items, and timing of major initiatives.
It can be helpful for framing ("60% probability of base case, 25% downside, 15% upside") but avoid false precision. Probabilities should reflect your genuine assessment, not mathematical exactness.
Grove FP supports unlimited named scenarios, each as a complete version of your model. Compare any two side by side with automatic variance calculations. Create new scenarios from any baseline with one click.
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