Scenario Planning and Sensitivity Analysis: Testing Your Plan

Using Scenario Planning and Sensitivity Analysis for Decision-Making

Building contingency plans and stress-testing your financial model. **Scenario planning fundamentals** Definition: - Create multiple versions of financial plan - Each version represents different assumption set - Prepare for range of outcomes - Make contingency plans for each Typical scenarios: Base case (most likely, ~50% probability): - Growth assumptions: Realistic based on current trajectory - Revenue: £1.5M annual (£100K → £150K MRR) - Expenses: Planned hiring (7 → 12 people) - Outcome: Breakeven month 12, £200K cash remaining Upside case (everything goes well, ~20% probability): - Growth assumptions: Strong PMF, viral growth - Revenue: £2.2M annual (£100K → £200K MRR) - Expenses: Same (don't increase burn chasing growth) - Outcome: Profitable month 9, £500K cash remaining Downside case (market slowdown, ~30% probability): - Growth assumptions: Churn increases, sales slow - Revenue: £1M annual (£100K → £85K MRR, declining) - Expenses: Still £1.2M (payroll committed) - Outcome: Bankrupt month 8 (need to cut costs or fundraise) **Building a base case model** Inputs (assumptions): Revenue drivers: - Current MRR: £100K - New customer acquisition: +5 per month - Average customer value: £2K per month - Churn rate: 5% monthly - Price increase: 3% mid-year Expense drivers: - Current payroll: £60K/month (7 people) - Planned hires: 2 eng (Apr), 1 sales (Jul), 1 ops (Oct) - Salary increase: 5% mid-year - Tools/infrastructure: £9K/month (growing 2% with scale) - Marketing: £10K/month (consistent) - Operations: £6K/month (consistent) Output example (monthly): Month 1 (Jan): - Beginning revenue: £100K - New customers: +5 × £2K = +£10K - Expansion: +£3K - Churn: -5% × £100K = -£5K - Ending revenue: £108K - Payroll: £60K - Tools: £9K - Marketing: £10K - Operations: £6K - Total expenses: £85K - Operating income: £108K - £85K = +£23K - Cash position: £600K + £23K = £623K Month 2: - Repeat with new revenue base (£108K) - Beginning revenue: £108K - Similar pattern = £116.6K revenue - Expenses: £85K - Operating income: +£31.6K - Cash: £654.6K Year-end projection (12 months): - Month 1-12: Revenue grows from £100K to ~£145K - Average monthly revenue: ~£121K - Average monthly expenses: £92K (rising due to payroll increases) - Average monthly profit: ~£29K - Year end cash: £600K + (£29K × 12) = £948K Results: - Revenue: ~£1.45M (close to £1.5M plan) - Runway end of year: >12 months (comfortable) - Profitability: Still losing money (operating loss ~£30K), but improving **Building upside and downside scenarios** Upside scenario: Assumptions change: - New customers: +10 per month (double) - Churn: 3% (better retention) - Price increase: 5% (higher value perception) Results: - Revenue growth: Much faster (£100K → £200K by month 12) - Expenses: Same (don't increase spend to match revenue, run lean) - Operating income: Positive by month 8 - Year-end cash: £600K + (strong profits) = £500K+ remaining - Profitability: Achieved month 8 - Outcome: Self-funding possible, strong position for fundraising Downside scenario: Assumptions change: - New customers: +2 per month (slower sales) - Churn: 8% (product issues, customer unhappy) - Market shift: Slowdown (fewer people buying) - Revenue declining after month 6 Results: - Revenue decline: £100K → £85K by month 12 (contracting) - Expenses: Still £85K/month (fixed payroll) - Operating income: Negative (-£5K/month by month 12) - Year-end cash: £600K - (£30K average monthly loss × 12) = £240K - Runway: Only 3-4 months at current burn - Outcome: Crisis (need to cut costs immediately or fundraise) **Sensitivity analysis** Definition: - Test "what if" scenarios - Change one assumption at a time - Measure impact on outcome Example 1: Revenue growth sensitivity Base case assumption: 50% annual growth (£100K → £150K) Test variations: - -10% growth (40% growth): £100K → £140K (-£10K impact) - -5% growth (45% growth): £100K → £145K (-£5K impact) - Base case (50% growth): £100K → £150K (baseline) - +5% growth (55% growth): £100K → £155K (+£5K impact) - +10% growth (60% growth): £100K → £160K (+£10K impact) Sensitivity chart: Growth assumption | Year-end revenue | Runway impact | |---|---|---| | 40% | £140K | -1 month | | 45% | £145K | -0.5 month | | 50% (base) | £150K | baseline | | 55% | £155K | +0.5 month | | 60% | £160K | +1 month | Interpretation: - ±10% growth = ±1 month runway impact - If actual growth 40%, runway reduced 1 month (critical to monitor) - Growth is high-leverage assumption (big impact on outcome) Example 2: Payroll expense sensitivity Base case assumption: 12 people by year-end (£96K/month) Test variations: - 10 people: £80K/month (-£16K/month) - 11 people: £88K/month (-£8K/month) - 12 people (base): £96K/month (baseline) - 13 people: £104K/month (+£8K/month) - 14 people: £112K/month (+£16K/month) Sensitivity impact: Headcount | Monthly payroll | Annual impact | Runway change | |---|---|---|---| | 10 | £80K | -£192K | +2 months | | 11 | £88K | -£96K | +1 month | | 12 (base) | £96K | baseline | baseline | | 13 | £104K | +£96K | -1 month | | 14 | £112K | +£192K | -2 months | Interpretation: - Each person = ~£16K annual impact (high leverage) - Hiring freeze could extend runway 2+ months - But impacts growth (fewer people = slower product) - Trade-off: Growth vs. runway Example 3: Churn rate sensitivity Base case assumption: 5% monthly churn Test variations: - 3% churn: Revenue impact +20% (better retention = higher MRR) - 5% (base): baseline - 8% churn: Revenue impact -15% (worse retention = declining) Impact on year-end revenue: Churn rate | Year-end MRR | Annual revenue | |---|---|---| | 3% | £165K | £1.65M | | 5% (base) | £145K | £1.45M | | 8% | £130K | £1.30M | Interpretation: - 2% change in churn = ±£200K annual revenue - Churn is high-leverage (focus here for impact) - Improving retention has big payoff (NRR >100%) **Building decision rules from scenarios** Rule 1: Hiring decisions Decision rule: - If upside case likely (revenue >£180K): Hire aggressively - If base case likely (revenue £140-160K): Hire cautiously - If downside case likely (revenue <£130K): Hiring freeze Application: - Month 3: Actual revenue £104K (on track for base case) - Decision: Hire engineering (planned) - Month 6: Actual revenue £128K (below base, downside trajectory) - Decision: Hiring freeze (preserve cash) Rule 2: Fundraising decisions Decision rule: - If base case: Fundraise on schedule (month 9) - If upside case: Can reduce raise amount (less dilution needed) - If downside case: Fundraise earlier (month 6, before cash crisis) Application: - Month 3: Downside signals emerging (churn high, growth slow) - Decision: Start fundraising conversations month 4 (earlier than planned) - Goal: Close by month 7 (before cash emergency) Rule 3: Product/market decisions Decision rule: - If churn increasing (heading to downside): Change product - If new customer CAC increasing: Market saturation (change GTM) - If NRR falling: Reduce revenue (not sustainable) Application: - Month 6: Churn increased from 5% to 7% (downside risk) - Decision: Pause new features, focus on retention - Timeline: Improve churn by month 9 or major decision needed **Contingency planning** For each scenario, identify: 1. Trigger (how will you know scenario happening?) 2. Timeline (when will you need to act?) 3. Action (what will you do?) 4. Owner (who is responsible?) Downside contingency plan: Trigger: - Churn increases to >6% for 2 consecutive months - Revenue growth falls below 2% MoM for 2 months - NRR falls below 95% Timeline: - Month 1-2 of trigger: Investigate root cause - Month 3: Implement response - Month 6: Measure improvement Actions: 1. Product: Reduce churn (improve onboarding, fix bugs) 2. Payroll: Hiring freeze immediately 3. Spending: Cut marketing 30% (reduce burn) 4. Fundraising: Start conversations (plan to close month 6-7) Owner: - Product team: Product improvements - CEO: Hiring freeze, fundraising - CFO: Spending cuts Expected outcome: - Reduce burn by 20-30% (extend runway) - Implement fundraising (raise bridge round if needed) - Improve product (recover churn) Upside contingency plan: Trigger: - Revenue growth >60% YoY - Churn <3% - Inbound pipeline exceeds capacity Timeline: - Month 1-2: Confirm trend - Month 3+: Scale spending Actions: 1. Sales: Increase acquisition (hire sales team) 2. Product: Accelerate roadmap (more features) 3. Infrastructure: Scale systems (support higher volume) 4. Finance: Plan Series B (capitalize on momentum) Owner: - Sales team: Hiring, campaigns - Product team: Roadmap acceleration - Ops: Infrastructure scaling - CEO: Investor conversations Expected outcome: - Accelerate growth (maintain momentum) - Raise larger round (higher valuation) - Capture market opportunity