A single forecast pretends the future is knowable. Scenarios admit it isn't and plan accordingly. The discipline produces better decisions because it forces you to see the range of outcomes rather than the optimistic case alone.
Definition
Scenario Planning - the practice of building 2-3 versions of a financial forecast, each under a different set of assumptions, to understand the range of likely outcomes and pre-plan responses for each.
Common uses
- Strategic decisions - testing how decisions hold up across scenarios
- Cash management - ensuring reserves and runway work in the downside
- Investor and lender conversations - showing you've thought through risk
Watch out
A "downside" scenario that doesn't actually feel uncomfortable is just base case dressed up as conservative. Make the downside genuinely scary.