How can you create a scenario analysis for your rolling forecasts?

1 Define your scenarios

The first step is to define the scenarios that you want to analyze. Scenarios are hypothetical situations that reflect different levels of uncertainty, optimism, or pessimism about the future. You can use various sources of information, such as market trends, industry benchmarks, competitor analysis, or expert opinions, to create your scenarios. Typically, you should have at least three scenarios: a base case, a best case, and a worst case. The base case is the most likely outcome, based on your current assumptions and data. The best case is the most favorable outcome, based on optimistic assumptions and data. The worst case is the most unfavorable outcome, based on pessimistic assumptions and data.

3 Assign values to your drivers

The third step is to assign values to your key drivers for each scenario. Values are the specific numbers or ranges that represent the expected performance of your drivers under each scenario. You can use various methods to assign values, such as extrapolation, interpolation, regression, or simulation. You should ensure that your values are realistic, consistent, and aligned with your scenarios. For example, if your best case scenario assumes a high market demand, your revenue value should reflect that.

4 Calculate your forecast outcomes

The fourth step is to calculate your forecast outcomes for each scenario. Forecast outcomes are the results of applying your values to your drivers, and then to your financial statements. You can use formulas, functions, or models to calculate your forecast outcomes. You should ensure that your calculations are accurate, transparent, and traceable. For example, if your revenue value changes, your income statement and cash flow statement should reflect that.

5 Compare and analyze your outcomes

The fifth step is to compare and analyze your forecast outcomes across scenarios. Comparison and analysis are the processes of evaluating the differences and similarities between your outcomes, and identifying the implications and insights for your business. You can use various tools to compare and analyze your outcomes, such as charts, tables, dashboards, or indicators. You should look for patterns, trends, gaps, or anomalies in your outcomes, and explain the causes and effects of them. For example, if your worst case scenario shows a negative cash flow, you should identify the main drivers and risks behind it.

6 Communicate and update your scenarios

The final step is to communicate and update your scenarios. Communication and update are the actions of sharing your scenario analysis with your stakeholders, and revising your scenarios based on feedback and new information. You can use various formats to communicate your scenario analysis, such as reports, presentations, or summaries. You should highlight the key findings, assumptions, and recommendations from your analysis, and tailor your message to your audience. You should also update your scenarios regularly, based on changing conditions, data, or assumptions. For example, if a new competitor enters the market, you should adjust your revenue values and outcomes accordingly.

7 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?