Creating different scenarios for your financial model is the process of examining and evaluating possible events or scenarios that would impact your assumptions and, in turn, change the result of your projections.
Scenario analysis is often used to get an idea of the most extreme directions that a financial model could take. It is useful for founders and investors to get an idea of what would happen if everything goes “bad” or if everything goes “right”.
Let's see how to create scenarios for your financial model.
A scenario could be used to indicate a specific evolution of the sector where your business operates, a different approach to your assumptions or a shift in the economy. For startup founders it is especially useful since it allows them to predict how their startup will do in different cases, in the end being more likely to find the right set of assumptions and the right projections. Usually three different scenarios are used:
Adding scenarios to a financial model is important for any business, even more for those with a lot of assumptions or for those starting out (startups) since the uncertainty is very high and there isn’t any historical data to reference.
To add scenarios to an existing model:
Making predictions is very hard and inherently risky, so having different scenario can help alleviate the uncertainty and reduce errors. There are some notable benefits:
As an alternative of creating a financial model with all the complexity of scenario planning, you can use Sturppy since all the hard work for you is already done.
Creating a scenario is a matter of just one click, we pre-populate the assumptions for the new scenario for you, starting from your base case scenario assumptions. Of course you can still go in and edit everything you want.
If you have any question please, feel free to contact us, we are always happy to talk to like-minded people. Also, if you are a startup founder or are interested in running a startup in the future you might like what we have built here at Sturppy, a financial modeling tool for startups that is fast and easy.
Good luck on your journey.