Every financial model is wrong. The question is whether it's usefully wrong — whether it helps you understand the range of outcomes your business might face and make better decisions as a result.
Single-point forecasts are the least useful kind of model. They give you one number — projected revenue, projected runway, projected profitability — with no indication of how sensitive that number is to your assumptions. Scenario planning fixes this by showing you what happens when your assumptions are off.
The three-scenario framework
The standard approach is to build three versions of your model: optimistic, base, and pessimistic. The base case is your best estimate of what will actually happen. The optimistic case models what happens if things go better than expected. The pessimistic case models what happens if things go worse.
The goal isn't to predict which scenario will occur. It's to understand the range of outcomes and identify which assumptions have the most impact on your business. If your pessimistic scenario still shows 12 months of runway, you have a lot of flexibility. If it shows three months, you need to act now.
How to set your scenario assumptions
The most common mistake in scenario planning is making the optimistic case too optimistic and the pessimistic case not pessimistic enough. Founders are naturally optimistic, which means base cases often look like other companies' optimistic cases.
A useful rule of thumb: your pessimistic case should be something you genuinely believe could happen, not a catastrophic scenario you've designed to make the base case look good by comparison. If you're a SaaS company, a pessimistic scenario might assume 20% higher churn, 30% lower new customer acquisition, and a 15% increase in CAC. Those are plausible outcomes in a difficult market.
Your optimistic case should similarly be achievable, not aspirational. It might assume you close a large enterprise deal you're currently pursuing, or that a new marketing channel performs at the high end of your projections.
What to look for in the comparison
When you compare your three scenarios side by side, focus on a few key questions. First, what's the runway gap between your base and pessimistic cases? If the pessimistic scenario cuts your runway by six months, you need to know that before you make hiring decisions based on the base case.
Second, which assumptions drive the biggest differences between scenarios? The inputs that create the largest spread between optimistic and pessimistic outcomes are your highest-risk assumptions. Those are the ones to monitor most closely and update most frequently.
Third, what's the earliest month where the pessimistic scenario creates a problem? That's your decision deadline — the point by which you need to either see the pessimistic scenario not materializing or take corrective action.
Scenarios as a decision tool
The real value of scenario planning isn't the models themselves — it's the conversations they enable. When you present three scenarios to your board or your investors, you're showing that you understand the uncertainty in your business and have thought through the implications. That's a much stronger position than presenting a single forecast and hoping it's right.
Horizon's scenario planning tool lets you build and compare multiple scenarios using multipliers applied to your base case assumptions. Change one number and see the impact across all your financial statements simultaneously.
More in Strategy
Running scenarios is step one. Step two is knowing what to do with the output. Here's how to interpret the gap between your optimistic and pessimistic cases.