Startup Budgeting: Using Scenario Planning & Analysis
Updated: Jul 13, 2022
When it comes to preparing a good financial forecast, Scenario Planning & Analysis can be one of the largest value adds to include. It gives you the power to understand each potential outcome of the uncertain future, so that you can make moves quickly and effectively.
Having a proper Scenario Planning & Analysis tool in place would allow you to prepare yourself for the worst case scenario while hoping for the best case scenario. This also helps you avoid any surprises, allowing you to be fully prepared for whichever direction your startup gets pushed to
Let's go over the areas of your budget that Scenario Planning & Analysis can be applied to.
The most important area to apply Scenario Planning & Analysis would be your Revenue Build.
What would your startup look like if you only hit 50% of your goal? What if you hit 120% of your goal? Each outcome will have a great impact on your overall numbers
When analyzing each of your revenue scenarios, ask yourself "how do these possible scenarios affect my cash out date? How does it affect the ultimate story that I'm going to be telling on at my next fundraise? "
Another great area to apply Scenario Planning & Analysis is your Headcount Plan.
We have already talked about how your hiring plan is probably going to account for the majority of your operating expenses. Tying a different scenario, such as an aggressive hiring plan vs a base hiring plan, is a great way for you to understand what exactly would your costs look like, based off of these changes?
When you have proper Scenario Planning & Analysis in place, it's a good idea to zoom out and review all of the areas of your business, and how they are affected under each scenario
My favorite method for understanding the impact of each scenario is to pick one key metric, and calculate that metric under each scenario.
Here's an example of how we can understand our projected cash out date based off of each scenario using excel's data table functionality
So here we can see revenue based off of our projected plan and also a zero-based plan, and our hiring based off of a base scenario and an aggressive scenario. With each of these levers, we can understand how our ultimate cash out date will be affected
Here's another useful view where you could see all of your scenarios in one snapshot, again taking your cash balance under a ceiling scenario versus a base scenario or versus a or a floor.
Startup's are all about pivoting, and there's no greater tool for pivoting than creating multiple scenarios in your startup's budget. When set up correctly, Scenario Planning & Snalysis can give you the insight into important business decisions that you will need to make in response to the environment you find yourself in.
Josh Aharonoff CEO and Outsourced CFO
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