Scenario Analysis Models

"Should we hire or should we cut?" is a question I'm hearing often from small business owners right now, which is fair given the mixed economic signals. Some clients are seeing their best quarters ever. Others are watching pipelines thin out. Everyone seems to be asking, "How do we plan for what we can't predict?" This is where scenario planning becomes your survival tool; not just hoping for the best, but modeling the reality of different futures. Here's what we walk our clients through: 🌳 The Growth Scenario: For example, if revenue is expected to be up, we’re looking at potential team expansion and higher overhead. Looking at what that does for cash flow given the changes to expected expense changes. 🌱 The Steady Scenario: Where flat growth is expected and we plan to maintain current team, we’ll want to optimize margins and prepare for inevitable per team member increases. There will likely be some percentage increase YOY but we expect the core costs to stay the same. 🍃 The Contraction Scenario: On the other hand, if revenue is expected to go down, we want to look at strategic cuts that allow the team to run efficiently while preserving cash. For our clients, this is usually a mix of team, professional services, and travel. We also want to ensure that the resources kept are used efficiently. Each scenario gets its own financial mode where we map out cash flow, runway, and break-even points for 3, 6, and 12 months ahead. The command center for this? Fathom. We've been using Fathom since the beginning of Little Fish Accounting and it lets us build the scenarios in real-time with clients, showing exactly how each decision ripples through their financials. No more spreadsheet gymnastics or gut-feeling guesses. Ultimately, the founders who survive uncertainty aren't the ones with crystal balls—they're the ones with clear models and decisive action plans. And we're glad to be the builders 🧱

𝗧𝗵𝗲 𝗡𝗚𝗙𝗦 𝗷𝘂𝘀𝘁 𝗿𝗲𝗹𝗲𝗮𝘀𝗲𝗱 𝘀𝗼𝗺𝗲𝘁𝗵𝗶𝗻𝗴 𝗯𝗶𝗴— for the first time, we now have 𝘴𝘩𝘰𝘳𝘵-𝘵𝘦𝘳𝘮 𝘤𝘭𝘪𝘮𝘢𝘵𝘦 𝘴𝘤𝘦𝘯𝘢𝘳𝘪𝘰𝘴 tailored for 𝘀𝘁𝗿𝗲𝘀𝘀 𝘁𝗲𝘀𝘁𝗶𝗻𝗴, 𝗳𝗶𝗻𝗮𝗻𝗰𝗶𝗮𝗹 𝘀𝘁𝗮𝗯𝗶𝗹𝗶𝘁𝘆, 𝗮𝗻𝗱 𝗻𝗲𝗮𝗿-𝘁𝗲𝗿𝗺 𝗺𝗮𝗰𝗿𝗼 𝗿𝗶𝘀𝗸. 🔸 This isn't about 2050. It's the next five years, i.e. 𝟮𝟬𝟮𝟱–𝟮𝟬𝟯𝟬. 🔸 This isn't abstract. It's 𝗚𝗗𝗣 𝘀𝗵𝗼𝗰𝗸𝘀, 𝗰𝗿𝗲𝗱𝗶𝘁 𝗿𝗶𝘀𝗸, 𝗶𝗻𝗳𝗹𝗮𝘁𝗶𝗼𝗻, 𝗮𝗻𝗱 𝘂𝗻𝗲𝗺𝗽𝗹𝗼𝘆𝗺𝗲𝗻𝘁. 𝗧𝗵𝗲𝘀𝗲 𝗮𝗿𝗲 𝘁𝗵𝗲 𝘀𝗵𝗼𝗿𝘁-𝘁𝗲𝗿𝗺 𝘀𝗰𝗲𝗻𝗮𝗿𝗶𝗼𝘀: 1.  A smooth transition ("Highway to Paris") 2.  A delayed, abrupt policy shift ("Sudden Wake-Up Call") 3.  Physical risk disasters without transition ("Disasters & Policy Stagnation") 4.  A fragmented world with climate chaos and policy misalignment ("Diverging Realities") These scenarios are a wake-up call for taking short-term climate risks seriously. ➤ Delaying climate action could increase global 𝗚𝗗𝗣 𝗹𝗼𝘀𝘀𝗲𝘀 𝗯𝘆 𝗼𝘃𝗲𝗿 𝟯𝘅, and unemployment spikes by 1.3 percentage points (Sudden Wake-Up Call vs Highway to Paris). ➤ Climate disasters aren’t just regional anymore. Floods, fires and droughts in Asia or Africa can cut European 𝗚𝗗𝗣 𝗯𝘆 𝟭.𝟳%, driven by supply chain exposure. ➤ Credit risk spreads explode in carbon-intensive sectors. In some cases, default probabilities jump by 20–30 percentage points, stressing banks and insurers alike. ➤ Green sectors could lose out if the transition is abrupt, fragmented, or disrupted by physical shocks. 𝗛𝗲𝗿𝗲 𝗶𝘀 𝘄𝗵𝘆 𝘁𝗵𝗲𝘀𝗲 𝘀𝗰𝗲𝗻𝗮𝗿𝗶𝗼𝘀 𝗮𝗿𝗲 𝗮 𝗴𝗮𝗺𝗲-𝗰𝗵𝗮𝗻𝗴𝗲𝗿 ➤ For the first time, compound hazards—droughts, floods, wildfires—are modelled together, showing how climate risk can become systemic through trade, finance, and supply chains. ➤ Monetary policy is now integrated, so climate shocks affect interest rate paths, inflation dynamics, and macroeconomic volatility. ➤ Financial contagion is now factored in. Using advanced modelling, the framework maps how climate-related losses feed into default risk, cost of capital, and sectoral investment flows. ➤ Sector-by-sector and region-by-region outcomes now include asset-level exposure, probability of default, and sovereign bond repricing, offering tools fit for risk management. 𝗠𝘆 𝘁𝗮𝗸𝗲 This release is a step-change in how we understand and model climate risk. These scenarios are critical because they model economic and financial impacts on business over the next five years. A timeline relevant for senior management, boards and shareholders. Because these scenarios capture dynamic feedback loops, sector-specific capital costs, and second-round effects that ripple through the financial system, the risk science is taken to a whole new level. These real-world complexities have been missing from science to date, which is why these scenarios are so critical. #NGFS #NetZero #ClimateRisk _____________ For updates, follow me on LinkedIn: Scott Kelly

Boosting Scenario Analysis & Sensitivity Testing: Key Strategies and Essential Questions for Your Advisor ↓ Most businesses underestimate how powerful “what-if” models can be when it comes to impressing buyers and safeguarding value. By exploring how shifts in key assumptions affect your bottom line, you show a proactive mindset that buyers love. Here’s where to focus: 💡 Defining Your Key Variables Why It Matters: Not all factors are created equal. Zero in on the variables—like cost of goods, conversion rates, or regulatory changes—that can cause serious fluctuations in revenue or profit. Ask Your Advisor: “Which data points are mission-critical in our industry, and how can we model changes in those factors accurately?” 💡 Stress-Testing Financials Why It Matters: Buyers often ask, “What if sales drop 20%? What if that new competitor enters sooner than expected?” A robust stress test reveals how well your business can absorb these hits. Ask Your Advisor: “How do we build downside scenarios that validate our resilience or highlight where we need contingencies?” 💡 Assessing Upside Potential Why It Matters: It’s not just about risk. Scenario analysis can show how positive developments—like a major partnership or a market shift—could catapult earnings upward. Ask Your Advisor: “What best-case scenarios resonate most with buyers, and how do we illustrate our readiness to scale quickly?” 💡 Aligning with Buyer Perspectives Why It Matters: Financial or strategic acquirers might view risk differently. Tailoring your analysis to address their main concerns proves you’ve done your homework. Ask Your Advisor: “How can we present these scenarios in a way that speaks directly to the type of buyer we’re courting?” 💡 Integrating Action Plans Why It Matters: Scenario analysis is useless without a plan to pivot if metrics go sideways. Show potential acquirers you have real solutions mapped out. Ask Your Advisor: “What concrete steps do we take if a negative scenario unfolds, and how do we communicate that readiness to buyers?” 🔎 Why You Should Care Buyers need to see you’re prepared for real-world volatility. A well-thought-out scenario analysis means fewer question marks and smoother negotiations. It shows you’re not just reacting to market twists—you’re anticipating them. 💪🏼 Your Game Plan Identify critical variables, create compelling scenarios, and outline exactly how you’ll respond. Offer both downside and upside views. By combining rigorous data with actionable plans, you transform due diligence into a conversation about shared possibilities—rather than exposing vulnerabilities for buyers to exploit. Join our (Intro to Exiting) Success To Selling Your SaaS Business webinar on April 17, 2025. 📩 Registration link in the comments! #MergersAndAcquisitions #ScenarioAnalysis #BusinessValuation #StrategicPlanning #DealStrategy

💡 A Practical Guide to Climate Scenarios! Really pleased to have written the forward to this valuable report on the types and applications of climate scenarios by MSCI Inc. and my former United Nations Environment Programme Finance Initiative (UNEP FI) FI colleagues Looking for a handy summary of the types of scenarios from qualitative to quantitative? Here it is: 1. 𝗙𝘂𝗹𝗹𝘆 𝗡𝗮𝗿𝗿𝗮𝘁𝗶𝘃𝗲 𝗦𝗰𝗲𝗻𝗮𝗿𝗶𝗼𝘀 These scenarios are qualitative descriptions of potential climate futures. ✅ Strengths: - Easily customizable - Useful for high-level strategic discussions - Can capture complex risks that are difficult to quantify ⚠️ Limitations: - Subjective and vulnerable to bias - Lack of numerical outputs makes them hard to integrate into risk models 2. 𝗤𝘂𝗮𝗻𝘁𝗶𝗳𝗶𝗲𝗱 𝗡𝗮𝗿𝗿𝗮𝘁𝗶𝘃𝗲 𝗦𝗰𝗲𝗻𝗮𝗿𝗶𝗼𝘀 This type builds on fully narrative scenarios by adding expert-driven quantitative estimates (macroeconomic forecasts, asset class returns, regional physical risks). ✅ Strengths: - Balances qualitative storytelling with numerical data - Allows for scenario comparisons without requiring sophisticated models - Easier to communicate results with clear quantitative insights ⚠️ Limitations: - Can give a false sense of precision if assumptions are weak - Still dependent on subjective expert input, leading to potential biases 3. 𝗠𝗼𝗱𝗲𝗹-𝗗𝗿𝗶𝘃𝗲𝗻 𝗦𝗰𝗲𝗻𝗮𝗿𝗶𝗼𝘀 These scenarios rely on integrated quantitative models to project how climate change and transition risks might evolve under different policy and economic conditions, using macroeconomic models, IAMs, and energy system models. ✅ Strengths: Highly structured and data-driven, reducing subjectivity. Can produce detailed, sector-specific outputs useful for investment decisions. Widely used by regulators and financial institutions for stress testing. ⚠️ Limitations: - Expensive and time-consuming to develop and maintain - “Black box” nature of complex models makes interpretation difficult - Results are only as good as underlying assumptions and data inputs 4. 𝗣𝗿𝗼𝗯𝗮𝗯𝗶𝗹𝗶𝘀𝘁𝗶𝗰 𝗦𝗰𝗲𝗻𝗮𝗿𝗶𝗼𝘀 Probabilistic models go beyond single-scenario forecasting by assigning probabilities, variance, and uncertainty estimates to different climate outcomes. ✅ Strengths: - Models uncertainty, improving risk management - Enables sophisticated stress testing for asset prices, portfolios, and corporate exposure - Valuable for insurance, catastrophe modeling, and financial risk assessments ⚠️ Limitations: - Highly complex and computationally demanding - Requires strong assumptions about uncertainty - Limited research on how climate change affects probability distributions #ClimateFinance #ClimateScenarios #SustainableInvesting #RiskManagement #ScenarioAnalysis #Risk #Finance

Finance leaders often confuse What-If analysis with Scenario Planning. What-if analysis is about the mathematical relationship between inputs and outputs. It’s useful to understand what COULD happen but not insufficient to prepare for what is LIKELY to occur. That’s where Scenario Planning comes in. It goes beyond What-if analysis by evaluating the most likely scenario and determine WHY and HOW they may happen. What-If Analysis Example: "If we increase our price by 5%, revenues are likely to drop by 2%." Scenario Planning Example: "Our main competitor may introduce a product soon that is slightly better than ours. The impact on the business would be a drop of 30% of our revenues in the first six months if we do nothing. If we lower our price by 5%, we are likely to only see a drop of 20% in revenue. And if we spend $500k in R&D, we should be able to compete in one year from now." Do you agree with the differentiation between What-If Analysis and Scenario Planning? Comment below. To your swift success in FP&A, Christian Wattig

Many FP&A teams fall into the trap of stopping at the “what-if” analysis. But that’s the bare minimum. Stellar FP&A teams? They’re proactive about scenario planning. And while both are important, they have important differences: → What-if analysis is goal-seeking that optimizes for a single variable. While useful, it's a very simplified version of the reality. → Scenario planning takes a broader view. It’s about identifying the key variables that truly impact your business and building actionable scenarios around them. It's a more nuanced and multi-faceted analysis of a complex and dynamic environment. The best FP&A teams make scenario planning a year-round practice, not just a budgeting-season exercise. Here’s how they do it: 1. Focus on key business levers Perform a sensitivity analysis on the 3–7 variables that drive your business (if you're not sure which variables are most important, go back to each stakeholder to identify the ones that matter - what moves your business?). 2. Keep a close pulse on teams Proactive scenario planning is only possible when you can track key levers against the roadmap and pipeline in real time. Is marketing struggling to build a pipeline? Why? In which part of the funnel? Is there a delay in the product roadmap that leads to lost deals? Why? Strong relationships with stakeholders give you the context you need to plan effectively. 3. Leverage technology to save time Year-round scenario planning can feel overwhelming, but modern tools make it manageable. Automate reporting and use AI integration to speed up the process and free your team to go beyond the data. When presented with compelling scenarios, the leadership team makes better, faster decisions, with more confidence. What strategies does your team use when planning scenarios?

A pre-requisite for any company planning for growth.. (whether through organic means or M&A). Always have your forward-looking "strategic finance" model ready and primed. For our buy-side clients considering M&A over the next 2-3 years, this is one of the first few milestones we set for our engagement. But it also applies if M&A is not a strategic priority. 𝗪𝗵𝗮𝘁 𝘁𝗵𝗶𝘀 𝘀𝗵𝗼𝘂𝗹𝗱 𝗶𝗻𝗰𝗹𝘂𝗱𝗲: 🎯 Drivers of how your business will grow in the coming months and years (revenue and cost) 🎯 Projected P&L 🎯Projected balance sheet and cash flows (including interest and debt payments) 🎯 The ability to run "What if" scenarios, such as the impact of acquiring a business, launching a new business line 🎯 The ability to forecast the performance on both a macro and company level (ability to raise prices, or loss of a key customer) 𝗪𝗵𝗮𝘁 𝘁𝗵𝗶𝘀 𝗺𝗼𝗱𝗲𝗹 𝗶𝘀 𝗻𝗼𝘁: ⛔ NOT historical reporting: It’s not about detailing last month or last quarter’s performance. ⛔ NOT an operational blueprint: It’s not about exact operational changes or capturing every business decision. ⛔NOT a static document: It’s not a one-time creation but a dynamic tool that needs regular updates. This model is forward-looking, providing high-level insights to help run scenarios and make strategic decisions without needing precise operational details. It may even need to encompass multiple business units. Without something like this, how do you... ❓Ensure growth goals: You won't know if you're on track to meet your growth targets. ❓Make informed strategic decisions: Your lack of high-level insights prevents or slows down decision-making ❓Determine capital needs: You cannot estimate what additional capital you may need, what it will cost you, and what your capital constraints are ❓Run effective scenarios: You lose the ability to simulate the impact of business changes, either within or outside your control. So my tip of the day... Build this model, find the right owner and oversight model, and keep it updated. What else would you add here? Feel free to reach out with questions. #mergersandacquisitions