Scenario analysis
In one sentenceComparing the plan's results under several complete situations, such as optimistic, base, and pessimistic cases, in each of which more than one assumption changes at the same time.
Simply put
In reality nothing changes on its own: when the market slows, sales fall and collections are delayed together. Scenario analysis draws a complete picture of each case.
The aim is not to predict the future but to prepare for it: if the pessimistic case means a loss the business cannot bear, plan now to reduce it.
Worked example
An electronics store sets three cases for its coming year, with sales and expenses changing together in each.
Optimistic case1,200,000 − 900,000 = 300,000 SAR profit
Base case1,000,000 − 850,000 = 150,000 SAR profit
Pessimistic case800,000 − 820,000 = 20,000 SAR loss
Worst expected resultLoss of 20,000 SAR
Don't confuse it with
Sensitivity analysisSensitivity isolates the effect of one variable; a scenario combines several changes in one case.