Scenario forecasting for B2B

Scenario forecasting means that instead of producing one revenue expectation, you work out a handful of possible futures, each based on explicit assumptions: a base scenario, one in which your largest customer leaves, one in which large deals slip by six months, and so on. In B2B it works best when each scenario revolves around a concrete event you can recognise, with a signal that gives early warning and an action agreed in advance. The aim is not to guess the right scenario, but to be prepared for each of them.

Why scenarios and not just a range

A statistical range tells you how far the outcome normally deviates from your expectation. That is useful, and how to set one is covered in forecast confidence explained. But a range describes ordinary fluctuations. The big blows in B2B are rarely ordinary fluctuations.

A customer that is 12 percent of your revenue putting its contract out to tender. A framework agreement expiring without renewal. A large customer refusing an indexation. A project stalled for a quarter because a permit has not come through. Events like these fall outside any statistical margin, but they can be named. A scenario gives them an amount and a plan.

The drivers of your revenue

Before you build scenarios, you need to know what your revenue depends on. In most B2B businesses there are five drivers:

1. Recurring base and retention. How much of the revenue from existing customers stays, and how much disappears. This is usually the largest item, and how to forecast it is covered in forecasting from historical revenue.
2. New customers and new deals. Size and timing of the pipeline.
3. Price. Indexation, price increases, discounts at renewal.
4. Timing of delivery. Especially for projects: when the work is carried out and so becomes revenue.
5. Payment. For the cash forecast: when the money comes in.

A good scenario changes one or two drivers in a way that matches a real event. A bad scenario takes ten percent off everything.

Which scenarios matter in B2B?

Do not start with optimistic and pessimistic. Start with the question: which three events would hit our year hardest? For most B2B businesses the answer is in this list.

• The largest customer leaves or halves. The greater the concentration, the more important this scenario.
• Large deals slip. Two or three deals that carry the forecast start six months later.
• Contracts expire without renewal. Especially if there is a cluster of end dates in the same quarter. How that quietly costs revenue is explained in revenue leakage from expired contracts.
• Indexation or a price increase fails. Customers refuse, or the increase is forgotten internally. See revenue leakage from missed price indexation.
• Capacity runs out. For service providers and project businesses: you sell the work but cannot deliver it because people or materials are lacking.
• The upside. A large deal arriving earlier, a wave of expansion with existing customers. You want to model that too, because growth without capacity is also a problem.

Worked example

Worked example: suppose you are a B2B service provider with around EUR 8 million in revenue. Your base scenario for next year looks like this:

• Existing customers, after historical retention: EUR 5,600,000
• Indexation of 3 percent on EUR 4,000,000 of contracts: EUR 120,000
• New customers from pipeline and historical average: EUR 2,000,000
• Total base scenario: EUR 7,720,000

Then you model the scenarios:

Two things stand out. Scenario A weighs far more heavily than C, so that is where your attention belongs. And the combination A + B is the figure your cost base has to withstand. If your staffing plan only comes under pressure at EUR 7,500,000, you already know you are two scenarios away from a problem.

For each scenario: signal and action

A scenario without a plan is a worry. With a plan it is preparation. Record three things for each scenario.

1. The early signal. What do you see before the scenario becomes reality? For scenario A: falling purchases by that customer, more escalations in support, a new buyer who does not respond, a tender. For scenario B: close dates that keep moving, no response to the draft agreement.

2. The threshold. When do you treat the scenario as active? For example: when the largest customer's purchases are more than 20 percent below average for two months in a row.

3. The action. What do you do then, and who decides? Freezing a vacancy, postponing an investment, putting extra commercial effort into the segment that can fill the gap, or talking to the bank about the credit facility.

The advantage of recording this in advance is that you do not have to decide under pressure. The discussion has already taken place while there was still time.

Common mistakes

• The optimistic scenario becomes the budget. The budget belongs on the base scenario, or slightly below it. The upside is an opportunity, not a plan.
• The pessimistic scenario is too mild. "Ten percent less" is not a scenario, it is a fluctuation. A real pessimistic scenario describes what happens when things go wrong with the customer or deal that matters most.
• Every scenario turns the same dial. If each scenario only adjusts the growth rate, you learn nothing about where you are vulnerable.
• No cash scenario. Revenue that slips also slips in your cash flow, often with extra delay from payment terms. Model at least the heaviest scenario through to cash.
• Made once, never updated. Scenarios belong with the forecast every quarter, not only with annual planning.

For project businesses

In project businesses, scenarios often revolve around timing and capacity more than customers. A project that slips a quarter does not just move revenue, it also leaves people without work. The scenarios then become: what if project X starts three months later, and what if we win two projects at the same time? More on this in revenue forecasting for project businesses.

Step by step

1. Build your base forecast in drivers, not as a single number: base, price, new, timing.
2. List your ten largest customers and five largest deals, with their share of revenue.
3. Choose three to five scenarios based on real events. At least one for your largest customer and one for your largest deals.
4. Model each scenario through to revenue, and the heaviest one through to cash as well.
5. Decide which scenario your cost base must be able to withstand. Usually a combination of two.
6. Record the signal, threshold and action for each scenario.
7. Review the signals monthly and update the scenarios every quarter.

Scenario forecasting is a layer on top of your regular forecast. How the whole fits together is covered in the complete guide to revenue forecasting.

Frequently asked questions

How many scenarios are enough?

Three to five. More becomes hard to follow and leads to scenarios nobody takes seriously. Choose the events with the greatest impact.

Should you attach probabilities to scenarios?

You can, but you do not have to. The value of a scenario lies in being prepared, not in the precise probability. A rough estimate such as small, real or likely is often enough.

What is the difference from a budget?

A budget is a target you manage towards. A scenario is a possible outcome you are prepared for. The budget belongs on the base scenario; the scenarios show what happens if things turn out differently.

Can scenario forecasting be done in Excel?

Yes. One tab per scenario with the same drivers, and a summary sheet that compares them, is enough for most businesses. It becomes laborious if you want to update scenarios weekly based on live data.