Base-case planning is a decision-making tool used in business planning, market forecasting, and other types of situations where an important strategic decision must be made. It involves creating a baseline scenario and building variant scenarios to explore possible outcomes if key variables are changed. This allows business executives to prepare for both best-case and worst-case scenarios and create backup plans. It is commonly used when new business owners create a business plan to seek startup funding.
A baseline scenario refers to a set of basic assumptions that should result in the most realistic outcome of a series of events. It allows an analyst to build variant scenarios by changing key variables to determine the deviation between the variant result and the base scenario result. This type of scenario development process is a decision-making tool used in business planning, market forecasting, and other types of situations where an important strategic decision must be made.
In business, it’s virtually impossible to know for sure what will happen in the future. Executives must make decisions based on the information they have at hand and their professional judgment about what is likely to happen in the future. The process of deciding on the course of action that will have a future result involves input from many people that must be weighed and synthesized to determine the course that will be most successful.
The input that goes into a decision-making process involves estimates and assumptions. If a decision about production levels today depends on the future price of oil, for example, the only way to include that information in the analysis is to look at the historical price of oil and make an estimate about future prices based on certain market assumptions. . There is no reliable way to know for sure how much oil will cost in 24 months; therefore, any change in production that a company now makes based on this variable has a certain risk.
Executives use base-case planning to work through the possible outcomes of changing key variables. The base case is what the analyst considers the most likely outcome, based on history and knowledge; this includes estimates and assumptions, but these inputs are added to the scenario at the most likely levels. Once the baseline scenario is established, analysts build variant scenarios that explore possible outcomes if key variables are changed.
This type of analysis allows business executives to prepare for both best-case and worst-case scenarios. No company wants to be caught if the market suddenly changes or if critical input becomes unavailable from a common supplier. Scenario planning keeps the business flexible. This type of decision-making process allows executives to create backup plans so the company knows what to do if things change.
One of the most common uses of baseline scenario planning is when new business owners create a business plan to seek startup funding. Investors typically expect the owner to present financial statements that reflect the most likely financial scenario for the company in the early years and present worst-case and best-case scenarios that reflect changes in the owner’s basic assumptions. These investors often want to know that the homeowner has a plan in place if anything substantial changes.
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