To prepare for a recession, build a three-case model • ExamPaper

Many founders are reactive when things don’t go as planned. They may give knee-jerk responses like, “If I lose 10% of sales, I’ll just fire five people.”

The problem with such approaches is that they don’t always solve the underlying business problem.

Take Peloton as an example: At the start of the pandemic, the home fitness company was doing well, nearly doubling its annual revenue. The spike — largely caused by people turning to home fitness when gyms suddenly became unsustainable — would also be its downfall, leading to a series of miscalculations that send the stock diving.

What really happened with Peloton was that the unexpected demand led to financial and planning errors. Peloton had counted on consumers to change their behavior and prefer to exercise at home. They were wrong.

What could Peloton have done to prepare for both the sudden upturn and downturn? They didn’t have a crystal ball, but luckily we have something that comes close. It is called a “three-case model”.

Case scenarios are only effective if time, effort and thinking are invested in them.

What is a three-case model?

Case models enable companies to proactively mitigate risk and predict financial trajectories. The business environment, consumer preferences and competition can all set off a chain of events that no one can predict with certainty. Fortunately, founders can still prepare for it.

Case models are part of scenario analysis, which help you visualize the most likely outcomes for a company. Case models help founders understand how shifts in the business climate can affect sales, cash flow, profit, and more. They can also visualize the consequences of strategic decisions, such as what would happen if they made an acquisition, built a factory, raised prices or entered a new market.

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