Worst-Case Scenario

A worst-case scenario combines unfavourable assumptions, such as falling sales, lower prices, rising costs or the loss of a major customer, to show the lower range of likely outcomes.

For example, if a company's base case forecasts profit of 4 million, its worst case might assume a recession, a 20% fall in sales and higher interest costs, leading to a loss of 1 million.

The main purpose is risk management. Seeing the worst case helps a business decide whether it could survive a bad year, how much cash it should hold, whether its debt is too high and what actions it would take if conditions deteriorated.

A worst-case scenario is not the same as a stress test. The worst case is usually a plausible bad outcome, while a stress test may examine more extreme shocks. Both help decision-makers avoid being caught unprepared.

Note: A downside case is very similar to a worst-case scenario. Some analysts use "downside case" for a moderately pessimistic outcome and keep "worst case" for the most severe plausible one.