What is a What-if Analysis?
What-if analysis is a forecasting technique used to explore the potential outcomes of different decisions before they are made.
What-if analysis helps in assessing the impact of changing variables in a decision-making process. By evaluating various scenarios, individuals and businesses can make informed choices by anticipating possible challenges and identifying opportunities.
How do you conduct a What-if Analysis?
A What-if analysis should take a structured approach:
1. Clearly define the objective of the what-if analysis. For example: “how would our revenue and cash flow be affected if our sales grew by 5%, grew by 10% or decreased by 10%?”
2. List all key factors and variables that could affect the outcome.
3. Now use our free What-if Analysis Excel template to simulate different scenarios by altering the variables.
4. Finally, you can analyze the outcomes of different scenarios and assess their impact on the objective.
What Are The Different Types of What-if Analysis?
We can break these down to sensitivity and scenario analysis.
Sensitivity Analysis
Sensitivity Analysis focuses on understanding how changes in one or more input variables impact the outcome. This type of analysis is particularly useful in assessing the robustness of a decision under varying conditions.
Scenario Analysis
Scenario Analysis involves examining the effects of different predefined scenarios or combinations of variables. This approach can help you understand the broader implications of strategic decisions by analyzing several possible future scenarios.
Benefits of Carrying Out a What-if Analysis
Scenario Analysis
What-If Analysis offers numerous benefits to finance leaders and teams:
- It provides a mechanism for proactively identifying potential risks and opportunities, allowing businesses and individuals to strategize effectively.
- What-if analysis enhances decision-making by grounding it in data-driven predictions, thereby minimizing reliance on guesswork.
- What-if analysis can foster a culture of resilience by preparing decision-makers for a variety of potential scenarios, ensuring agility in response to unforeseen circumstances.
In summary, what-if analysis is a great tool for finance teams to use during the forecasting and decision-making process because it allows everyone to understand how different scenarios will impact things such as revenue, expenses and cash flow. This, in turn, can help organizations reduce risk and gain confidence in business decisions.
