What If Analysis: Explained
Hey, there! As a CFO, I know how essential it is to predict the future success of our company. When I first heard of the "what if analysis" tool, I was curious, confused and, to be honest, a little skeptical about how it could help our company. However, after trying it out, I became a believer. If you’re also curious about "what if analysis," then keep reading.
Sometimes also called sensitivity analysis, what if analysis is a technique that allows you to explore the potential impact of changes in input values on the output of a model or calculation. In simpler terms, it helps you predict the effect of different scenarios on your business’s financials.
Let's say you're projecting your company's sales volume for the next year. You create a model in Excel, with different assumptions and data, and based on it, you’re best-guessing some numbers. With what-if analysis, you pick a value that you want to change (like the sales volume), and Excel calculates how that change affects your financials or outputs.
There are three primary types of what-if analyses:
Well, imagine that our company plans to launch a new product line in the upcoming year. We can use what-if analysis to predict how different factors could impact our bottom line, such as:
Using what-if analysis, we can run different scenarios and estimate the potential effect of, let's say, an increase in sales volume, or depreciation of our currency. It's not a forecasting tool, but it does offer informed assumptions that can serve a valuable purpose.
With what-if analysis, we aren't guessing how a potential change will impact our financials. Instead, it provides clear and structured data, helping us make decisions on financial modeling objectively.
What-if analysis exposes us to different scenarios and helps us identify risk factors that we may have overlooked and which could impede future success. It can avoid surprises and help us prepare for the worst.
When evaluating the plans or goals of our company, what-if analysis can help to identify issues that could appear and create unique counsel to help make important decisions faster and with more confidence.
What if analysis gives us an informed view of the potential outcomes of different actions. What-if analysis is an incredibly useful tool – don’t just consider it for modeling purposes but also for evaluating the potential outcomes of strategic plans.'
If we want to avoid surprises and feel more confident while making important decisions, our company must adopt and embrace what-if analysis. With it, we get the bigger picture of the potential impact of different assumptions.
So next time someone asks you what-if analysis is, you won't have to blush and shuffle your feet like I did!
Disclaimer: This piece isn't a paid advertisement, just my opinionated CFO perspective.