Using What-If Scenarios in Financial and Operational Modeling

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Financial and operational modeling can be used to visualize a variety of business scenarios, based on different business drivers.  This allows companies to gain deeper insights into the ways each decision will affect their businesses.  

Performing these “what-if” scenarios is imperative to better understanding the impact of each financial decision or investment. In turn, companies make smarter business decisions.

What Is What-If Analysis?

Rather than creating a budget or a forecast based on past results, forward-thinking companies will strategically analyze what “could” happen in the future and then roll the desired results into the corporate plan. 

Let’s take an example.  One company asks itself, “What would be the impact on our business if we add 10 new sales representatives next quarter?”  Asking that simple question translates to a different outcome for different managers. 

For instance, what is the impact of this hiring scenario on the controller’s expense budget or forecast?  For the head of Sales, how would this decision impact revenue and commissions for the year?  For the VP of Marketing, what additional programs would the department need to create to support these new sales representatives? 

To effectively answer that “what-if” question, these different users have different drivers they will need to model.  The controller will be thinking about payroll drivers—such as FICA, FUTA, and SUTA—while the VP of Marketing will be wondering how many additional marketing programs, and related costs, are needed to increase the pipeline.  Fundamentally, these managers have different drivers they will want to model to determine the impact on their budgets or forecasts.    

Why Is Modeling What-If Scenarios Important?

Every business decision entails a degree of risk, and managing risk appropriately can help a business remain competitive and increase growth.  By analyzing “what-if” scenarios, companies can significantly reduce the potential risk of business decisions by gaining a deeper understanding of how each decision will impact the overall company financials.  This allows businesses to grow more efficiently by making informed, data-supported decisions that are most likely to improve company finances and operations.

Can Spreadsheets Be Used for What-If Analysis?

While “what-if” scenarios can be modeled in spreadsheets, it’s likely that users will encounter many of the same spreadsheet challenges they face when doing a budget or a forecast. 

Spreadsheet-based modeling makes for an incredibly tedious and drawn-out process due to the complexity of calculations and the need to track and compare multiple scenarios.  It's also prone to manual error and will result in decreased accuracy of any analysis.

To learn more about how spreadsheets can cause havoc on the planning and performance management processes, check out this white paper.

What’s a Better Approach to Modeling?

Using cloud-based modeling capabilities that are built on an EPM platform, offer multi-dimensional ad-hoc modeling capabilities, and are linked to the financial planning process is a better approach.  

In the previous “what-if” scenario example, users coulFinancial modelingd take their slice of data from the financial plan and manipulate it as needed.  Departmental analysis with the desired drivers could be performed, adding new dimensions or new members and calculations, to determine the impact of that “what-if” scenario on the department.  Once the analysis is completed, the results can be linked back into the overall corporate plan.  The data is consolidated into a single platform, eliminating data inconsistencies and providing one source of the truth.

By performing “what-if” scenario analysis and systematically linking it back to the corporate plan, companies can make more informed decisions and reduce risk.  Companies can assess the potential outcomes of the decisions, investments, and other business activities that directly impact the financials.

To learn more about the benefits of cloud-based modeling, check out this recent white paper on managing performance and planning for the future.

Download the Free White Paper 

 

 

Posted by on July 6, 2016
Janette Kosior

Janette Kosior is Senior Director of Product Marketing with Host Analytics. Janette has more than 15 years of experience in the Enterprise Performance Management industry. Prior to joining Host Analytics, Janette was with Oracle where she led the Financial Close Product Management team. Prior to Oracle, Janette held various roles in product management and technical support with Hyperion Solutions. Janette has a BBA from the Isenberg School of Management at the University of Massachusetts.

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