What-if analysis is a technique used in financial planning and decision-making business software to assess the potential outcomes of different scenarios or changes in variables. It involves evaluating the impact of various "what-if" situations on financial flows projections, business performance measures, or outcomes.
In what-if module of FP&A software, you typically make hypothetical adjustments to one or more variables and observe the resulting changes in the overall financial picture. This helps you understand how different factors or events may affect your financial statement or business performance. The best option in this case is if your planning software allows to collect and analyses information from different sources in real time. It can be very useful for such sectors as agriculture that results of final production, stock loadings and goods amount for sale can be hardly defined.
Here are a few examples of what-if analysis in different contexts:
Financial Projections: When creating financial projections for a business or project, you can use what-if analysis to explore different scenarios. For instance, you can modify variables like sales growth rates, pricing strategies, or production costs to understand the potential impact on revenue, profitability, and cash flow. This analysis can help you identify risks, assess the feasibility of goals, or optimize your financial plans.
Investment Analysis: In investment decision-making, what-if analysis can be valuable. You can analyze the potential returns and risks associated with different investment options by adjusting variables such as interest rates, market conditions, or investment durations. By doing so, you can assess how changes in these variables might impact investment performance and make more informed investment decisions.
Risk Management: What-if analysis is also useful in risk management. By simulating various scenarios, you can evaluate the potential consequences of risks and uncertainties on your finances or business operations. For example, you can assess the financial impact of economic downturn or supply chain disruption. This analysis helps you develop contingency plans, allocate resources effectively, or implement risk mitigation strategies.
Sensitivity Analysis: Sensitivity analysis is a specific type of what-if analysis that focuses on understanding the sensitivity of a particular variable or assumption on the overall outcome. By varying one variable at a time while keeping others constant, you can assess the sensitivity of financial models or forecasts to changes in that specific variable. This analysis provides insights into which factors have the most significant impact on your financial results and helps you prioritize your focus.