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Have you ever sat at your desk and wondered what your business would look like if an alternate scenario happened? In the world of financial forecasting and Excel, you can!
What-if analysis is a useful tool in Excel; it shows how changing one or more values will affect the outcome of set formulas. This is useful because it can project what business operations would look like through a financial model given a range of various inputs. This is a form of sensitivity analysis in which the user can see the effect of different variables rather than creating an individual model for each scenario. For example, a business owner wants to see what their revenues would look like based on optimistic inputs and compare it with the revenues from base case and pessimistic inputs; a what-If analysis can be run to see the net impact for each specific scenario.
Another advantage of using what-if analysis is that it can help facilitate business planning. For example, a user may want to determine the amount of dividends they are able to declare in a given year based on different possible performance outcomes of a company. If the company performs well, the user may want to declare more dividends in that given year. By using what-if analysis the user can determine how much cash they can declare in a good scenario and the minimum cash they can withdraw in a bad scenario. This tool can help the user plan for their personal finances and expenses that year.
Similar to financial models, sensitivity analyses serve different purposes for different users. Whether using it for personal or business reasons, what-if analysis can help you prepare for the future.