The Budgeting and Forecasting Experts Blog

Budgeting for Changes that Impact Your Business with What-If Analysis

When it comes to strategic planning and budgeting, few tools are more useful than the what-if analysis. This type of analysis takes all of the information thus far "as is," and predicts what would happen if one variable, or a number of variables, were to change.  The theory behind it is quite simple. An overly simplified example is taking the original budget, and reducing sales to see what it does to the bottom line. This gives the keen financial executive insight into the possibilities that arise should business not go as planned. This is actually the most common of the what–if analysis scenarios, but there are numerous variables that can affect a business in more ways than one should they not occur as predicted in the planning process.  

This is why when it comes to business budgeting and planning; the what-if analysis is a superior planning tool.  It is not infallible however.  For example, if you use Excel, you are likely thinking to yourself right now that is sounds easy enough. You can pull up your budgeting spread sheets and change numbers as you need to see what happens to the bottom line with a change in one. Did you receive word that insurance costs may be increasing? You imagine you can simply go into your Excel spreadsheet and bump that line item up to see what happens. Did you hear that you could be losing a big customer?  You see no reason why you cannot simply adjust sales for that potential loss and see what the damage would be.  

Here is the problem with using Excel for what-if analysis.  Human error is almost a given, and if not a given it is certainly too large of a risk to be taking when it comes to budget planning and being prepared.  If all of your what-if scenarios are based on a number that is the product of a formula error, the results could be disastrous, and the scary part is that this type of mistake is almost impossible to catch before the damage has been done.  Human error can happen in a number of ways when it comes to Excel, but the most common are related to the fact that you have to enter the formulas manually, and you must save and copy the spreadsheets multiple times to create multiple scenarios.  Something is almost certain to get crossed in the process.

So what is the solution?  Software from Centage reduces the risk for human error.  All of the programming is built-in and thoroughly tested.  Once the budget is established in the software, numerous what-if scenarios can be created and even saved as different versions, without fear of compromising the original budget or another analysis due to a botched copy and paste job.

Excel can be useful, but it is not the best tool for in-depth business budgeting and planning.  To be confident in how prepared you are, without fear of something as simple as a misplaced formula messing everything up, something more solid than Excel is required. This will save time and money, both on the front end and by eliminating the need to retrace your steps to clean up a mess.