So what is what-if analysis? Also defined as sensitivity analysis, what-if analysis is a brainstorming technique
used to determine how projected performance is affected by changes in the
assumptions that those projections are based upon. What if analysis is often
used to compare different scenarios and their potential outcomes based on
Often used scientific research and in conjunction with business and financial
risk assessments, sensitivity analysis is applicable to virtually any activity
or system. For example, if you're planning a family vacation, you might
consider the cost of driving versus flying. However, what if the cost of
gasoline goes up between now and then? What if competition heats up between
airlines? These factors could affect your costs and your ultimate decision. By
using sensitivity analysis, you can explore various scenarios and make better
decisions as a result.
The Benefits of What-if Analysis
Conducting a what-if framework is beneficial in several ways. Not only can you
make better and more informed decisions by changing assumptions and observing
or estimating the results, you are also better able to predict the outcome of
your decisions. For example, if you have conducted a sensitivity analysis
before deciding to increase your prices, your decision is less risky than if
you didn't go through this exercise. After all, you've already determined how
the price increase will affect your business. In addition to providing you with
a glimpse into the future, sensitivity analysis leads to faster decisions.
Common What-if Analysis Methods
Common methods of sensitivity analysis include using:
Scenario management tools such as those built into Microsoft Excel
Brainstorming techniques involving identifying activities and potential factors
that could affect the outcome of those activities. This also involves
generating "what if" questions to determine how the activity will be affected
by different scenarios.
Modeling and simulation techniques (often used for testing computer systems and
Using Sensitivity Analysis in a Business Plan
While sensitivity analysis is often used by researchers, analysts, scientists,
and investors, it also makes sense for start-up entrepreneurs and small business managers. After all, starting and managing a new business involves uncertainty and risk. By asking what-if questions and running a financial
simulation, you can make better decisions as well as demonstrate the strength
of your business plan to investors.
As you learn more about what-if analysis, you may be intimidated by the numerous
methods and complex formulas often used. Fortunately, you don't need to dust
off your algebra books in order to use sensitivity analysis in your business
plan – if you choose the right business planning software.
Look for software application that has what-if functionality
built in. Business planning software typically walks you through the process,
prompting you to answer questions and fill in the blanks. With a built-in "what if" modeling tool, you can ask your own questions and address the risks and uncertainty
surrounding your start-up. These are powerful tools that can help you make
better decisions, prove your company's viability under various scenarios,
answer questions bankers and investors may have, and guide you toward creating
the strongest business possible. What if you could see into the future? How
would it affect your decisions?
Or, you could create a business plan that addresses a wide range of likely
scenarios? You can. What-if analysis comes built into some of the best business and strategic
planning software on the market. Make a smart decision now by choosing strategic planning solution with this vital tool built into it and make even smarter
decisions in the future.