Use cases for What-If scenario modelling

What-If scenario analysis is a very powerful framework for taking decisions. It is a general misconception that it mainly caters to macro-economic scenario modelling. While that is certainly one of the use cases, there are some interesting examples from a micro economic perspective too.

In this 5-part series, we plan to cover some of the most common use cases of the same.

  • Financial analysis
  • Pricing
  • Logistics planning
  • Evidence for business proposals
  • Customer modelling
  • Applications in the Blockchain and Smart Contracts space

We would like to start the series with financial analysis use case where scenario modelling is mostly used in the micro context.

Think financial planning is for large companies only?

While in large companies, financial planning is very common and even have whole departments dedicated for it, it used to be that smaller companies especially start-ups didn’t spend too much time on the same. As pointed out by Tomasz Tunguz of Redpoint Ventures in his blogpost, this trend is definitely changing. Some highly successful start-ups are taking this seriously too. It is quite obvious, more and more investors are becoming numbers driven. While for an early stage investment, they are persuaded by vision and the team, when it comes to series A and later stages, it is all about the traction. Getting your financial planning in order from a very early stage encourages this culture in an organisation making it easier when you reach the growth stage. Other key benefit in our opinion is that even forecasting and planning key financial metrics drives motivation in the early stage employees.

If you can share the numbers to external stakeholders such as your investors (or potential) with no extra effort, that could save even  4 hours, it is a big plus for start-ups and small businesses who are always time starved. This was the main motivation behind building the feature in our platform that enables public sharing of dashboards (through a secure mechanism) if one wants to.

Impact of external factors

What-If scenario planning mandates the finance team to think beyond standard reporting and start thinking about potential external factors that could have an impact on the business. While there are plenty of qualitative frameworks such as PESTEL analysis, when it comes to quantitative frameworks for analysing the impact of external factors, What-If truly comes on top. The scenario models have to apply a numerical value for the impact, forcing the planners to think deep into various ways it could affect the business. While budgeting is very important for a business, building scenarios based on hard facts and operational data to support the forecasts helps building early warning indicators to monitor the financial health of the company.

Multi factor analysis

When it comes to modelling internal factors, companies store and analyse lots of information pertaining to their operations. So much so that, there are too many variables in the picture. One option in this context is to create a multivariate model (a model with multiple variables). The analysts can plug in the best guestimates  for each variable and calculate a forecast value based on the probability distribution. You can also take it a notch by running thousands of permutations on these variables using Monte Carlo simulation.

Tool of choice

Finance professionals loves Excel and spreadsheets. So, it is their obvious tool of choice when it comes to scenario modelling.

One wise man – The answer to every problem lies in a spreadsheet

Jokes apart, if you are looking for collaboration between the different stakeholders while working on a scenario model or centralise the whole planning exercise, you need a collaborative decision modelling tool. DataQuarks offers Business Options platform that is primarily focused on What-If scenario modelling on the cloud.

Summary

What ever planning is done, we cannot precisely predict the results. But the process of planning various scenarios and identifying mitigating options will help prevent a shock.

 

Image Source – Plans by Sumeet Basak on Flickr