If you have ever worked with a spreadsheet, the chances are you have seen the importance of undertaking what-if analysis.  It may be you need to understand and quantify the key drivers of business success or confirm “myths of the business”.

We offer a tried and tested technique known as Strategic Options Analysis:

Scenario Analysis

• “Snapshot” technique: unlikely any given situation will actually occur
• Scenarios are often used to generate “top down” views of the world. Several variables are changed in order to simulate a particular situation (e.g. if considering turnover, prices might be increased, but volumes reduced, etc.)
• Often referred to as “worst-case”, “best-case” and “alternative” scenarios
• Changing variables individually can be cumbersome, and in any cases, the scenarios evaluated may be meaningless 
• May be used to assess whether your base case really is the most likely / expected variant 

Sensitivity Analysis

• Sensitivities are usually used to generate “bottom up” views of the world
• Only one variable is changed so that its influence on key output(s) can be determined and ranked
• Often an unrealistic technique, depending upon the complexity of the underlying model
• Two types of tornado: deterministic (vary each input by the same percentage) and non-deterministic (vary by likelihood of variability)
• Care is required in interpretation: best to use an experienced professional

Simulation Analysis

• Using probabilistic frequency charts / histograms, sensitivity and tornado charts in tandem, greater insights can be developed than by use of fixed-point modelling alone
• Provides greater information than separate sensitivity or scenario analyses
• Recognises managerial decision-making

Ratio Analysis

• Even though this is not usually what-if analysis, this accounting technique helps understand the current situation
• What-if analyses can then be constructed consistent with the present situation
• Helps identify unrealistic scenarios and areas of potential future stress