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How to Develop the Capability To Do What-if Scenario Modeling

Scenario ModelingThe COVID-19 pandemic offers a powerful reminder to expect the unexpected. At the start of 2020, no one predicted the events that would eventually impact every single business in America. And yet some businesses have weathered the pandemic better than others, and not just those that sold toilet paper and disinfectant spray. The elites of their industry didn't see the pandemic coming, per se, but they were better prepared when it arrived. Why?

In large part, because they didn’t assume their upward trajectory would continue forever. The booming economy over the previous decade led some companies to think that strong growth and stable markets would proceed without interruption – leaving them poorly prepared when the pandemic hit. A smaller but smarter group of companies acknowledged the obvious - that economic cycles always swing downwards – and prepared for the inevitable. Here’s how.

The Most Proactive Planning Possible

What if revenues declined by 30%? What if a competitor called with an acquisition offer? What if new markets appeared or tougher regulations got passed? What if a global pandemic challenged all of our assumptions? These are the kinds of questions that what-if-scenario modeling seeks to answer.

Used for proactive planning, what-if scenario modeling proposes various positive and negative events that could happen to a company or the market. Then it seriously considers the consequences, even running the numbers to objectively answer “what if?”

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In practical terms, what-if scenario modeling represents an advanced form of the budgeting and planning that companies already practice. Except it doesn’t stop with preparing a budget and then comparing it to the actual expenditures, bringing understanding up to the present. What-if scenario modeling goes a long step further, looking into the future to forecast circumstances on the horizon so that finance leaders can see looming budget problems in advance.

“Today, finance teams must navigate towards an uncertain future at a time when macro and microeconomic conditions are uniquely complex. And they must do it on the basis of dramatically shortened planning horizons. It's not enough to think in terms of quarters and years; they must think in terms of weeks and months,” according to CFO Dive.

Under the best circumstances, proactive planning based on what-if scenario modeling looks beyond the obvious to explore the unthinkable. Decision-makers identify the best and worst-case scenarios, then game plan what would happen if they came true. Hopefully, those scenarios remain in the realm of the hypothetical. When they don’t, though, companies capable of what-if scenario modeling already have plans in place and experience under their belt. That preparation helped select companies move dynamically through the throws of the pandemic, illustrating why far more companies should start practicing what-if scenario modeling.

Predicting the Future Made Easy

Planning for multiple different futures takes a substantial amount of time, staff, and brain power – resources stretched thin right now. Fortunately, the next generation of financial management solutions makes what-if scenario modeling simple in practice but sophisticated in outcome. That is to say, it makes predicting the future easy.

Smarter tech will play a big role in the pandemic recovery, the future of accounting and finance, and the digital transformation taking place across the economy. It’s essential. Learn what part it plays in your post-COVID-19 business model by downloading this free whitepaper.

Topics: General