Founders routinely deal with changing business conditions. As a business becomes more successful, the variables that drive success increase in volume and complexity. To accurately chart growth trajectories and push their business to greater heights, you need the ability to easily conduct a thorough what-if scenario analysis.
Scenario analysis deals primarily with modeling financial variables to understand their impact on the business. In addition to conducting deep analysis, it’s also important to have access to reports that can help you quickly chart the impact of changes to your model.
Ad hoc assessment reports will help you make better decisions on the fly and deal with changes during negotiations. If business conditions change rapidly, ad hoc reporting will help you react to them faster.
Let’s take a look at how this type of analysis helps founders react to opportunities better.
Cash flow impact of an acquisition
At some point, every growing company has to consider acquiring a competitor or complementary company. The impact of an acquisition is tough to model since many variables enter the picture. First, business owners have to consider the future projections of the acquired company. Will it maintain its profitability, or will business conditions push it into the red?
When it comes to financial projections, this is what scenario analysis is, because it illustrates the implications of the possible paths a business could take. By creating different financial models, the acquiring company’s cash flow situation becomes easier to project.
An alternative to acquisition is creating a new product or service in-house. This is an important choice, since companies incur heavy costs upfront that they hope to recover down the road. Business owners can model the impact of these initial cash outflows and tinker with their assumptions to create a wide variety of models that approximate future performance.
The result is that approaching an acquisition is no longer a daunting task. Business owners can rely on their real-time dashboards and immediately view the impact of changing numbers on the deal.
Modeling business impact of changing conditions
Business conditions are dynamic. Unfortunately, many companies still rely on static reports using historical data. Parameterized reports cannot display the impact of changing numbers, no matter how detailed they might be.
Business owners and finance executives need the ability to explore the impact of different assumptions on their bottom line. For instance, does lowering operating costs increase the bottom line, or does it result in diminished manufacturing capabilities that ultimately reduce your bottom line?
As economic conditions change, businesses have to change with it. While an investment opportunity might seem great right now, will rising inflation hamper its performance down the road? All investments have assumptions inherent to them, and modeling the impact of changes within them is critical when making good decisions.
Evaluate key business drivers
Businesses have a range of important functions that drive performance. However, understanding which ones are key can be difficult. For instance, is allocating capital to your marketing budget more critical than entering a new market? Which one has a greater bottom-line impact in the short and long term?
Owners of growing businesses face capital allocation decisions all the time, and conducting quick what-if scenario analysis is essential. These analyses also add value to meetings where various departments and stakeholders express their opinions.
For instance, if a stakeholder suggests a plan of action, your team can immediately model the financial impact and propose alternatives if the results are less than desirable. Financial modeling of this kind also reveals hidden business drivers and trends that stakeholders might not be aware of.
Best of all, the impact on your bottom line isn’t nebulous. It’s highly quantifiable and is expressed in terms of cash flow reduction or increase, bottom-line impact, and changes to cash flow cycles. Thanks to the ad hoc nature of these reports, you can make better decisions a lot faster and react to market conditions instantly.
Bring multiple data sources together
The variables that affect a business arrive from disparate data sources. Companies often struggle to consider the combined impact of these variables since their effects are compounded.
For example, a cash flow shortfall in one unit might result in less investment in another, which leads to less production and lower bottom lines in the following quarter.
An ad hoc scenario analysis template will help you bring all of these variables into one place where you can slice and dice them to examine their impact on the business. The result is that you’ll be able to consider the impact of any number of variables and won’t be constrained by a lack of data portability.
Instant analysis, instant decisions
Ad hoc reporting is a powerful tool for business owners to possess. It allows you to quickly examine the impact of your decisions and reduces the time it takes your organization to arrive at the right choice. By modeling different scenarios via dynamic reports and dashboards, you’ll evaluate opportunities better and increase your bottom line.