Do you get confused while taking major decisions in business or anywhere in life? Like you want to buy a mobile phone, but there are so many brands available in the market, and because of that you are confused.
So these types of all types of confusing situation’s solutions we can easily find by doing a what-if scenario analysis.
What-if analysis is a process that a business or anyone can use to make a better decision.
And here I will discuss, all what-if analysis, and that will help you in both your professional and personal life.
WHAT’S IN IT
Definition of What-if analysis
What-if analysis is a process where we can input different values for different scenarios and predict what can happen in the feature, by asking questions like, what will happen if I do this, what will happen if I do that.
It helps us to make better decisions quickly and easily.
The what-if analysis takes the help of sensitivity analysis and scenario analysis to give us a result.
The sensitivity is a process where the decision-makers tweak one of the critical inputs and observe how sensitive that model is.
And the scenario analysis is a process where they list a series of inputs and calculate the effectiveness of the model by changing each input.
And finally, the what-if analysis where we can ask what-if questions and those questions answered by the sensitivities and scenarios.
Steps to Conduct What-if Analysis
There are five steps available to conduct what-if analysis.
Step 1: Make a Team
Before starting the process, we have to make an excellent team of potential people. The team members should not assume anything in advance so that at the time of brainstorming, they can see the reality or previous data as it is and make their decisions.
Step 2: Develop what-if questions
After making a good team next, we have to develop what-if questions with the team. The questions should be related to the problem, and it should have the potential to determine the advantages, disadvantages and the risks of the project.
Like if we do this, then what advantages and disadvantages we will get from this.
Step 3: Calculation of risks
After developing all the what-if questions now the time is to calculate, what possible risks they have. We should observe all the questions deeply and assess all the possible risks by making different scenarios.
Step 4: Recommendations
After calculating the possible risks, then the team selects some scenarios which have low risks. And then they select scenarios which have a strong potential to grow the business and leave others.
Step 5: Evaluation
After that, we have to evaluate whether what we choose is working according to our assumption or not. If it is working what we assume, then it’s okay. Otherwise, we have to select another scenario.
Example
Let’s take the example of a company which tries to launch a new product to the market.
Now do a what-if analysis for their new product and find the best way to make it more profitable.
If we are launching a product, then there are many other methods also available to calculate the product’s success factor. Like we have to see what’s the demand for the product, what kind of product’s people like most, etc. by doing marketing research.
And among them, what-if analysis is also a part of that and from which we can assume many things about its success.
After making a good, we have to prepare the right questions. Because in a what-if analysis making good questions is essential.
We can make questions by observing all scenarios.
We have to make scenarios and questions like if we launch our product only in rural areas then what happens? If we lunch only in urban areas, then what happens? If we price it high, then what happens? And if we price it low then what happens? Etc.
So we have to make questions by our goals, what we want to achieve from that product. And that also determines the action’s advantages and disadvantages.
After that, we may select some scenarios between them, and if it matches to our desired goal, then we can select that.
Benefits of what-if analysis
Doing a proper what-if analysis is very beneficial for your business or decision making. It increases your decision-making process.
Because when we conduct what-if analysis, then we assume all the scenarios and know all future happening effects of our current activities.
So it also gives us the confidence to make the right decision.
Let’s go back to our previous example of product launch and see what feature advantages and disadvantages it gives.
By analysing we can know in which market we have to launch our product to earn a good profit.
We can know when we are increasing and decrease the price then how our audience reacts towards our business.
So whenever we have to make big decisions, then we must have to conduct what-if analysis to make a better and faster decision.
Tools for Modeling What-if Analysis
There are many tools available for modelling this what-if analysis.
Manual scenario
We can make this tool by using formulas and dropdown boxes. And it is a common scenario.
If we do it correctly, then we can get better results from it. First, we can put our data by using formulas and dropdowns, and then we can make different.
Scenarios
If we change one of our data, then that reflects in the scenarios.
But we should not use so many scenarios for a model.
Because if we use so many, then it may confuse us instead of giving the results.
And at least we can use three types of scenarios best case, base case, and worst-case scenarios.
And after that, we can use according to our requirements.
Data table
This we can use when we have a single output and one or two inputs.
Like we sell one product and want to calculate the profit then we can use this.
We have to input the product’s selling price and the cost of that product as input. And we have to put the subtraction formula from selling price to cost then we can find the profit as output.
Conclusion
If you have a small business then also you can use this what-if analysis. By using this method, you also can make fast your decision-making process.
In a small business, you need to make a big team for this process; you can also use Microsoft excel and calculate it easily.
You can make different scenarios in the Microsoft Excel sheet, and by implementing formulas and changing values, you can calculate what-if analysis.
But when your business grows, then you have to make or hire a good team for this process. And by collecting data and analysing them, you can calculate the what-if values.
And you can also use the previously used data to compare present’s situations. You can use different software also to conduct this process.