How to Get the Most Out of What-If Scenario Analysis

Effective financial planning often starts with two simple words — what if?

As much as we’d like to believe we could perfectly predict the future with a financial model, the truth is that there’s no way to forecast your business with 100% certainty.

And that’s why what-if scenario analysis is so important. Your job in finance is to minimize risk and act as a strategic partner in planning the business. But you can’t do that if you’re only ever planning for one baseline scenario.

Don’t go through your next planning cycle with the bare minimum set of scenarios. Elevate your role as a strategic partner by making what-if scenario analysis a more proactive process in your organization.

What Is What-If Scenario Analysis?

What-if scenario analysis is the part of an overall scenario planning process where you change input values and assumptions to a baseline financial model to show the potential outcomes of strategic decisions. Simply put, it’s the process of asking “what if?” questions about the business and forecasting possible future results.

Why Finance Teams Should Conduct What-If Scenario Analysis More Often

One tip for more effective scenario planning is just to run the exercise more often and more proactively.

From the finance seat, that means being inquisitive and thinking about “what if?” questions continuously. What would happen if we doubled our headcount plans? What if we changed our SaaS pricing strategy or collections policies? What if there’s a market downturn and we experience a worst-case scenario?

There are a few benefits to making this kind of what-if thinking a consistent part of your job:

It helps the business maintain optionality

Optionality is crucial to minimizing risk in any business. The more flexible your business plans are, the easier it is to adapt to new internal and external factors as they come up throughout the year.

While managing optionality ultimately falls on the CEO’s shoulders, finance has an opportunity to strengthen that strategic partnership by bringing visibilty to the possible outcomes of multiple paths. Bringing scenarios to your CEO proactively will increase trust in the finance function and elevate your role as a partner in business growth.

It gives business partners a better foundation for strategic planning

No one in the business has the kind of holistic perspective of operational and financial metrics that finance has. So, even though leaders of different departments know their own goals and strategies better than anyone, they don’t always have the full context of how their plans impact the business.

Regular what-if scenario analysis at the department level helps you create a strong foundation for strategic planning. It gives you an opportunity to surface critical questions about departmental strategies, helping leaders sense-check their plans, ensure they’re always aligned with company goals, and drive more data-driven decision-making.

It helps you keep your models fresh and flexible

Financial modeling is never a set-it-and-forget-it process. But because it’s so time-consuming to roll your models forward and keep them fresh month to month and quarter to quarter, it’s common for financial models to be more like point-in-time snapshots of the business than tools for agile planning.

Continuous what-if scenario analysis forces you to keep your models fresh to understand how current circumstances impact future outcomes. And not only that, what-if analysis helps you stress test your models so you can see where logic breaks and build more flexibility into the architecture.

How to Conduct What-If Scenario Analysis

The step-by-step process for what-if scenario analysis isn’t all that different from the steps of a broader scenario planning process — it’s why the terms are often used interchangeably. But if you want to differentiate, think about the scenario planning process as the broad, end-to-end exercise that involves finance and all of its key stakeholders, whereas what-if scenario analysis can be limited to finance’s own steps in the process.

Here are the basic steps to follow to analyze your what-if scenarios.

Decide what scenario you want to analyze

This may seem like an obvious step, but it’s an important one. There’s an infinite number of what-if questions you could pose about the business — and not all of them will return strategic insights about the business. Narrow your focus on what matters most to the business so you don’t waste your time.

There are two levels you could focus on: the department level and the company-wide level.

On the department level, you could focus on what-if scenarios that involve changes to budgets or plans. In marketing, for example, you could ask: what if we doubled our spend on Google Ads this quarter? Your analysis would involve figuring out whether or not the potential returns on those investments would make sense for the business.

For the sake of simplicity, we’ll focus on a what-if scenario analysis example at the company-wide level. You might ask, what if we exceed our ARR growth expectations by ~40% this year?

From there, you can start to analyze the numbers.

Clone your model and update key drivers for your scenario

Once you have your what-if scenario in mind, you can start to build out the models for your analysis. For the example we mentioned above, let’s assume there are two scenarios — a baseline scenario and a best case.

In this example, you have the base case where you project to double ARR to $5 million with 100 headcount. And in the high case, you increase the ARR projection to $6 million and headcount to 120.

This scenario focuses on two common levers for any SaaS business — revenue growth and headcount. By holding income statement assumptions the same and not adding any sort of fundraising event, you’re able to see the cash flow impact of additional headcount expenses and whether or not the 40% revenue growth increase justifies accelerated headcount planning.

In most cases, you’d round out this analysis with additional scenarios. Maybe you add another what-if for a down market where you miss revenue targets significantly and have to cut headcount plans. And maybe you add another what-if that includes a funding round in the next year.

Present your findings to relevant stakeholders

After you’ve built out your models with tweaks to critical levers and assumptions, you should have multiple paths to present to stakeholders.

In the case of our simple headcount scenario analysis, you’d likely present the findings to your CEO and help think through the best path forward for the company.

This is arguably the most critical part of what-if scenario analysis. It’s where you need to hone your financial storytelling skills and go beyond the spreadsheet. Your CEO doesn’t just want to see two different scenario models — they want to understand the impact. And that means breaking down the model into terms they can understand.

Show how you arrived at the increase in revenue growth. Was it increased customer count because sales outperformed expectations? Was it stronger pipeline generation from marketing? Was it a significant improvement in net revenue retention?

And where are you allocating the extra heads in the high headcount case? Are you expecting an increase in AE hiring? Or, are you investing more in R&D so product can help the company expand its ICP in the near future?

It’s never enough to present your scenario models on their own. Go the extra mile to present the findings in a way that focuses on outputs and business impact — that’s what elevates finance’s role as a strategic partner.

Mosaic vs. Excel — How to Improve What-If Scenario Analysis for Better Financial Planning

If there’s one thing to take away from this guide, it’s that your what-if scenario planning should be a continuous and proactive process. And while that’s easy enough to say, it’s much harder to do in practice — which makes this discussion as much about technology as it is about the process and best practices.

In some ways, Microsoft Excel has always been the perfect analysis tool for scenario planning. It gives you the flexibility to change anything and everything in your model and build exactly what you need to reflect the business. But that flexibility comes with drawbacks — stale data, manual processes, complex version control, a lack of collaboration, and more.

But perhaps most important is the fact that it’s so difficult to compare model outputs in traditional Excel models. Changing cells to toggle inputs might be easy for you, but it’s not the language of your business partners. If your goal is to make outputs digestible for executive team members and department heads, adopting financial planning and analysis software like Mosaic is critical — especially if you want to make the process continuous and proactive.

The Mosaic Strategic Finance Platform connects your critical source systems to provide real-time visibility of your numbers, automating the process of updating models with the latest actuals. You can easily duplicate and lock different scenarios and tweak assumptions so that they automatically update across all relevant models. And with the analysis canvas, you can use a template to compare model outputs with business partner-ready visualizations and data tables in just a few clicks, like in the example below.

Want to see how easy what-if scenario analysis can be with a tool like Mosaic? Reach out for a personalized demo and run a scenario of your own in real time.