What-If Analysis

Intermediate

What-if analysis is the practice of changing assumptions in a financial model to see how results would change, answering questions such as "what if sales fall by 15%?"

What-if analysis is a broad, practical approach to exploring uncertainty. Managers ask questions about possible changes and use a financial model to see the effects.

Questions might include: what if we raise prices by 5%? What if a major customer leaves? What if interest rates rise by two percentage points? What if we hire ten more people? Each question is tested by changing the relevant inputs in the model and observing the new results.

For example, a business considering a price increase might find that profit rises if sales volume falls by less than 8%, but falls if volume drops more than that. This helps it judge whether the increase is worth the risk.

What-if analysis is an umbrella term that includes sensitivity analysis, which changes one variable at a time, and scenario analysis, which changes several together in a consistent story. Spreadsheet software includes tools specifically designed for it, such as data tables and goal seek.

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