Definition
What-if analysis is commonly used in financial planning to evaluate possible outcomes of specific events, whether favorable or unfavorable to the company. This analysis can help in comparing different financial plans and coming up with alternatives to be used in case a business situation changes. Scenarios can be based on the likely business impacts. For instance, a sudden drop in demand, an unfavorable result of a pending legal matter, etc.
Example
Under what-if analysis companies can see how changes in certain plans can impact the bottom line. In case a business is experiencing an unfavorable environment, a what-if analysis can help in using alternative strategies to deal with the situation.With the help of what-if analysis, management can examine various facts and possibilities that may impact the company.
Why it matters
What-if analysis can be beneficial in these ways:a. The results help to design budget variations as per changes in earnings that are a result of external changes.b. FP&A team can come up with a contingency plan to use under specific circumstances such that the company can continue to achieve its goals.c. Business leaders can take calculated and informed decisions using this analysis.