Mastering What-If Analysis: Tools and Examples

Rewritten:

If you're involved in advanced business analysis, you may be familiar with the term what-if analysis. This technique is widely used by data analysts, managers, and Excel users to gain insights and explore potential scenarios.

What-if analysis is a valuable tool for business owners who need to analyze various scenarios using Excel. In this article, we will delve into the details of what-if analysis and explain how it can be useful in your business endeavors. Let's get started without further delay.

Meaning of What-If Analysis

Before we move into the other important parts of the article, there is one thing that you need to be familiar with, and that is the definition of what-if analysis.

Rewritten: To put it simply, this analysis involves tracing back the calculations to determine the input required to produce a specific output in Excel. By specifying the desired output, Excel can provide the necessary input to achieve the desired results.

How is What-If Analysis the reverse of Formulas?

To make this a bit simple for you, we are going to say that what-if analysis is considered as the opposite of the formulas that we have with us at the moment.

Instead of using formulas to determine the output based on input, this process works in reverse. By providing a specific output, you can determine the necessary input.

With the help of the what-if analysis, one can do a lot of things, and we are here to tell you all about these things.

What are the usages of What-If Analysis?

By accurately estimating their monthly savings, individuals can effectively plan for their retirement goals. Additionally, calculating their return on investment allows for better budget planning.

So, there is no doubt that it is one of the most important processes that people should be using right now.

3 Tools of What-If Analysis

Performing a what-if analysis can be effectively done using Excel, which offers three tools for this purpose. These tools can help you to analyze various scenarios and make informed decisions based on the results.

These tools are known as-

Scenarios

Data tables

Goal Seek

Later in the article, we will delve into the details of these tools. But for now, we will take a different approach.

Despite our explanation, it's possible that some individuals may still struggle to fully grasp the concept of this common type of analysis.

Therefore, we have prepared a comprehensive example to help you fully comprehend the concept at hand. It is crucial that you pay close attention to this section as it will provide clarity and understanding regarding our discussion. So, let's dive in and explore what we have in store for you. We are confident that you will find our offering compelling and beneficial.

Example of What-If Analysis

Let us understand the concept of what-if analysis with an example of a monthly calculation of EMIs.

Calculating your monthly EMI can seem daunting, but we're here to simplify it for you. Let's say you've taken out a loan of $25,000 from the bank with an annual interest rate of 20%. If you plan to pay off this loan within 18 months, we'll show you how to calculate your monthly EMI.

The remaining data, such as monthly interest payments and other details, can also be easily calculated using the financial formulas provided. These formulas are incredibly helpful in managing your loan payments. Based on the calculations, it appears that you will need to pay $1619.08 each month over a period of 18 months to ensure that the loan is paid off in full.

Assuming you can afford to make a monthly payment of $2500, the next step is to determine the length of time it will take to fully repay the loan.

Using the Goal Seeker tool for what-if analysis, you can determine the precise duration required to fully repay your loan. This is undoubtedly a valuable exercise worth undertaking. In fact, you may now feel inclined to conduct your own what-if analysis.

So, why not tell you how to do that with the help of these amazing tools that we were talking about in the earlier part of the article? This will surely be a lot of help to you.

Excel Tools of What-If Analysis

#1. Scenario Manager

Create random scenarios using the excel format's scenarios tool to perform what-if analysis effectively. Access the tool under the What-if analysis section located near the Data ribbon.

By simply clicking on the "add" button, you can easily create new and exciting scenarios. To get started, simply enter the scenario name and select the cells that need to be modified. Depending on the scenario, you may only need a few cells or up to a maximum of 32. Once you have selected the cells, enter the desired values and click "OK" to complete. For further analysis, utilize the "Summary" option to compare values and gain valuable insights.

#2. Goal Seek

Although the scenario manager tool is effective for known variables, it can still be beneficial to take a step back and analyze the situation from a different perspective. This is where Goal can come in handy, providing answers to any questions that may arise.

Simply navigate to the same section as the Scenario Manager to access the Goal Seek tool. Input three distinct parameters into the corresponding cells, taking note of any set cells which should contain the goal value. This tool is highly valuable, as it allows for quick and easy problem-solving once the parameters have been inputted.

#3. Data Table

Utilize the scenario summary data table to access a variety of scenarios and their corresponding cells and values. It's important to note that these values may not automatically update when changes are made to the data. To ensure accuracy, utilize Data tables which can be easily adjusted based on different variables. For scenarios with only one variable, a 2-column data table should suffice.

In Conclusion

To populate the second column of your table in the most efficient way, simply leave it blank and allow Excel to fill it in. Using the What-if analysis section, select the table and choose the Data table option. With just a few clicks, you'll be all set.

The what-if analysis is an essential tool that mid to senior-level managers and data analysts prefer to check various scenarios. With the help of Excel tools mentioned in this post, completing the process efficiently is possible.

On the concluding note let us have a brief look upon the tools and their best usages-

You can use the Scenario Manager for comparing different business scenarios with different changing inputs

It is suggested to use Goal Seek for the Reverse Calculations

You can use the Data Table when 1 or 2 inputs are changing for changing the output.

So, what do you consider the most useful tools of what-if analysis? Share your experience of using what-if analysis with us in the comments below.