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Budgeting Tool for What-If Analysis & Better Decisions

May 12, 2020
Formula-free FP&A

Eliminate human error, increase confidence, and shave hours (or more) off your FP&A process.

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The budgeting process for most companies occurs over several months. You prepare the budget model by adapting last year’s Excel spreadsheets, plan and distribute them to each department head, and answer their questions about how to use it. Then, once they’re done, you consolidate all of those spreadsheets together to create your overall budget. This is not an easy task as you spend more time managing the logistics of the budgeting process instead of doing the actual evaluation and what-if analysis that help make your budget useful for running your business.

How easily can you perform what-if analysis?

But what-if something changes? New criteria are introduced. Your company has the opportunity to acquire a competitor. Great news! …Or is it? While you try to keep your focus on the details of the deal, you’re thinking about the fact that the budget for nearly every department will be affected. You start thinking of the logistics of essentially starting over with the spreadsheet distribution process and re-consolidating everything into the master budget.

Consider This

What if version control of your budget model wasn’t a concern? What if you could focus on the impact of the change rather than spending time managing the logistics of your budgeting model?  And how quickly could you perform what-if analysis using your current budgeting tool to determine the ROI of the proposed purchase if it is finalized in two months versus in six months? How valuable would it be to know how your current year cash flow will be affected by the integration of their book of receivables in those two scenarios?Acquisitions don’t happen every day for most of us but things do change. You need to be ready for it.

Driver-Based Scenario Planning, Cash Flow Projections, and Dynamic Forecasting

Using a modern solution for what-if analysis

Let’s add a new product. How will it affect your inventory? Will your current cash flow be sufficient to cover the ramp up time? How would the additional staff to launch it affect your bottom line?When you use a modern budgeting tool, life can get easier.  You can pull in your YTD actuals, apply your budget model to the remaining months of the year and see where things are. This is “Scenario 1”. Then enter in the specs of the new product that’s being considered: the cost, price, anticipated sales volume, etc. You’ll be able to immediately review the impact on your income and expenses and your bottom line. Check your cash flow reports. Will money be freed up when the revenue starts flowing? Do you need to anticipate investing it? Or do you need some short-term funding to get your stock established before you can do that launch?These scenarios happen for us every day. I’m sure you’ll have a gut feeling of what the results will be. Does that match what you came up with in completing this 20-minute exercise? What if it doesn’t?You can save this as “Scenario 2.” Update the proposed price point and cost of the new product if you were to make a luxury version of it instead. Sales volume may be lower, but your new profit margin could more than make up for it. You can run those numbers in just a few minutes and compare them on screen to see which product helps your bottom line more.How quickly would you get to the same answer using your current spreadsheet method? Modernizing your budget process can help your company with decision making year-round.

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