Have you ever heard of the term what-if analysis?
What-If analysis is one of the most common processes that data analysts, managers, or excel users tend to use these days for advanced business analysis.
Business owners use what-if Analysis for analyzing different scenarios in excel.
Here we are going to talk about what-if analysis and all the related aspects that you might find pretty useful when you are dealing with something like this. So, without wasting any more of your precious time, let us just get on with the article now-
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.
If we were to define this analysis, then we would say that it is a basic process of calculating by going back, so that we can find out the input and that too by providing a particular and specific output in between.
Means you will give Excel the output that you want and ask Excel to give you the input which can provide you that desired output.
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.
When we are using formulas, we try to find out the output by giving the input into the formulas, right?
This process here is just the opposite where you will be able to find out the input when you are providing a proper and specific output there.
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?
A person will easily be able to estimate the particular savings that they should in a month so that they can properly plan their retirement goals.
Also, they will be able to find their return on investment and then plan the budget accordingly.
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
When it comes to the performing of the what-if analysis, most people tend to use the Excel in their computer to do that in the best way. You will be able to use three different tools to perform this analysis in the Excel sheet.
These tools are known as-
- Data tables
- Goal Seek
We are going to discuss these three tools in the latter part of the article for sure. However, for now, we are going to do something different.
Even after the explanation, we know that some people still might not properly get the concept of this type of analysis that people tend to do a lot.
Hence, we are here to provide you with a perfect example so that you can have a clear idea in your mind about the concept.
We advise that you read this part very carefully because then you will be able to understand what exactly we are talking about in here. So, why not buckle up and see what we have in store for you and we are pretty sure that you are going to like what we have to offer right here for you.
Example of What-If Analysis
Let us understand the concept of what-if analysis with an example of a monthly calculation of EMIs.
We are here to tell you that you will be able to use this method to calculate the monthly EMI that you have to pay to the bank. Now how does one do that in the first place? Well, this is exactly what we are going to tell you right here.
Say you have taken a loan from the bank and the amount is about $25000 in total. Also, imagine that the rate of interest on this loan is about 20% every single year and then you imagine that you want to pay the loan in 18 months.
Apart from that, the data that remain such as the EMI every month, monthly interest payment and a lot of others can be easily calculated with the help of the amazing financial formulas which are provided to you in the first place.
Well, according to the formulas, you will have to pay about $1619.08 every single month to make sure that you can properly pay the loan that you have taken in 18 months.
So, now you have to assume that you are capable of paying about $2500 in a single month so that you can pay the loan in a shorter period.
So, how will you be able to decide the number of months that it will take to complete the loan payment when you are making the monthly payment of $2500.
With the help of what-if analysis tool Goal Seeker, you will be able to find out the exact number of months that you might need to pay off the entire loan. Now, doesn’t that seem like something that you would want to do in the first place?
We are pretty sure that it does and we are also pretty sure that you now want to do some what-if analysis yourself.
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
With the help of the scenarios tool in the excel format, the user will be able to perform the what-if analysis in the best way. The first thing that they need to do is to create some certain scenarios which are pretty random, and then we will move on from there.
If you are not able to find out the Scenario Manager tool, then it is located right near the Data ribbon, and you will find it under the What-if analysis section.
All you have to do is click on the button add, and you will be able to add new and amazing scenarios and then what you have to do here is add the scenario name and the cells which you want to change in the first place. The scenario will have about 32 cells maximum in it.
However, some scenarios don’t need that many cells, to be honest. After that, you have to provide the values in the cells which you need to use in the scenario and then you need to click on the button that says OK to finish after you are done adding the values that you want. You will also be able to compare the values with the help of the Summary option, and it is one of the best methods to perform this analysis for sure.
#2. Goal Seek
While you might think that the scenario manager tool is efficient for the known variables, it can sometimes be a great help if the person just moves backwards for the analysis. This is where Goal can be used in order to get all the answers to the questions that you have.
You will also find this Goal Seek tool in the same section where you found the Scenario Manager. All you have to do is provide three different types of parameters into the cells. You might come across some set cells, and it means the cells that would contain the goal value.
This is also considered to be one of the most important tools to use. All you have to do is put these parameters and then look for the solutions, and you are all set.
#3. Data Table
You will be able to find a data table with the scenario summaries, where there will be many different scenarios with their cells and values. However, with the data change, these don’t really get updated.
So, this is where you need to use the Data tables because these can easily be based on the different variables in the first place. If there is just one variable, then you need to use a 2-column data table.
The first column will have the variable, and the second will be left all blank so that Excel can populate it in the best way. All you have to do is select the table and then navigate it to the What-if analysis section and then choose the option of Data table, and you are definitely all set.
So, these are some of the details about the what-if analysis that we are pretty sure you need to know about. We can say this without a doubt that it is one of the most important processes that one needs to use for various scenarios.
What-if the analysis is one of the most useful methods of checking different scenarios preferred mid to senior-level managers and data analysts. Excel tools mentioned in this post will help you complete the process in the quickest possible fashion.
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.