Why you should run what-if scenarios

If you think that once you've forecast your budget for the year, you're all set — forecast again. The annual budgeting process is arguably the most important function of the finance office, but all too often businesses fail to compare their forecasts to actuals throughout the year, meaning they don't regularly adjust their forecasts as conditions on the ground change.Partially, this is because of the way business budgeting and forecasting has been done in the past. Many companies still prepare their budgets and forecasts manually, generating an endless stream of Excel spreadsheets that all need to be updated, approved, and consolidated over the course of weeks (if not months).This manual process leads to broken formulas and incorrect data — not to mention regularly recurring forecast errors.Whether you're wrapping your annual budget process or starting to lay the ground work for next year's, it's never a bad time to take stock of how your projected numbers line up with your actuals. Ask yourself:

• Are your quarterly numbers still on track?
• Have any unexpected expenses arisen that were not previously accounted for?
• Is current cash flow at the expected levels?

The answers to these questions are important because they can help budget managers and finance leaders chart the remainder of the year.

When inaccurate data throws off your annual forecast

Outdated or inaccurate data is one of the biggest problems with forecasting for many businesses. Too many variables and data points are missed due to lack of time or human error. Assumptions from months ago, when the budget was created, may have changed or been invalidated by unforeseen market changes or other circumstances, like an unexpected slide in sales or the sudden need to invest in new equipment or technology.The same goes for potential opportunities. Bad data skews analysis, leaving you to miss out on a potential boon for your business.All of these factors can eventually spell trouble. Over 70% of companies are forced to change their forecasts midway into their fiscal year. If a reforecast wasn't part of the original plan, this leaves them scrambling to make up for lost time and information, especially considering it takes most weeks or even months to redo a forecast using manual, spreadsheet-based methods. By then, it's often too late to effectively reforecast without compromising on the finance team's other core functions.

The benefits of what-if scenario planning

What-if scenario planning helps mitigate these uncertainties and the problems caused by bad data by improving the accuracy of the budgeting and forecasting (and reforecasting) process.

Improve performance

What-if planning helps improve both operational and financial performance by allowing your company to run scenarios that combine both real-time and historical data. While spreadsheets offer only limited forecasting ability and data estimates, software that runs what-if scenarios allows you to identify potential risks.These risks include everything from budget shortfalls to inefficient departments or processes. Enabling deeper, at-a-glance insights into business units and sales figures helps managers highlight potential problems more effectively.Identifying these risks can help reduce cost overruns, forecasting bias, and other inaccurate estimates that negatively skew reporting and budgeting. Being able to plan for potential issues means managers can make decisions based on real-time information, reducing mistakes that hurt the company’s bottom line.

Quick turnaround

Leveraging cloud-based software means decisions can be made quickly, because every decision-maker has access to data and can model their own scenarios.Managers can avoid endless discussions and running numbers on multiple Excel spreadsheets. The potential for human or versioning errors is dramatically decreased.For those businesses that need to make adjustments on the fly, what-if scenarios can be run in minutes, not weeks or months.

FP&A software with robust what-if scenario planning helps you plan for the future

What-if planning is all about improving decision-making and reducing potential risk, both of which have a positive impact on the bottom line. It enables managers to confidently make the right decision at the right time. Not only will it put your company on the best footing for success — it'll also give you a leg up on your competition.

‍Centage empowers finance teams to automate the forecasting processes, forecast the impact of multiple scenarios, and quickly identify where, when, and why actuals differ from plan, so you can take appropriate action. Book a demo to see Centage's what-if scenario planning features in action.