How a What-If Analysis Can Strengthen Your Budget
No matter how much forecasting your organization does when building a budget, something always comes along throughout the year to throw a wrench in your plans. Whether it’s poor sales or funding, unplanned expenses, or market shifts–it hits when you least expect it. That’s where a what-if analysis can help you avoid a budget shortfall.
A what-if analysis is an accounting tool that is used for exploring alternative scenarios to your current budget. Let’s say you want to get an idea of how increasing your employees’ hourly pay by a dollar will change your overall budget. With a what-if analysis, you can run the numbers to find out without changing your actual budget.
A what-if analysis is perfect if you want your organization to have a better plan for the future, a faster turnaround when facing setbacks, and for knowing when to avoid potential risks. So let’s review the ways it can improve your organization.
Plan Your Organization’s Future
No one knows what will happen from one day to the next, but if you want to make sure your organization can weather the storm, then a what-if analysis is as close to a crystal ball as you can get. While it can’t tell you how to become a millionaire, it can at least tell you whether or not your budget is sustainable enough to last throughout the year.
If you have multiple budget proposals and you’re not sure which one will be the most effective, you can use this tool to find out. You can test each one and then decide on the budget that works best going forward. This not only prepares you for the year, but ensures your organization is set up to be successful.
If you find that you’re changing your budget every month due to unforeseen setbacks, don’t worry, it happens to most organizations. It’s rare for anyone to make it an entire year without changing their budget at least once. The only question you have to ask yourself is how are you going to turn things around when you’re in the middle of a crisis?
Instead of scrambling to try and right the ship, you can use the what-if analysis to get back on track. You can brainstorm some budget adjustments, test whether they work or not, then make a plan moving forward. Since your organization is vulnerable when hit with a setback, it’s important you avoid taking a step in the wrong direction and wind up in a worse position than you were to begin with.
There’s a common belief that you need to be able to take risks to find success. While taking risks can be good, they can also hurt your organization if they don’t pan out the way you hope. One challenge with taking risks is understanding all the ways they can financially impact your organization.
By running a what-if analysis, you can alleviate some of that stress. After running the numbers, you can see how the risk might affect your budget and determine whether the costs outweigh the burden. If they do, then you can at least be confident knowing that if you do decide to take that risk, it won’t pull the rug out from under you.
When it comes to running a business or nonprofit, budgeting is essential for making sure you have enough money to last through the year. Unfortunately, there are always obstacles you have to face. A what-if analysis makes it easier to overcome those obstacles by letting you plan for different scenarios. In the end, you will be more confident in your decision-making.