Many businesses forecast financial performance using results from a variety of scenarios to monitor its sensitivity to varying factors. They will normally consider at least 3 scenarios: best case, expected and worst case. This type of scenario modelling can be used for forecasts and strategic business decisions, such as launching a new product.
Whilst completing this analysis, businesses also look at the key sensitivities that will impact the performance, to understand the metrics they need to monitor.
Below is an example of the difference that can be made to profit based on just a 1% increase in performance for each sensitive metric:
Metric Original Scenario 1% Increase
Prospects 1000 1010
X Conversion Rate 10% 10.1%
= Total Customers 100 102
X Sales per customer 10 10.1
X Average Price £100 £101
= Turnover £100,000 £104,050
X Margins 15% 15.15%
= Profit £15,000 £15,764
Therefore just these small increases across all core drivers enabled the overall profit figure to increase by 5%!
What are the benefits of scenario modelling?
- It provides details of expected future returns of the business, enabling you to make decisions based on your expected cash flows
- The results provide insight into the key drivers of business performance, allowing you to know which metrics to focus attention on
- The results also enable you to plan some pro-active responses in case worst case scenarios occur in reality. This planning enables you to respond more efficiently and effectively than your competitors.
In these uncertain times, are you aware of how sensitive your business is to the market? Do you know what levers to pull to migitate the risk to reducing profits?
If you would like a FREE financial health check for your business, or alternatively support with business forecasts, scenario planning and sensitivity analysis, please contact us here or contact Paul directly at Enrich Accounting on 07403 407455 or at firstname.lastname@example.org