What if...?
1. What if...?
Hello, and welcome back to financial analysis in Power BI. In this chapter will explore the possibilities of asking, "What if...".2. Scenario analysis
Scenario analysis is a type of financial modeling that evaluates the performance of a dependent variable given certain factors determined by the analyst. Scenario analysis goes by a few different names, depending on the goals of the analysis. What-if analysis is commonly used to evaluate goals. For example, if a company wants to know what the revenue would be given an increase in sales, a what-if analysis is perfect for this. Stress testing isn't any different than what-if analysis, only that it takes scenario analysis to the extreme, which is valuable in identifying risks within a company's financial plan. After the 2008 Financial Crisis, financial analysts realized just how important stress testing was, and many models are now calibrated to test for an economic collapse like the Financial Crisis or worse.3. Forecasting in scenario analysis
Forecasts are commonly used in scenario analysis because they predict or estimate a future outcome based on assumptions. They usually use historical data and some set of assumptions to inform predictions of the future, so scenario analysis can be used to find what the future could hold in a specific situation. There are many different ways, or methodologies, to create a forecast, but the basics are straight line, moving average, and regression analysis. We won't get into depth about the last two, as it's out of the scope of this course, but I invite you to check out the citation at the bottom of this slide for more information provided by Harvard Business School.4. Straight line forecasting
Straight Line Forecasting is the easiest forecasting methodology. This assumes the growth rate will remain constant for the next period. In scenario analysis, the growth rate can be changed to examine all the possible outcomes. Usually, analysts will use the last year's growth rate. Let's look at the formula. F-t is the forecast for the a time period. To calculate a straight-line forecast, simply take last time period's value, denoted as x-t minus one, and multiply it by one plus the growth rate. For example, if 2021's revenue was $100,000, and the growth rate was 2%, then the forecasted revenue for 2022 would be $102,000.5. Straight line forecasting
Because the growth rate remains constant, it looks like a straight line on a chart, which gives this methodology its name.6. Growth rate
It's also important that you understand how to calculate growth rates. A growth rate is the same as finding the percent change. Find the difference between the end and start values and divide it by the start value. For example, to find the growth rate between 50 million in 2019 and 70 million in 2020, first find the difference between 70 million and 50 million; 20 million. Then divide that by the start period; 50 million. That returns zero point four, or a 40-percent growth rate.7. Let's practice!
Awesome! You now know about forecasting different scenarios and finding growth rates. Now it's your turn to practice!Create Your Free Account
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