Because the future cannot be predicted with any certainty, it’s never a good idea to take your financial model’s results and claim, either to your boss or to your client, that the results are final. This allows the analyst to “stress-test” the financial results because the reality is that expectations can and usually do change over time. In previous articles, we discussed the fact that these forward-looking assumptions may not always hold true, and that the use of a scenario manager is a great way to incorporate several different performance possibilities into your financial model. A rule of thumb: results are never finalĪ scenario manager allows the analyst to “stress-test” the financial results because the reality is that expectations can and usually do change over time. Typically, once an analyst inputs both historical financial results and assumptions about future performance, he/she can then calculate and interpret various ratio analyses and other operational performance metrics such as profit margins, inventory turnover, cash collections, leverage and interest coverage ratios, among others. It provides a way for the analyst to organize a business’s operations and analyze the results in both a “time-series” format (measuring the company’s performance against itself over time) and a “cross-sectional” format (measuring the company’s performance against industry peers). Using data tables for performing a sensitivity analysis in ExcelĪ financial model is a great way to assess the performance of a business on both a historical and projected basis.
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