Scenario Analysis

Posted: July 9th, 2021

Week 5 Discussion

Scenario analysis is important when an organization is determining whether to buy or sell stocks, when composing a personal budget, or when purchasing or selling a business organization. Scenario analysis helps a business to effectively plan for eventualities of decisions (Postma & Liebl, 2005). There are a number of advantages of using scenario analysis. It ensures that a business avoids making a poor investment decision. It assists a firm to effectively plan for the future and to avoid risk (Cosenz & Noto, 2016). Scenario analysis also helps a firm project a return on investment. Finally, it also helps a firm in the development of a corporate strategy. There are two major challenges of scenario analysis – its inability to accurately determine the “by-products” of major decisions and the involvement of correlations and assumptions that may be incorrect. Evidently, the advantages of scenario analysis are more than its disadvantages.

Financial Analysis and Capital Budgeting

Financial analysis is a business finance management aspect that involves the assessment of historical financial data to acquire information about a business’ current and future financial performance (Brooks & Mukherjee, 2013). It is applicable in many situations to provide management with the information necessary to make business decisions. It is necessary to understand the financial health of business when managing operations and making future business plans. The ability to read and interpret financial data is key for any business manager. Financial analysis plays an important role in capital budgeting (Bierman Jr & Smidt, 2012). Financial statements are the necessary tools for showing the budget of a business organization, which shows the upcoming projects, marketing plans, and available financial resources. Information provided by financial statements is necessary for making good capital investment decisions.

References

Bierman Jr, H., & Smidt, S. (2012). The capital budgeting decision: economic analysis of investment projects. Routledge.

Brooks, R., & Mukherjee, A. K. (2013). Financial management: core concepts. Pearson.

Cosenz, F., & Noto, G. (2016). Applying system dynamics modelling to strategic management: a literature review. Systems Research and Behavioral Science, 33(6), 703-741.

Postma, T. J., & Liebl, F. (2005). How to improve scenario analysis as a strategic management tool? Technological Forecasting and Social Change, 72(2), 161-173.