Scenario modeling on projected financial statements is important in any year, but macroeconomic events like the 2020 pandemic and more recently, inflation and rising interest rates, can dramatically increase the stakes for finance executives to understand the range of possible financial outcomes for their business. Unforeseen dislocations between supply vs. demand and cash flows vs. debt servicing brought on by macroeconomic shocks can have a significant detrimental impact to a company’s financial standing. This necessitates an increased focus on how scenarios impact cash flow, liquidity, and balance sheet strength.
Therefore, any scenario modeling solution should go beyond the income statement and provide insights into the balance sheet, cash flow statement, and key metrics derived from those statements.
At Alithya, we have been implementing Oracle’s Strategic Modeling solution (and before that its on-premise equivalent Hyperion Strategic Finance) for over twenty years to help our customers run scenarios that provide insights to make business-critical decisions. Whether it’s inflation and interest rate risk of today, or the pandemic and the 2008 Great Recession of yesterday, the business need to generate financial insights from scenario modeling remains the same. Then - as it is now, cash flow is king, and the ability to preserve liquidity and financial flexibility is paramount.
By leveraging Strategic Modeling’s out-of-the-box integrated financial statements, we build financial models that allow our customers the ability to immediately see how a change in volume or other key business drivers ripples through the income statement, balance sheet, cash flow statement, and key performance metrics that are derived from financial statements. Our implementations of Strategic Modeling include credit metrics and ratios that allow our customers to evaluate how various scenarios will impact the metrics that banks, rating agencies, and internal management use in their analysis of the business.
Oracle Strategic Modeling scenario capabilities
Of course, no scenario modeling solution would be effective without best-in-breed scenario capabilities, and here is where Strategic Modeling shines. It has two primary tools in its what-if toolkit that are of great benefit to our clients.
Scenario Manager
Scenario Manager greatly facilitates the process of creating on-the-fly scenarios and comparing them against the base case or other scenarios. Scenario Modeling capabilities are designed for end users to create and run and provide immediate results to key strategic questions.
Monte Carlo simulations
Monte Carlo simulations allow customers to forecast a range of possible input values for key drivers and then run thousands of trials or simulations to see the range of outcomes on key metrics in the model. This provides a probabilistic approach to modeling that helps to assess risk and the probability of certain outcomes occurring.
By combining the great scenario capabilities of Strategic Modeling with a set of fully integrated financial statements, we can help our customers answer the important what-if questions that senior management, the board, and external stakeholders are asking. With ever evolving economic conditions, this is a need that will not go away.