Micro- and Macro-Scenario Analysis
Projects and initiatives do not happen in isolation. There are always external economic factors that affect large-scale business decisions. For example, credit ratings, bond pricings, and looming recessions all affect the viability of capital projects, initiatives, and purchases. Scenario-based financial models must incorporate external and internal conditions to maintain relevancy to an organization’s financial future.
Scenario analysis is best defined as the process of stress-testing a business’s finances over a series of macro- and micro-scenarios. Macro-scenarios incorporate both external and internal factors into one overarching financial scenario. For example, a macro-scenario for the construction of a new warehouse might include:
- Purchase price of building materials
- Cost of hiring a construction firm
- Building completion timeline
- Current debt pricing
- New staff for the warehouse
- Economic conditions upon completion
Each component of the above macro-scenario are themselves micro-scenarios. For example, the purchase price and quality of building materials can vary between vendors and hiring additional staff can change depending on completion time of the new warehouse as well as a host of additional factors.
If each micro-scenario has three different possibilities, that yields 36 or 729 unique financial scenarios!