Iterate regularly to test for variable sensitivity
Every model has the ability to be stress tested. Test them regularly to see how the result changes based on varying conditions. Test for sales dropping 10%. What if prices drop 5% and sales rise 10%? What if your entire logistics department is out sick for the month of October?
To go back to the role of forecasts in the economic downturn, most of the models used in financial houses had no capability to test for the possibility of an across the board housing price drop. Their inputs would not allow them to enter a negative number. It’s possible that those institutions wouldn’t be in the situation that they find themselves in if they could test the sensitivity of their outputs based on negative home price increases.
If your forecast model doesn’t allow you to test for a given condition change that could occur, it is time for a revision. Never let yourself be held hostage by the constraints of your overgrown spreadsheet. It is up to you to make decisions based on the criteria you feel you need to make them against.
A common question is “how do you test for sensitivity?” It surprises everyone who asks how simple it actually is: draw up five scenarios that could happen over the next forecast period (typically this will be high variable growth, medium variable growth, no change, medium variable decline and high variable decline). Use your imagination because it changes from business to business and period to period.
Brainstorm how those five scenarios would make the numbers look. Some data points will go up, others down. Use your best estimation abilities; accuracy is not vital since the scenario didn’t actually happen. Put the revised data into the model and see what the outcome is. Compare all five scenarios against what actually happened. You now have a possible range of outcomes that could have occurred.
This gives you a greater ability to understand the impact of shifting market conditions. If you believe that there is a 5% chance of high growth 15% chance of medium growth, 40% chance of no change and 40% chance of medium decline you can apply those probabilities to the outcomes to get a blended decision. You are essentially hedging against the possibilities that are likely to occur. You will be a better decision maker for this process.