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Sensitivity Analysis

"What-if" scenarios

A budget is an action plan based on the best available information and assumptions for the future. Performing sensitivity analysis to test those assumptions or alternative options can greatly enhance the value of budgets as tools for planning and for feedback and course correction.

A sensitivity analysis applies a "what-if" situation to the budget model to see the effect of the potential change on the original data. For example, what if the cost of materials rises 5% or what if sales rise 10%? Calculations for sensitivity analysis can be complicated when dealing with a master budget that has summarized multiple divisional and/or functional budgets. Software packages for financial planning models are available and commonly used to perform these calculations, giving managers a powerful tool to determine the costs and benefits of various options and possibilities.

Using scenario analysis software, you can quickly see the potential impact of a change in assumptions, without having to generate new forecasts for each budget item such as raw materials or selling and administrative costs.
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