How can sensitivity analysis test the robustness of your budget models?

1 What is sensitivity analysis?

Sensitivity analysis is a method of testing how sensitive your budget model is to changes in one or more input variables, such as sales volume, price, cost, inflation, interest rate, exchange rate, or any other factor that affects your revenue or expenses. By changing these variables within a certain range or under different scenarios, you can see how your budgeted income, cash flow, or profitability change as well. This can help you assess the potential impact of uncertainty and risk on your budget performance and identify the most critical variables that drive your results.

3 How to perform sensitivity analysis?

There are different methods and tools for performing sensitivity analysis, depending on the complexity and purpose of your budget model. One of the simplest and most common methods is to use a spreadsheet software, such as Excel, and create a data table that shows how your budget output changes when you vary one or two input variables. For example, you can create a data table that shows how your net income changes when you change your sales volume and price. You can also use formulas, charts, and graphs to visualize and analyze the data table. Another method is to use a software that can perform more advanced and sophisticated sensitivity analysis, such as Solver, Crystal Ball, or @RISK. These tools can help you perform what-if analysis, scenario analysis, simulation analysis, and optimization analysis, which can handle multiple variables, non-linear relationships, probability distributions, and constraints.

4 What to look out for?

Sensitivity analysis can provide you with valuable insights and information for your budgeting and forecasting, but it also has some limitations and challenges that you need to be aware of. First, sensitivity analysis does not tell you the likelihood or probability of each scenario or variable change. It only shows you the possible outcomes based on your assumptions and estimates. Therefore, you need to use sound judgment and data sources to support your assumptions and estimates and update them regularly. Second, sensitivity analysis does not account for the interactions and dependencies between different variables and scenarios. It assumes that each variable or scenario is independent and does not affect the others. Therefore, you need to consider the interrelationships and correlations between different factors and how they may influence your budget results. Third, sensitivity analysis does not provide you with a definitive answer or solution for your budgeting and forecasting. It only shows you the range and variability of your budget outcomes. Therefore, you need to use sensitivity analysis as a tool for exploring and learning, not as a substitute for critical thinking and decision making.

5 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?