Sensitivity analysis
Sensitivity analysis is a simple way to see how results change when key assumptions move. You tweak one or more inputs (like price, volume, or costs) and watch the impact on profit, cash flow, or project value. It helps you spot which drivers matter most and where the risks are.
Quick example
Test what happens if your average selling price drops slightly while volume stays the same. You may find profit falls faster than expected because the lower margin applies to every unit.
There are two common styles: one‑way (change one input at a time) and multi‑way (change several together). Sensitivity is different from a scenario, which bundles a set of linked assumptions into a story such as “slow sales and higher costs”. Use the results to set safe price floors, watch key costs, and plan cash buffers.
These are typical inputs to test:
- Sales price per unit or hourly rate
- Sales volume or utilisation
- Unit variable costs (materials, shipping, commissions)
- Fixed overheads
- Payment terms and customer delays (cash flow timing)
- Exchange rates for foreign sales or purchases
- Discount rate or required return in project appraisal
Be clear about what stays fixed and what moves with volume. Write down your assumptions so you can repeat the test or explain the result later.
Start simple, then build
Begin with one input at a time, then combine the few that matter most into realistic scenarios. Focus on the drivers that move profit or cash flow the most.
