What is sensitivity analysis?

Sensitivity analysis tests how changes in financial-model assumptions affect the model’s outputs. It is used to identify which assumptions have the greatest influence on profitability, cash flow, funding requirements, valuation or debt-service capacity.

What is sensitivity analysis in financial modelling?

Sensitivity analysis in financial modelling measures how an output such as EBITDA, cash flow, IRR, NPV or DSCR responds when one or more assumptions change. The technique helps identify the assumptions that create the greatest financial risk.

What is what-if analysis?

What-if analysis is the broader process of changing model inputs to examine the resulting outputs. Microsoft Excel includes Data Tables, Scenario Manager and Goal Seek as built-in What-If Analysis tools.

What is scenario analysis in business planning?

Scenario analysis changes several related assumptions simultaneously to create a coherent alternative forecast, such as a downside, severe-downside or upside case. It shows how the entire business performs in a different operating environment rather than isolating a single assumption.

What is the difference between sensitivity analysis and scenario analysis?

Sensitivity analysis usually isolates individual drivers to identify which assumptions matter most. Scenario analysis changes several assumptions together to model a complete alternative outcome. Sensitivity analysis identifies the pressure points; scenario analysis shows what happens when several pressure points occur together.

How do you perform sensitivity analysis in Excel?

For one- or two-variable sensitivity analysis, Excel’s Data Table function can substitute a range of input values into linked model cells and automatically calculate the resulting outputs. Microsoft provides dedicated one-variable and two-variable Data Table functionality within What-If Analysis.

What assumptions should be tested in a business plan?

The most common assumptions are revenue, selling prices, volumes, gross margins, operating costs, payroll, debtor days, inventory, creditor days, CAPEX, interest rates, utilisation and project timing. The correct variables depend on the business model and funding structure.

Do funders require sensitivity analysis?

Requirements differ between institutions and transactions. South African funders such as the IDC and SEDFA publicly require credible financial forecasts, detailed assumptions, sustainable cash flow and evidence of repayment ability. Sensitivity analysis is a practical way to demonstrate the resilience of those forecasts and expose the risks that could affect repayment.

What are the best practices for interpreting sensitivity analysis results?

Identify the assumptions that produce the largest output changes, establish the relevant breakpoints, focus on cash, repayment, and profit, distinguish plausible downside from extreme stress, and connect each major sensitivity to a management response and a measurable KPI.