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1.7 Test Your Projections
Sensitivity Analysis
Take a Closer Look
Example
Downloads (MS Excel)
The financial forecasts you prepare are based on assumptions and predictions
that may or may not be accurate. For instance you may assume interest
rates will rise, or you may predict that your sales will grow at a certain
rate. Make sure that you test your financial forecasts so that you can
plan effectively.
Sensitivity analysis allows you to look at various "what if"
scenarios to assess how your company's financial health and targets
may be affected by changes in circumstances. The analysis may also show
where you need to gather more information to support your assumptions.
An Example: The Impact of a Drop in Sales Revenue
Here's an example of a sensitivity analysis. New Tech's business plans
and its financial needs are based on projected sales revenue. What happens
if in reality this revenue drops?
Base case
| |
2000
Actual |
2001
Forecast |
2002
Forecast |
| Sales revenue ($) |
3,000,000 |
3,900,000 |
4,700,000 |
| Gross margin ($) |
1,815,000 |
2,435,000 |
3,075,000 |
| Operating income ($) |
403,000 |
425,000 |
990,000 |
| Income after taxes ($) |
204,500 |
205,000 |
548,000 |
| Return on total assets (%) |
8.50 |
5.95 |
11.66 |
Scenario A: Sales revenue decrease by 5%
| |
2000
Actual |
2001
Forecast |
2002
Forecast |
| Sales revenue ($) |
3,000,000 |
3,705,000 |
4,465,000 |
| Gross margin ($) |
1,815,000 |
2,314,000 |
2,896,000 |
| Operating income ($) |
403,000 |
310,000 |
831,000 |
| Income after taxes ($) |
204,500 |
131,000 |
445,000 |
| Return on total assets (%) |
8.50 |
3.79 |
11.03 |
Scenario B: Sales revenue decrease by 10%
| |
2000
Actual |
2001
Forecast |
2002
Forecast |
| Sales revenue ($) |
3,000,000 |
3,510,000 |
4,230,000 |
| Gross margin ($) |
1,815,000 |
2,182,000 |
2,731,000 |
| Operating income ($) |
403,000 |
182,000 |
671,000 |
| Income after taxes ($) |
204,500 |
47,000 |
341,000 |
| Return on total assets (%) |
8.50 |
1.37 |
8.44 |
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