What is sensitivity analysis?

Definition

Sensitivity analysis tests how much a result changes when you move one assumption and leave the others still. It is a planning check, not an account on the books.

On the books, nothing posts. Closed actuals stay in the general ledger; the test lives in a workbook beside them.

You change one input, such as average job size or a unit price, and watch revenue, cost, or cash respond. The point is the size of that response.

Where it shows up

P&L: Related to how income and expense change when one assumption moves.

Balance sheet: Related to how balances change when one assumption moves.

Cash flow: Related to how cash changes when one assumption moves.

See also: Scenario Planning · Forecast · Driver-Based Forecasting

When you look at your Income Statement, this test shows how net income would shift if one driver of a line moved. Closed months stay as they posted.

The Balance Sheet can sit in the same check when cash, receivables, or payables depend on that driver. Many shops start with income and expense and only later push the move into balances.

Cash changes in the test only if the assumption you move actually changes receipts or payments. Moving a noncash estimate does not, by itself, change the bank.

Owners keep this in a planning file. The live books remain the record of what already posted.

How it works

Start with a base view of the period. Then change one input by a round amount and recalculate the result.

Each pass follows the same method:

• Change one input by a round amount
• Hold every other assumption still
• Read the swing in the result

Hold every other assumption still. If you move job size, do not also move job count and close rate in the same pass.

Read the difference. A $1,000 drop in average ticket that cuts annual revenue by $80,000 tells you that ticket size moves the year a lot.

You can run the same test on a second input later. Each pass answers a different question, still one input at a time.

This is not a journal entry. Nothing in the general ledger changes because you tested a lower average job.

The test is the one-assumption move. Building several full futures at once is a different exercise.

If a small move barely changes the result, that input is not the one to watch most closely. If a small move swings operating expenses or cash hard, that input needs a closer look.

The test can be done on a price, a volume, a cost rate, or a timing assumption. The method is the same: move one, hold the rest, read the swing.

Example

A solar installer plans 80 jobs a year at an average of $10,000 each, for $800,000 of revenue. The owner wants to know what happens if the average job comes in lighter.

The test drops average job size by $1,000, to $9,000, and holds the 80 jobs still. Annual revenue falls to $720,000, an $80,000 cut.

Each further $1,000 drop takes another $80,000 off the year. The owner can see that relationship without rewriting every other line.

The books still post real jobs to revenue as they are completed. The $80,000 is a planning result, not a book entry.

If the owner then tests jobs completed instead of job size, that is a second pass. The first pass stays the job-size move.

The Financial Statement Package still shows what actually posted. The test lives in the planning file beside it.

Common mix-ups

Sensitivity analysis is not the same as scenario planning. Scenario planning builds several plausible futures; this test moves one assumption and holds the rest still.

It is not the same as the updated projection itself. The projection is the heading; this test asks how that heading would change if one input moved.

It is not the same as driver-based forecasting. Driver-based work builds the projection from volume and rate; this test then pokes one of those inputs to see the swing.

Related terms

• Scenario Planning: Modeling several plausible futures to see how the numbers hold up.
• Driver-Based Forecasting: Building projections from the underlying volume and rate assumptions.
• Forecast: An updated projection of where the numbers are actually heading.
• Break-Even Point: The sales level at which total revenue exactly covers total costs.
• Net Present Value: The value today of an investment's expected future cash flows, net of its cost.
• Margin Of Safety: How far sales can fall before the business drops below break-even.
• Budget: The approved plan of revenue and spending for a coming period.
• Payback Period: How long it takes an investment to return its own cost in cash.