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    What Is A 'Sensitivity Analysis'

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    Merliza Jusayan
    The document discusses a sensitivity analysis example where John, who is in charge of sales for a Christmas decoration company, analyzes how increases in customer traffic at the mall might impact total sales revenue. It provides details on how John determines that a 10% increase in customer traffic results in a 7% increase in sales. It then explains how John can use this information to predict revenue increases if traffic rises by 20%, 40%, or 100%.

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    What Is A 'Sensitivity Analysis'

    Uploaded by

    Merliza Jusayan
    6 views5 pages
    The document discusses a sensitivity analysis example where John, who is in charge of sales for a Christmas decoration company, analyzes how increases in customer traffic at the mall might impact total sales revenue. It provides details on how John determines that a 10% increase in customer traffic results in a 7% increase in sales. It then explains how John can use this information to predict revenue increases if traffic rises by 20%, 40%, or 100%.

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    The document discusses a sensitivity analysis example where John, who is in charge of sales for a Christmas decoration company, analyzes how increases in customer traffic at the mall might impact total sales revenue. It provides details on how John determines that a 10% increase in customer traffic results in a 7% increase in sales. It then explains how John can use this information to predict revenue increases if traffic rises by 20%, 40%, or 100%.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    6 views5 pages

    What Is A 'Sensitivity Analysis'

    Uploaded by

    Merliza Jusayan
    The document discusses a sensitivity analysis example where John, who is in charge of sales for a Christmas decoration company, analyzes how increases in customer traffic at the mall might impact total sales revenue. It provides details on how John determines that a 10% increase in customer traffic results in a 7% increase in sales. It then explains how John can use this information to predict revenue increases if traffic rises by 20%, 40%, or 100%.

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    © All Rights Reserved
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    Sensitivity analysis example

    John is in charge of sales for HOLIDAY CO that sells Christmas decorations at a


    shopping mall. John knows that the holiday season is approaching and that
    the mall will be crowded. He wants to find out whether an increase in
    customer traffic at the mall will raise the total sales revenue of HOLIDAY CO
    and if so, by how much.

    The average price of a packet of Christmas decorations is $20 and during the
    previous year’s holiday season, HOLIDAY CO sold 500 packs of Christmas
    decorations, resulting in total sales worth $10,000.

    After carrying out a Financial Sensitivity Analysis, John determines that a 10%
    increase in customer traffic at the mall results in a 7% increase in the number
    of sales.

    Using this information, John can predict how much money company XYZ will
    generate if customer traffic increases by 20%, 40%, or 100%.

    Based on John’s Financial Sensitivity Analysis, these will result in an increase in


    revenue by 14%, 28%, and 70% respectively.

    Sensitivity Analysis
    What is a 'Sensitivity Analysis'
    A sensitivity analysis determines how different values of an independent variable impact
    a particular dependent variable under a given set of assumptions. This technique is
    used within specific boundaries that depend on one or more input variables, such as the
    effect that changes in interest rates (independent variable) have on bond prices
    (dependent variable).

    Read more: Sensitivity Analysis Definition |


    Investopedia https://www.investopedia.com/terms/s/sensitivityanalysis.asp#ixzz5IZntmrty 
    Follow us: Investopedia on Facebook
    What are sensitivity analysis best practices?

    #1 Layout in Excel

    Layout, structure, and planning are all important for good sensitivity analysis
    in Excel.  If a model is not well organized both the creator and users of the
    model will be confused and the analysis will be prone to error.

    The most important points to keep in mind for layout in Excel include:

     Place all assumptions in one area of the model


     Format all assumptions/inputs in a unique font color so they are easy to
    identify
     Think carefully about what to test – only the most important
    assumptions
     Understand the relationship (correlation) between dependent and
    independent variables (linear, nonlinear?)
     Create charts and graphs that allow users to visualize the data
     Create a separate area for the analysis using grouping (see example
    below)

     
     

    #2 Direct versus indirect methods

    The direct method involves substituting different numbers into an


    assumption in a model.

    For example, if the revenue growth assumption in a model is 10% year over
    year (YoY), then the revenue formula is = (last year revenue) x (1 + 10%). In the
    direct approach, we substitute different numbers to replace the growth rate,
    like 0%, 5%, 15%, and 20% and see what the resulting revenue dollars are.

    The indirect method (as shown below) inserts a percent change into formulas


    in the model, instead of directly changing the value of an assumption.
    With the same example as above, if the revenue growth assumption in a
    model is 10% year over year (YoY), then the revenue formula is = (last year
    revenue) x (1 + 10%).  Instead of changing 10% to some other number, we can
    change the formula to be = (last year revenue) x (1 + (10% + X)). Where X is a
    value contained down in the sensitivity analysis area of the model.

    To learn how to do this step by step launch our sensitivity analysis


    course now!

    #3 Tables, charts, and graphs

    Sensitivity analysis can be challenging to comprehend even by the most


    informed and technically savvy finance professionals, so it’s important to be
    able to express the results in a manner that’s easy to follow.

    Data tables are a great way of showing the impact on a dependent variable


    by changing up to two independent variables.  Below is an example of a data
    table that clearly shows the impact of changes in revenue growth
    and EV/EBITDA multiple on a company’s share price.

     
    Tornado Charts can be a great way of showing the impact of changes to
    many variables at once.  They are called Tornado Charts because they are
    sorted from the most impactful to least impactful in a way that shapes the
    chart like a tornado cone.  To learn how to build these charts, launch
    our sensitivity analysis in Excel course now!

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