Financial Planning and Analysis – Conducting Sensitivity Analysis

Financial planning and analysis are actually regarded as the budgeting, forecasting, and analytical processes that support an organizations’ financial health and business strategy. It depends heavily upon the analysis to measure and plan the business operations as well as forecasting their financial impact while considering a different set of assumptions.

Financial planning and analysis or FP&A experts are likely to monitor, analyze, and help manage the financing needed to meet certain obligations, tracking and analyzing cash flow, analyzing the financial statements along with other financial and operational data that are important and might be affected to certain changes in scenarios.

In other words, financial planning and analysis are two things which are crucial when it comes to running or starting a business as well as for personal ventures since it helps greatly with coming up sensible decisions about financing that will eventually guide one to their determined goals or objectives.

There are a couple of ways to analyze ones’ business where the most commonly used by financial modelers is building a sensitivity analysis to help determine and evaluate the extent to which changes in assumptions and inputs can affect the various outputs of interest such as the Revenue, Net Income, Free Cash Flows, and many more value key drivers.

Sensitivity analysis is a very useful tool to analyze the impact of any changes in key assumptions on the key output of the model, such as the NPV and IRR. By running a variable through different scenarios or circumstances, you’ll be able to determine how sensitive the output is and also find out how to keep the inputs constant. In other words, sensitivity analysis is the task of calculating the uncertainty of a financial model while considering different sources of inputs.

A sensitivity analysis is part of a financial model and is usually conducted at the end, after all the series of key inputs and outputs needed as variables are determined. But, of course, one must not get confused which to focus on since it is best to choose variables that is the most informative to look at.

To help you get a gist of how a financial model with sensitivity analysis is built, you can check out this list of the financial model template with sensitivity analysis included: Sensitivity Analysis Model Templates. You can also get more templates for different use cases and are industry-specific at eFinancialModels, a platform with a wide range of templates made by financial modeling professionals with a vast experience in financial modeling as well as extensive know-how.