Forecasting & Sensitivity Analysis

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Forecasting & Sensitivity Analysis

One of the most challenging aspects of a business plan is financial projections. If we intended to present the business plan to a group of investors, we have to explain them with numbers. As the investors are focused on the profitability of the company.

The challenge is creating financial projections and forecasting the growth and future of the organization. Whereas the sensitivity analysis is a way to predict the outcome of a decision if a situation turns out to be different compared to the key prediction(s). It is very useful when attempting to determine the impact of actual outcome of a particular variable will have it differs from what was previously assumed.

Why is forecasting and sensitivity analysis important?

Forecasting plays a pivotal role in the operations of the modern management. It is an important and necessary aid to planning and effective operations.

  • It provides relevant and reliable information about the past, present events and likely future events. This is necessary for sound planning.
  • It gives confidence to managers to make decisions relating to forecasting.
  • It helps in analyzing and understanding the problem area.
  • It is helpful in comparing the actual and estimated results.
  • Helps in developing sound foundation in the management.

The importance of sensitivity analysis are:

  • It helps in identifying the key variables that have influence in the cost and benefits of the project.
  • It is useful in determining the demands, expenses, operating costs, legal costs, revenues and financial benefits
  • This method helps in assessing whether changes will effect a particular project and the consequences of the same.
  • It helps in determining the unpleasant situations that might occur due to change, thereby identifying and implementing the actions that will help mitigate these adverse effects.

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