The penultimate step in our 8 Steps Business Improvement Programme is Analyse. Do you put off or struggle to find the time to carry out this vital process for your business? Even if your business is performing well, there could be ways to make it even more profitable or valuable.
Sensitivity or what-if analysis is a useful way to examine how your business would cope if a worst-case scenario were to happen – the loss of a key customer, lead supplier or a valuable member of staff for instance.
You can also use sensitivity analysis to improve your business performance, the outcome might be to raise your prices, improve your supply chain process or employ a specialist. Sometimes the simplest changes can have a dramatic impact on your bottom line.
How to carry out a sensitivity analysis
Sensitivity analysis can look and feel quite complicated so if you’ve never done it before, the experts at CRM can help. It requires the in-depth identification and study of all the ‘what if’s variables using historical data to give possible outcomes using a mathematical formula from financial modelling. It’s a powerful tool to enable business owners to make important decisions about future investments and direction.
In business forecasting, certain assumptions need to be made, such as:
- Cash flow timing in/out and amounts
- Sales volume and pricing and gross profit margins/overheads for profit budgeting
- Investment appraisals (amount, timescale and cash flow)
Despite the usefulness of sensitivity analysis, it’s not foolproof and the disadvantages are that you can only measure the impact of one variable at a time. In addition, the historical data that the assumptions are based on may not be entirely accurate but it helps decision-makers to understand the uncertainties and advantages or disadvantages within a decision model.
So, making informed decisions and adding credibility to your financial modelling are just two of the reasons to tackle sensitivity analysis, but you don’t need to do it alone. We’re here to help as part of our 8 Steps Business Improvement Programme. Please get in touch with CRM to find out more on 01865 379272.