Sensitivity Analysis in Financial
Modelling
Understanding Key Drivers and Risk
in Financial Decisions
Your Name / Organization / Date
Definition
• Sensitivity analysis examines how changes in
key assumptions affect outcomes.
• Helps understand the impact of uncertainty on
financial performance.
Importance
• Risk assessment: Identify high-impact
variables
• Decision support: Make informed investment
and project choices
• Prioritization: Focus on critical factors
• Scenario planning: Prepare best, worst, and
likely case outcomes
Key Variables
• Revenue drivers: sales volume, unit price
• Cost drivers: raw materials, labor, operating
expenses
• Financing variables: interest rates, debt levels
• Investment assumptions: capex, depreciation
• Macro variables: inflation, tax rate, exchange
rate
Step-by-Step Process
• 1. Build base case model
• 2. Select key inputs
• 3. Change one variable at a time
• 4. Record results
• 5. Analyze sensitivity
• 6. Visualize results
Types of Sensitivity Analysis
• Single-variable sensitivity
• Multi-variable sensitivity
• Percentage change sensitivity
• Break-even sensitivity
Example Scenario
• Base case: Revenue $12M, COGS $7M, OpEx
$2M, Discount rate 10%
• Questions:
• - Revenue drops by 10% → effect on NPV?
• - Costs rise by 5% → effect on profitability?
• - Discount rate increases 1% → impact on
valuation?
Visualization (Tornado Chart)
• Tornado charts rank variables by impact
• Largest effect variable on top
• Helps identify critical assumptions quickly
• Placeholder for sample tornado chart
Benefits
• Insight into financial risks
• Highlights critical assumptions
• Supports strategic decisions
• Prepares for best and worst case scenarios
Limitations
• Dependent on input accuracy
• Single-variable analysis may miss interactions
• Complex models may need scenario or Monte
Carlo analysis
Advanced Tips
• Use Excel conditional formatting for quick
visualization
• Combine with scenario manager for multiple
variables
• Evaluate sensitivity of discount rate and
terminal growth in valuations
Summary / Conclusion
• Sensitivity analysis is a powerful tool for
financial modelling
• Identifies risks, informs decisions, and
prioritizes focus areas
• Essential for scenario planning and strategic
financial management