Sensitivity Analysis

Sensitivity analysis is a financial modeling tool used to assess how changes in key variables affect the outcome of a financial decision or projection. By altering inputs such as costs, interest rates, or sales volume, sensitivity analysis helps businesses and investors evaluate the potential impact of various scenarios and market conditions. This analysis is often used in budgeting, forecasting, and risk management to prepare for different financial outcomes.

Example

A company might use sensitivity analysis to predict how a 5% increase in raw material costs would impact its overall profit margins.