Sensitivity analysis is a technique that examines how changes in individual input variables affect the output of a financial model, holding all other inputs constant. By varying one assumption at a time — such as revenue growth rate, gross margin, or a key cost driver — sensitivity analysis quantifies how sensitive the projected financial outcome is to changes in each input, identifying which variables have the greatest impact on outcomes and where management attention should focus in uncertain environments.
Why This Matters
Not all assumptions in a financial model carry equal risk. Sensitivity analysis separates the assumptions that matter most — those whose variation would significantly change the financial outcome — from those that have minimal impact on the result. This enables management to focus uncertainty management effort on the variables that most affect outcomes, rather than treating all assumptions as equally important. It also provides a quantified basis for assessing how much confidence management should place in a financial projection given the uncertainty in its key inputs.
Where This Fits
This term sits within the Planning & Projections area of Performance & Control.
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