Sensitivity and stress testing

Question 1

What is sensitivity analysis and how does it work?

Answer 1

This analysis involves revising one key budget assumption and examining the impact this has on the budget. For example, what percentage change in a variable would cause us to only break even.

Advantages
- It can identify which assumption has the greatest impact on the budget and therefore what needs to be considered most carefully

Disadvantages
- Only one assumption could be changed at a time. For example, if selling price drops would volume increase? This would not be answered in sensitivity analysis.

Question 2

What is stress testing and how does it work?

Answer 2

This examines how a budget would perform or function under severe or unexpected pressure.

It goes beyond a simple what if analysis and evaluates the impact of the entire scenario on an organisation. For example, technology changes, changes in customer taste, cyber security attack or workforce strikes

This allows us to plan for each scenario