Creating a Sensitivity Analysis & Forecast

Creating Your Forecasted Sensitivity Analysis

After completing your Financial Budgets (step 1), your First Year Forecasted Cash Flow Statement (step 2), your First Year Forecasted Income Statement (step 3), your First Year Forecasted Balance Sheet (step 4) your First Year Forecasted Ratios (step 5), and your First Year Forecasted Break-even Point (step 6), the next step is to develop your Forecasted Sensitivity Analysis (remember to create your forecasted financial statements and analysis one year at a time).

Recall from previous discussions, a Sensitivity Analysis is a "what-if"tool that examines the effect on a company's Net Income (bottom line) when forecasted sales levels are increased or decreased. For example, a sensitivity analysis can answer the following questions:

  • "WHAT" would be my forecasted net income, "IF" my sales forecast is 30%, 20%, or 10% too high?
  • "WHAT" would be my forecasted net income, "IF" my sales forecast is 20% or 10% too low?

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    As you might suspect, an original Forecasted Income Statement is needed to create a Forecasted Sensitivity Analysis. In other words, before you can create a 200Z Forecasted Sensitivity Analysis, for example, you MUST prepare a 200Z Forecasted Income Statement (IE the 200Z Forecasted Income Statement becomes the foundation for the 200Z Sensitivity Analysis).

    Many business plan writers generally prepare only one Sensitivity Analysis. That is, a sensitivity analysis for their FIRST forecasted year of operation. Therefore, in our example, Murray would prepare a Forecasted Sensitivity Analysis for 200X only (IE his first forecasted business year). Below illustrates Murray's 200X Sensitivity Analysis. (Please Note: Murray can develop a Forecasted Analysis for 200Y if he chooses; however, he elects not too).

    SCHOLARSHIP INFORMATION SERVICES
    SENSITIVITY ANALYSIS
    FOR YEAR ENDING DECEMBER 31, 200X

    		15%
    Decline
    in Sales    		 10%
    Decline
    in Sales    		 200X Original
    Forecasted
    Figures    		 10%
    Incline
    in Sales
    ASSUMPTIONS:
    Sales in units 3,400 3,600 4,000 4,400
    Selling Price per unit $26.00 $26.00 $26.00 $26.00
    Total Product Cost per unit $3.00 $3.00 $3.00 $3.00

    SALES:
    Total Sales $88,400 $93,600 $104,000 $114,400

    VARIABLE COSTS:
    Cost of Goods Sold $10,200 $10,800 $ 12,000 $ 13,200

    FIXED COSTS:
    Total Marketing Expenses $37,998 $37,998 $37,998 $37,998
    Total Administrative Expenses $46,173 $46,173 $46,173 $46,173
    TOTAL FIXED COSTS $84,171 $84,171 $84,171 $84,171

    NET INCOME BEFORE TAXES $(5,971) $(1,371) $7,829 $17,029

    PLEASE NOTE: All Operating Expenses are assumed to be Fixed Costs. The only Variable Cost is Cost of Goods Sold.

    As you can see, the sensitivity analysis consist of three main components; namely, 1) The Heading, 2) Sales Percentage Factors, and 3) The Body.  Below briefly explains each component; beginning with "The Heading".  For a complete examination of these three components as they relate to Murray Wilson's company, please click HERE.

    Below summaries the Forecasted Financial Statements and/or Budgets that need to be completed before you can develop your Forecasted Sensitivity Analysis.

    Budget Name Required to Determine Your Forecasted
    Original Forecasted Income Statement
    		Sales, COGS, Operating Expenses, Taxes
    OR   the following  Financial Budgets
    Sales Budget Total Sales for each Business Year
    Cost of Goods Sold Budget Cost of Goods Sold for each Business Year
    Operating Expense Budget Total Operating Expenses for each Year
    Income Tax Rate & Budget Income Tax Rate & Obligation
    Fixed Asset Budget Deprecation Expenses on Fixed Assets

     

    ADDITIONAL EXAMPLE ON THE SENSITIVITY ANALYSIS

    J&B Incorporated

     

    Categories: Forecasting