What is profit sensitivity analysis?

Sensitivity analysis is A method of risk assessment related to a group of quantitative methods. Its essence is as follows. A value is determined, the change of which can be traced and measured. This is a value that is of great importance for the feasibility of the project. Then, the input parameters change one by one, while the change in the reference value is fixed. If the value has changed by more than 5% (in some cases a maximum deviation of up to 10% is allowed), the sensitivity analysis performed indicates that the project has a high degree of risk. After all, such a reaction force indicates a high degree of dependence on the oscillations of the input parameters.

We will not give detailed calculation formulas, but for an example we will explain what can be a control measured quantity, and what is a variable parameter on which it depends.

Most often, in practice, the sensitivity analysis of enterprise profits is performed . It is necessary to measure the dependence of the profit that the company will receive from other values, and, accordingly, assess the degree of risk. So, what can profit depend on? From the volume of sales, from specific variable costs and other factors. The power of influence of each of these factors will depend on the type of company's activity, the type of production. So, some enterprises will react more strongly to changes in purchasing prices for raw materials, others - to change production volumes.

As factors, resistance to which is taken into account in the analysis, the indicators of the economic situation as a whole in the market / in the country, for example, inflation, can act. And in each case, performing the sensitivity analysis, it is desirable to simulate three scenarios. This is the best option for the development of the situation, pessimistic and, finally, realistic.

An important condition: when changing the initial data and subsequent measurements of the reference value, it is important that only one input parameter is changed. Otherwise, the results obtained can hardly be considered reliable. But, since in reality we are dealing with a set of changing factors, such calculations, taking into account several quantities at once, are performed using a computer. The sensitivity analysis of the project is carried out in 6 stages:

1. Establishment of input parameters that affect the measured indicator (for example, profit).
2. Determination of the formula showing the dependence of profit on input parameters.
3. Calculation of the indicator under the predicted factors affecting it.
4. Calculation of the indicator when changing factors affecting it (changes in factors and, accordingly, the sought-for indicator are expressed as a percentage). This procedure is carried out for all investigated factors, the data are fixed in tables and graphically displayed in the form of graphs. In addition, there is a variant of analysis, in which the calculation formula is substituted not by changes in factors in percent, but by specific values. This allows to reveal what will happen to the indicator (profit) at specific input values.
5. Identification of the most significant factors, which in the case of a particular enterprise depends on profit, as well as the calculation of their critical values.
6. Final analysis of the results.

Often the sensitivity analysis of the profit is performed simultaneously with the break-even analysis. Together, these calculations provide the most complete picture of what will happen to the enterprise under changing conditions, and how to keep the profitability of production. They also identify the maximum allowable values for the enterprise input parameters.

Thus, the analysis of the sensitivity of an investment project or an operating enterprise makes it possible to establish the degree of financial risk, the appropriateness of investing funds, and to identify aspects that require the most close attention and develop measures to protect the company's stability. All this helps to properly allocate labor and financial resources, contributes to the effective management of the enterprise and provides it with a stable profit.