Description
Sensitivity Analysis in Corporate Performance Management (CPM) software refers to the process of varying the inputs of a financial model to determine their effect on the output metrics. Through sensitivity analysis, companies can identify and understand the variables that carry the maximum risk and can potentially impact profitability. This feature allows users to run multiple scenarios simultaneously and determine the areas that require attention.
Example Use Case
Scenario: An enterprise-level manufacturing firm uses CPM software to manage its financial operations. The firm regularly conducts sensitivity analysis to gauge the potential impact of changes in raw material costs, labor costs, and unit demand.
Solution: Using sensitivity analysis functionality in their forecasting software, they can run various scenarios simultaneously like an increase in raw material costs, increase in labor costs, decrease in market demand, etc. The software will then highlight the variables that expose the most risk.
Considerations
Sensitivity analysis functionality is more prevalent in the CPM tools that lean more into modeling vs structured budgeting and forecasting. As such, the products tend to skew more enterprise and higher cost as they generally serve more complex use cases.
When looking at a sensitivity analysis demo, consider the following:
| Functionality |
Description |
Purpose |
| Variable Range Definition |
Allows users to define a range of values for each variable involved in the analysis. |
To assess how changes in input variables affect the results, providing a spectrum of potential outcomes. |
| What-If Scenario Modeling |
Enables the creation of multiple what-if scenarios by altering variables. |
To identify variables that have the most significant impact on outcomes and to plan for various possible futures. |
| Interactive Dashboards and Visualization |
Offers interactive dashboards and visual tools, like graphs and heat maps. |
To make it easier for decision-makers to visualize and understand the potential impact of different variables. |
| Monte Carlo Simulation |
Uses random sampling and statistical modeling to estimate the probability of different outcomes. |
To provide a more comprehensive view of potential risks and outcomes by considering a wide range of variables. |
| Tornado Charts |
Generates tornado charts to visually display the sensitivity of the outcome to changes in each variable. |
To quickly identify which variables have the most significant impact on the outcome. |
| Break-Even Analysis |
Calculates the point at which total costs and total revenue are equal, under different scenarios. |
To determine the minimum performance necessary to avoid loss, helping in assessing the feasibility of projects or investments. |
| Driver-Based Modeling |
Allows users to define key drivers of business performance and model how changes to these drivers affect outcomes. |
To enable more accurate and relevant sensitivity analysis by focusing on variables that directly influence business performance. |
| Scenario Comparison and Overlay |
Provides the ability to compare and overlay results from different scenarios side-by-side. |
To facilitate comparative analysis and help identify optimal strategies under various conditions. |
| Automated Reporting and Documentation |
Automatically generates reports and documentation detailing the assumptions, methodologies, and results. |
To support transparency, compliance, and informed decision-making by providing clear records of the analysis process and outcomes. |
Questions to Ask a Vendor
- Sensitivity Analysis Feature: Does your CPM Software support sensitivity analysis of multiple scenarios simultaneously?
- Risk Identification: How does the software determine and display which variables expose the most risk? Can it identify interactions between variables?
- Capabilities: We have a specific sensitivity analysis need (see table above). Does your software handle that?
