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Introduction to my Blogs

In this space, I hope to bring you information largely from my own experience and from sources that I consider trusted. It is also my hope that it will make a difference in your personal lives and help you to make better business decisions.

As I know you have limited time, I will make these posts as short and to the point as possible.

What If (Sensitivity) Analysis – A tool less used in Financial Projections

Over the years, I have seen many financial projections accompanying business plans, and this one financial sheet keeps missing.  It is most important to business owners, investors, and bankers.  Why is it important? Business is risky. When we make projections, we do so with certain assumptions in mind.  These can go in either direction.  So, you want to test what the company’s likely financial situation will look like if certain variables change. Often you want to see the impact of changes in Total Expenses and Total Revenues on Net Income (Profit) levels. I think that All owners should compose this projection, and all investors and bankers demand this in any business plan submitted to them.  Here is an example of one I did for a client:

Note:

1. At the horizontal axis and the vertical axis at 0% change in projected income and expenses, notice that Net Profit is $69.8 million
2. If there is a change Total Expenses of 15% and there is 0% change in Projected Income, Net Profit is projected at $63 million.
3. If there is a fall-off in Projected Income of 20% and in increase in Total Expenses of 20%, Net Profit is projected at $37.6 million.

You can peruse the foregoing table and get the likely financial situations of this company at different axes.  For sure, you can extend the table with different percentage changes.

So, you can see why its important for stakeholders.  Were I a banker, I would demand What if Analysis projections from business loan applicants. Click here to send a message.