Sensitivity Analysis vs. Scenario Analysis: What’s the Difference?
Head of Customer Operations
There are hundreds of inputs and assumptions across your financial model, which means there’s a near-infinite number of possible scenarios you could build off of it.
That’s why the most important part of scenario planning and analysis isn’t about your model — it’s about understanding which levers you should pull to build out the “what-ifs” of your forecasting process.
If you want to figure out which levers will have the biggest impact on your business and increase the strategic value of your scenario planning exercises, make sure you’re adding sensitivity analysis to the process.
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What Is Sensitivity Analysis?
Sensitivity analysis is the process of modifying key drivers in your financial model and reviewing outputs to better understand which changes have the biggest impact on the business.
The concept of sensitivity analysis is essentially the same as any what-if scenario analysis example — you’re manipulating certain inputs to show potential outcomes. But sensitivity analysis is more of an internal exercise. It’s a tool for showing which inputs and drivers your business is most sensitive to.
What Is the Difference Between Sensitivity Analysis vs. Scenario Analysis?
The primary difference between sensitivity analysis and scenario analysis is the desired outcome.
In scenario analysis, you’re asking what-if questions about the business and trying to determine possible future outcomes of those situations. Sensitivity analysis is something you might do before running scenario analysis to better understand which assumptions in your model are the true drivers of the business.
More often than not, scenario analysis shows the potential outcomes when you make changes to the same assumptions whereas sensitivity analysis shows outputs when you change different variables.
Effectively forecast and visualize your data so you can focus more on telling the story behind the numbers.
Benefits of Sensitivity Analysis vs. Scenario Analysis
You shouldn’t be thinking about sensitivity analysis and scenario analysis as either/or tools — they’re better together. While they both roll up into an overarching scenario planning process, there are potential benefits that come specifically with a sensitivity analysis exercise.
It’s an educational tool for business partners
Sensitivity analysis helps you translate model outputs into terms business partners can understand. Show department leaders, executives, and other decision-makers which aspects of their strategic plans have the biggest impact on the business and budgeting. Use those insights to help modify plans and investment decisions, and drive toward company goals.
It improves scenario analysis efficiency
Sensitivity analysis gives you in-depth insight into which drivers you should build scenarios around. This makes your scenario analysis exercises more targeted, saving you from rebuilding models for different scenarios that won’t necessarily help you with business decision-making.
It helps you cross-check the integrity of your model
Your model should be a reflection of the business. So, in theory, you should know the key drivers and metrics your business is most sensitive to before you start modeling. Sensitivity analysis allows you to check your work, helping you see whether or not the key drivers you modeled around are actually most impactful to outputs.
When to Use Scenario Analysis vs. Sensitivity Analysis
In general, finance teams should use both sensitivity analysis and scenario analysis more often than they’re used to. In the past, this subset of financial modeling wasn’t necessarily an expectation for finance teams or financial analysts — at least not on a consistent basis. Now, given the uncertainty of the current economic climate, testing the flexibility of financial plans on a regular basis is the norm.
But beyond just conducting both exercises more often, there’s a general rule of thumb to help you decide when to use one or the other (if you aren’t doing both in tandem). Use scenario analysis any time you want to project multiple future growth paths at company and department levels. And use sensitivity analysis when you want to check if the drivers in your model properly reflect the needs and expectations of the business.
It’s easier to understand the use cases with practical examples. In scenario analysis, you’re thinking about what-if questions like:
- What if we add ten new AEs next year instead of five? How does that affect top-line revenue?
- What if we double our ad spend? How does that impact pipeline and funnel conversions?
- What if there’s a market downturn and we miss revenue projections by 50%? How does that impact our cash runway and headcount expectations?
But in sensitivity analysis, you’re thinking more about things like:
- What’s a bigger driver of revenue growth: AE headcount or quota attainment?
- Which variable is a better driver of pipeline growth: traffic and lead growth or funnel conversion rates?
- What has a bigger impact on short-term cash flow: billing terms or collections assumptions?
In a perfect world, you might be able to run sensitivity analysis in one planning cycle and feel comfortable with your model for a long period of time. But the reality is that circumstances (internally and externally) change so quickly now. Your model is changing much more frequently than it used to, which means you may have to make sensitivity analysis a regular activity alongside scenario planning.
Make Sensitivity Analysis More Valuable with Mosaic
Sensitivity analysis in spreadsheets suffers from the same weakness as spreadsheet-based what-if analysis — comparing the outputs between two models is complicated (especially for non-finance people).
This is one of the primary benefits of using a Strategic Finance Platform like Mosaic for your scenario and sensitivity analyses. After you’ve duplicated your models, tweaked the set of assumptions, and built new cases, you can use the analysis canvas to easily create a side-by-side view of the outputs.
Stop fighting against version control, manual data aggregation, and error-prone modeling in Excel. Reach out for a personalized demo of Mosaic and learn how you can make scenario and sensitivity analyses a regular part of your FP&A cycles.
Sensitivity Analysis vs. Scenario Analysis FAQs
What is an example of sensitivity analysis?
One example of sensitivity analysis is when you compare drivers for top-line planning. If you have a sales capacity model for your top-line plan, you could run a sensitivity analysis to see whether the more impactful driver of the model is increased AE hiring or quota attainment.
You’d build the baseline model and then create two duplicates — one that increases headcount and holds attainment steady and one that increases attainment assumptions while holding headcount steady. You can compare the outputs side by side to see which lever your business is more sensitive to.