Sensitivity analysis is involve changes to punish the cash budget, for example a certain percentage decrease in income or a percentage increase in costs and / or expenses, etc. (Eg interest rate, volume and / or the sales price, the cost of labor, the raw materials, the tax rate, the amount of capital, etc.), And time, show the gap with that for its implementation before any changes in such variables on the market.
Some frequently asked questions to investigate the sensitivity analysis are
1. How much income could vary, costs and / or expenses?
2. What percentage variation should be assumed?
The answer depends on what is the magnitude of risk involved in the activity of the firm. As such, the risk of making and selling refined oil and soybean meal (the dregs of soy has little effect on income).
Assuming that the risk of the cash budget is 10%, the situation could result from:
- turnover less than estimated. But you could buy fewer raw materials, materials and other inputs to produce a smaller volume.
- Low price of products.
- Increased cost of raw materials (soy beans), materials and inputs.
For sensitivity analysis is advisable to assume variations in revenues and costs up to a maximum of 10% from the figures originally calculated without risk, although this statement should not be taken dogmatically.
Assuming that the risk is greater than 10% of variations, such as 18%, then you better prepare several contingent cash budgets that include variations of 15%, 18%, 20%, etc., Or better even resorting to a simulation model that simulates a wide range of variations combined.
In this case it is assumed that the executives of the Industrial Society, preventing the possibility changes that cause risk on expenses, they want to know what the cash position would be if the next administration were to materialize:
- Only 10% of total revenues, with the decrease of 10% of income.
- The increase of 10% of costs and expenses, unchanged from the level of income (compensation).
IMPORTANCE OF SENSITIVITY ANALYSIS
The importance of sensitivity analysis is manifested in the fact that the values \u200b\u200bof the variables that have been used to carry out the project evaluation may have departures effects consideration in measuring results.
project evaluation will be sensitive to variations in one or more parameters if, by including these variations in the assessment criteria used, the initial decision to change. The sensitivity analysis through the different models reveals the effect on profitability changes in forecasts of relevant variables.
is important to see which variables have more effect on the result against varying degrees of error in its estimate for deciding about the need for further study of these variables, to improve estimates and reduce the degree of risk for error .
However, mistakes are more common in the estimates for the uncertain future that is the projection of any uncontrolled variable, such as changes in levels of real prices of the product or its inputs.
Depending on the number of variables that are sensitized simultaneously, the analysis can be classified as one-dimensional or multidimensional. In dimensional analysis, awareness is applied to a single variable, while in the multidimensional, we examine the effects on the results produced by the incorporation of variables simultaneously in two or more relevant variables. BIBLIOGRAPHY
1. Nassir Sapag Chain, Reinaldo Sapag Chain, "Preparation and Evaluation", Fourth Edition.
2. Oscar G. Montalvo Claros, Basic Financial Management - The Short Term, First Edition, Publications Center, Faculty of Economics and Finance.
3. Karen Marie Mokate, "Financial Evaluation of Investment Projects", First Edition.
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