Question

What is sensitivity analysis? Why is it important for managers?

Answer 1

It is an analysis of variables and elements which tell the relationship of the two variables. It tells how the values of independent variable have a great impact on the values of dependent variable taking into consideration some assumptions. This analysis is used in mathematics, finance etc. This tells the impact of some set of variables on a single variable based on data collected. For this analysis, managers have to find out dependent and independent variables.

Example- If a sales manager want to see the impact of number of walk in customers on the sales numbers, he can calculate it by knowing that 20% increase in walk in customers, increase 8% of sales revenue. So this a kind of cause and effect relationship also.

Importance for managers- Sensitivity analysis is very important for managers. Most importantly, it is used in decision making. Decision making is the vital part of any business. Managers can get to know which variable has more effective and which is less and accordingly can take decision. Decision cannot be taken in isolation; it needs so many permutations and combinations. Sensitivity analysis is also used in making business policies.