Profit Sensitivity Analysis
Reveals Strengths & Weaknesses

This profit sensitivity analysis is an essential bottom line tool that instantly exposes a company's strengths and weaknesses, by applying rigorous value engineering principles to financial statements.

This straightforward financial analysis is a little-known (and unfortunately little-used) business tool to help managers determine where to apply limited resources to maximize the profitability of the company.

It's relatively easy to prepare such an analysis from financial statements. This business tool is a variation of value engineering using techniques advocated by the Society of American Value Engineers (SAVE).

Real Life Example

Following is a typical sensitivity analysis for a small business (annual sales of $12,000,000). It shows the percentage change in profitability caused by a 1% increase in the factor concerned, other factors remaining constant.

In this instance, the company's management mistakenly placed extraordinary emphasis on controlling fixed costs instead of variable costs, which have a much greater effect on profitability than do fixed costs.

The value-focused sensitivity analysis helped show them that they needed to redirect their scarce resources to controlling variable costs, thus eventually improving profitability.

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