Profit Sensitivity Analysis

The profit sensitivity analysis is an essential bottom line tool that uses value engineering principles applied to financial statements.

The profit sensitivity 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 profit 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 (keeping all other factors 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 profit sensitivity analysis helped show them that they needed to redirect their scarce resources to controlling variable costs, thereby eventually improving profitability.

Return from this profit sensitivity page
to the cash flow management page.