Sensitivity Analysis: Stress-Testing Your Financial Model
Single-point forecasts are fiction. Sensitivity analysis helps you understand the range of possible outcomes and identify which assumptions matter most to your success.
Every financial model is built on assumptions—growth rates, conversion rates, churn, pricing. Sensitivity analysis tests how your outcomes change when those assumptions prove wrong. It's not about predicting the future; it's about preparing for different futures.
The Goal
Sensitivity analysis answers: "What happens if we're wrong?" A model that only works under perfect conditions isn't useful. You need to know which variables can break your business and which ones don't matter much.
Why Sensitivity Analysis Matters
Sophisticated investors and boards expect sensitivity analysis. It demonstrates financial maturity and helps focus management attention on what matters.
Key Benefits
Risk Identification
Discover which assumptions carry the most risk before they materialize in your P&L.
Resource Allocation
Focus improvement efforts on variables that actually move the needle.
Contingency Planning
Prepare response plans for different scenarios before you need them.
Stakeholder Confidence
Show investors and boards that you understand the range of possible outcomes.
When to Use Sensitivity Analysis
- Fundraising: Investors will ask "what if growth is 20% slower?"
- Board meetings: Present range of outcomes, not just the base case
- Strategic decisions: Evaluate major investments or pivots
- Budget planning: Set realistic targets with upside and downside ranges
- Economic uncertainty: Plan for recession, inflation, or market shifts
Identifying Key Variables
Not all assumptions deserve equal attention. Focus sensitivity analysis on variables that are both uncertain and impactful.
Variable Selection Framework
High Uncertainty
High Impact
Focus analysis here
Low Uncertainty
High Impact
Monitor closely
High Uncertainty
Low Impact
Don't over-invest
Low Uncertainty
Low Impact
Use best estimates
Common High-Impact Variables
| Business Type | Key Variables to Test |
|---|---|
| SaaS | Churn rate, expansion rate, CAC efficiency, sales cycle |
| E-commerce | Conversion rate, AOV, repeat rate, shipping costs |
| Marketplace | Take rate, liquidity, buyer/seller acquisition |
| Services | Utilization, bill rates, project margins, win rate |
Building Scenario Frameworks
Scenarios combine multiple assumption changes into coherent narratives. They're more useful than testing individual variables in isolation because real-world changes tend to be correlated.
Three-Scenario Framework
Base Case (50% probability)
Your most likely outcome based on current trajectory and planned initiatives. This is what you commit to in operating plans and board meetings.
Upside Case (25% probability)
Things go better than planned: product-market fit accelerates, market conditions improve, key hires perform above expectations. Should be achievable, not fantasy.
Downside Case (25% probability)
Key risks materialize: slower sales, higher churn, competitive pressure, economic headwinds. This is where you need contingency plans.
Example Scenario Assumptions
| Variable | Downside | Base | Upside |
|---|---|---|---|
| Revenue Growth | +30% | +50% | +75% |
| Gross Churn | 8% | 5% | 3% |
| CAC Payback | 18 months | 12 months | 9 months |
| Gross Margin | 68% | 72% | 76% |
Building a Scenario Toggle
Create a single cell that controls scenario selection. Use INDEX/MATCH or named ranges to pull assumptions based on this selector. This makes switching between scenarios instant and error-free.
Building Sensitivity Tables
Sensitivity tables show how a key output (like cash runway or valuation) changes as you vary one or two inputs. They're powerful visualization tools for boards and investors.
One-Way Sensitivity: Impact on Cash Runway
| Churn Rate | Cash Runway | Change |
|---|---|---|
| 3% (optimistic) | 22 months | +4 months |
| 4% | 20 months | +2 months |
| 5% (base) | 18 months | — |
| 6% | 16 months | -2 months |
| 7% (pessimistic) | 14 months | -4 months |
Two-Way Sensitivity: ARR by Growth × Churn
| Growth ↓ / Churn → | 3% | 5% | 7% |
|---|---|---|---|
| +30% | $8.2M | $7.1M | $6.0M |
| +50% | $11.5M | $10.0M | $8.5M |
| +70% | $14.8M | $12.9M | $11.0M |
This table immediately shows: a 2pp increase in churn has roughly the same impact as a 20pp decrease in growth. That insight shapes where you invest resources.
Communicating Results
How you present sensitivity analysis matters as much as the analysis itself. The goal is to build confidence that you understand your business, not to overwhelm with uncertainty.
Presentation Best Practices
- Lead with base case: Present your expected outcome first, then show the range
- Focus on 2-3 variables: Don't overwhelm with every possible sensitivity
- Explain the narrative: What would cause the downside? The upside?
- Show your response: What levers would you pull if downside materializes?
- Use visuals: Waterfall charts, tornado diagrams, and heat maps communicate faster than tables
Common Presentation Formats
Tornado Diagram
Shows relative impact of each variable. Bars extend left (negative) and right (positive) from base case.
Waterfall Chart
Shows how you bridge from downside to upside, with each improvement step labeled.
Spider Chart
Shows multiple scenarios across several metrics simultaneously.
Data Tables
Excel's data table feature for automated sensitivity calculations.
Avoid This Mistake
Don't present only favorable scenarios. Sophisticated investors see through this immediately. This is one of the modeling mistakes that kill investor confidence. Showing realistic downside risks (with mitigation plans) builds more credibility than showing only upside potential.
Need Help With Scenario Planning?
Eagle Rock CFO builds financial models with robust scenario analysis. Let us help you understand your risk profile and plan for multiple futures.
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