TABLE OF CONTENTS Almost by definition, the purpose of any financial model is to explore the effects of changing the input assumptions. Sensitivity analysis, also referred to as what-if analysis, tends to refer to the process of adjusting one or two key drivers and observing or recording the results; scenario management refers to the process of changing several drivers to create specific operational or economic situations. A further refinement involves the assessment of likelihood or risk involved with a particular scenario. It is worth emphasising that we should only use the one model for analysis. It is often tempting to develop scenarios in a series of copies of the original workbook, but this can lead to immense problems in the future if one of the common assumptions or calculation routines is then revised. Even a relatively trivial adjustment can then take several hours or days to distribute to the suite of scenario specific workbooks, and even with the development of the change tracking functionality in Excel it can be difficult to reconcile one workbook with another.
In this chapter we will look at a number of techniques for manipulating or flexing financial models, but before we start, backup your work first. It is not helpful to embark on a review of the model's assumptions and then to lose the original figures. For sensitivity and Goal Seek analysis, cell comments may be sufficient. We will consider other techniques for scenario management.
The demonstration workbooks for this chapter are in Chapter 6: Sensitivity Analysis and Scenarios folder on the CD-ROM.
A good starting point is the Goal Seek tool. You have...
