Understanding Business Forecasting: The Importance and Limitations of Sensitivity Analysis

The video discusses business forecasting, emphasizing its reliance on assumptions and the inherent uncertainty of predicting future performance. It introduces sensitivity analysis as a quantitative method to evaluate the robustness of forecasts by considering best and worst case scenarios. The video provides an example of how changes in variables can drastically affect business profits. It highlights the importance of planning for different outcomes and critiques sensitivity analysis for its dependence on assumptions, while acknowledging its usefulness in assessing forecast reliability.

What is a key challenge in business forecasting?

• It is independent of economic conditions.

• It is unaffected by market competition.

• It relies on assumptions about future variables.

• It always guarantees accurate predictions.

What is the purpose of sensitivity analysis in business forecasting?

• To predict exact future outcomes.

• To evaluate different scenarios and their impact on forecasts.

• To ensure maximum profits in all cases.

• To eliminate all assumptions.

In the provided example, what happens to profits in the worst-case scenario?

• Profits increase significantly.

• Profits remain unchanged.

• Profits decrease drastically.

• The business incurs a loss.

What is a major criticism of sensitivity analysis?

• It provides exact future predictions.

• It guarantees a loss in the worst-case scenario.

• It does not rely on any assumptions.

• It is based on assumed figures which may not be accurate.

Why is it important to critique sensitivity analysis?

• To prove it is unnecessary for business forecasting.

• To ensure it eliminates all risks.

• To confirm it always predicts positive outcomes.

• To understand its reliance on assumptions and plan accordingly.