Understanding Business Forecasting: The Importance and Limitations of Sensitivity Analysis

The video discusses business forecasting, highlighting 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 examples of how changes in variables can impact profits and emphasizes the importance of planning for different outcomes. It also critiques sensitivity analysis for its dependence on assumptions, underscoring the need for careful evaluation of forecasted scenarios.

What is a key challenge of business forecasting?

• It always guarantees accurate predictions.

• It relies on assumptions about future variables.

• It does not consider economic changes.

• It is unaffected by market competition.

What is the primary purpose of sensitivity analysis in business forecasting?

• To eliminate the need for assumptions.

• To predict exact future sales figures.

• To evaluate the impact of different scenarios on forecasts.

• To ensure forecasts are always correct.

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

• Profits remain unchanged.

• The business incurs a loss.

• Profits increase significantly.

• Profits decrease drastically.

What is a major critique of sensitivity analysis?

• It guarantees accurate predictions.

• It is only useful for large businesses.

• It relies on assumptions for scenario analysis.

• It eliminates the need for assumptions.

How can sensitivity analysis benefit a business?

• By predicting exact future profits.

• By reducing the need for market research.

• By helping plan for unexpected scenarios.

• By ensuring all forecasts are accurate.